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Steve
Palmer, chief executive
of Toronto investment firm
AlphaNorth Asset
Management, scans the market for inefficiencies. And it pays off
in the long term. While
comparable market benchmarks are down as much as 46%, his small-cap fund has returned nearly 200% since its launch
in 2007. In this
exclusive interview with The Energy
Report, Palmer explains why
his long-term vision makes him a continued
believer in oil and
uranium.
Companies Mentioned: Athabasca Uranium Inc. - Bannerman Resources Ltd. - Cameco
Corp. - Canadian Overseas Petroleum
Ltd. - Hathor Exploration Ltd. - Mega Uranium Ltd. - Newfield Exploration Company - Primary Petroleum - Rosetta Resources Inc.
The Energy
Report: About 30%
of the AlphaNorth Partners
Fund, which consists mostly of Canadian securities, was invested in tech stocks, with similar percentages in metals and energy the last time we spoke in May. What's the asset mix now?
Steve Palmer: Technology stocks comprise
about 32%, metals 26% and energy
27%.
TER: Although the fund
was down about 6.5% in August, it
is up 23% for the year through August. It was down
about 15% in September, but it's
still positive on the year.
What edge does AlphaNorth have that allows you
to make gains in an economic
climate that's as negative as this one?
SP: It's very difficult to make money when markets drop more than 10% in a month. We don't pretend
to be able to make money
in those kinds of months like we
experienced recently and
in the fall of 2008. However,
since inception of the fund in December 2007, the fund has returned approximately 190% despite declines in the Canadian indices.
The Canadian indices that I use as benchmarks are both negative. The S&P/TSX
Venture Index, which is
the closest benchmark to what
we do, is down 46% over that timeframe and the S&P/TSE
Composite is down 5%. Despite
the poor markets, we're still able to generate substantial returns over a long-term timeframe.
TER: What is your primary strategy for generating
profits?
SP: Good stock picking. We've had some good calls on specific stocks. We've been
able to sell them at the right time. We use technical analysis to help do that. We do some
hedging in the Partners Fund at certain times when we think
the market is vulnerable to a correction. That has helped
cushion the downside and contribute to positive returns when the short positions work
out.
TER: In the coming quarters,
do you see yourself leaning more towards one of those sectors that you mentioned earlier, perhaps at the expense of another?
SP: No, not particularly. Given the correction, all of those
sectors have been beaten
down pretty good. There are a lot of bargains across the board now.
TER: Let's take a closer look at the energy portion of the AlphaNorth
Partners Fund. What's the mix in terms of oil and gas, uranium, renewable and coal?
SP: It's mainly oil-focused. Coal would be the next most
significant component and then
iron ore and uranium.
TER: Uranium's off the radar for many investors given the events resulting from the tsunami in Japan earlier this year. Are you still a believer
in uranium?
SP: Yes, I'm still a believer. Long term, the supply/demand should result in higher prices. China's still moving forward with building many new nuclear plants. There's a huge demand for power in many parts
of the world. Uranium is, in many
cases, the most practical
way to add power. It's unfortunate what happened in Japan. It's created
a negative investor
sentiment in the short term, but the fundamentals are expected to be strong over the long term.
TER: Many uranium projects
being developed need $50 uranium just to break even. The spot price for
uranium is just above that now.
Do you believe Chinese demand alone can bring
uranium prices up enough
to make smaller development projects sustainable?
SP: Chinese demand
will account for probably more than half of total new demand over
the next 10 or 20 years. We've been working through stockpiles from nuclear weapons, but that's pretty much depleted
now. We do need new supply, but there are not many new uranium projects coming on.
TER: China's Sichuan Hanlong
Group is in takeover talks with Bannerman Resources Ltd. (BAN:TSX; BMN:ASX), which owns two
uranium development projects
in Namibia. Uranium titan Cameco Corp. (CCO:TSX; CCJ:NYSE) is
in the midst of a hostile bid
for Hathor
Exploration Ltd. (HAT:TSX.V), which has a high-grade uranium project in
the Athabasca Basin. These are clearly
cases of larger companies
preying on smaller
uranium companies beset by low
share prices. Could it be
time to take positions in uranium companies with near-term development projects?
SP: It just demonstrates
that larger companies need to increase production and economic
uranium deposits are very
difficult to find. They are more difficult to find than many
other commodities. The
good projects are going
to be in high demand.
TER: What are some
uranium stories in the fund?
SP: Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX) is one.
TER: It's not all that
far from Hathor. It's
about to begin a drilling
program in the next few weeks.
What are you expecting from that?
SP: I'm not expecting
anything, but I'm hoping for good results. It's in the right neighborhood
and there's obviously a
lot of high-grade uranium and some
very profitable mines close by. The company has a very small valuation; they have reasonable odds of success. I'm just hoping
that the drills are kind.
TER: Do you have any
holdings in Australia?
SP: We have a stake
in Mega Uranium Ltd. (MGA:TSX) in one of our other funds.
TER: What do you like about that story?
SP: It's cheap. It has defined
deposit in Australia, which is a good jurisdiction. It's not just a one-project company.
TER: Some of those
projects are in locations that
need some political will in order to begin mining. Do you see that happening?
SP: Yes. I think there's a decent chance that it will
change. You need some political will in many areas for uranium. It's
not something that people
typically welcome. The permitting process can be quite
long regardless of where you are.
TER: What are some
oil and gas stories that are undervalued right now?
SP: Canadian Overseas Petroleum Ltd. (XOP:TSX.V) has assets
in the North Sea, which is a good jurisdiction. Management has drilled
wells there before and been quite successful. They have multiple
locations to drill. It has lots of cash to complete
the job. If you risked their drill targets, you still get
a net asset value (NAV) over $1 a
share. It's currently trading at $0.32.
I just saw some research yesterday from an analyst that has a risked NAV of $1.20. Assuming
all of their drilling is successful, the potential NAV would be roughly $3.50. That's unlikely to occur because they are not going to be 100% successful. The end result will be
somewhere in between those two numbers.
TER: Is there another
intriguing name?
SP: Primary Petroleum
Corp. (PIE:TSX.V) is very
cheap and it has a lot of potential.
Primary is an emerging play in Montana for
the Bakken. It's a shale play that extends
into Montana from
Alberta. Several larger
U.S. companies seem to be having some
good success there. Rosetta Resources Inc. (ROSE:NASDAQ) and Newfield Exploration Corp. (NFX:NYSE) have been having a lot of success drilling in Montana. Primary
has about 300,000 acres, which is
quite large for a small company. It also recently signed a letter of intent with a U.S. major to farm in on
the majority of their acreage where the partner will fund the exploration. Primary will have no requirement to spend any of its cash and it will benefit from the expertise and experience
of its partner.
TER: What's your outlook for the energy sector?
SP: Energy is one
of the commodities I favor.
It's a resource that's gone once you use it, so you
constantly have to keep finding more. The demand
continues to grow.
TER: Thanks.
Steven Palmer, CFA, serves as president,
CEO and a director of AlphaNorth
Asset Management since founding the firm in 2007. AlphaNorth currently manages a long-biased,
small-cap hedge fund. As VP of Canadian equities
at one of the world's largest financial institutions,
he managed assets of approximately $350M.
He also previously managed a small-cap pooled fund, achieving returns ranked #1 by Morningstar
Canada. He has a BA in economics from the University of Western
Ontario.
The
Energy Report
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