Since Wednesday was PI day (3.14), I thought I might update my PI trade article, says Dave Landry, f...
Digging into World Precious Minerals
09/19/2016 10:00 am EST
The World Precious Minerals Fund is designed to offer exposure to junior and intermediate mining companies. Here, we talk to portfolio manager Ralph Aldis who explains the fund's strategy, his outlook for the gold sector and some favorite portfolio holdings.
Steve Halpern: Our guest today is Ralph Aldis, of U.S. Global Investors and portfolio manager of the industry-leading World Precious Minerals Fund (UNWPX). How are you doing today, Ralph?
Ralph Aldis: Doing very good, Steve.
Steve Halpern: Now, the World Minerals Fund has earned Morningstar five-star rating for the past three-year period and has been strongly outperforming its peers. Could you explain the underlying investment strategy of the fund?
Ralph Aldis: Well, from a macro standpoint, we start out with a matrix of top-down models and bottom-up stock picking selection models to determine from a weighting and countries sectors and individual securities.
You know, we believe government policies are a precursor to change, and certainly, with a lot of the Fed talk we've had lately, that's been causing the market to oscillate quite a bit.
But we try to track all of these countries in terms of their government policies and how that will impact economics and the populations within those countries in terms of maybe their purchasing patterns. We also sort of apply a group of statistical and fundamental models.
We generally have a GARP format to what we're looking for -- growth at a reasonable price -- and the other aspect is that we overlay these explicit knowledge models with our tacit knowledge, which we obtain by spending time with management.
We travel to the site to see the operations first-hand, ask people onsite about the operations and just try to make sure that what we think is what is actually going on, so it's sort of a top-down view like that, and then we start out, and we meld that with our bottom-up knowledge, trying to pick the right companies.
Steve Halpern: And given the name World Minerals, that would suggest that you look all over the globe for these opportunities?
Ralph Aldis: Yes, yes, and there are some countries that necessarily are in sort of a no-fly zone, like Venezuela, but there are some changes that may turn positive in Venezuela, but right now, it's probably not the best place to go.
But we have investments in Africa, Australia, Asia, and the United States, obviously, too, and Canada, which is a very big part of the mining scene.
Steve Halpern: Now, you also spent a good deal of time meeting with management teams of the companies that you follow. How important is this part of your investment approach to really know the people running the companies behind these minds?
Ralph Aldis: I think this has been key to our success in this industry, because you've got to know the people and have a sense of what their thought processes are.
You know, maybe when you ask them questions, how do they respond. Are you given a roundabout answer? Or are you given a very specific answer with actually painted more detail than we thought?
As kind of a contrast, I would say, Klondex Mines (KLDX) is one of our biggest companies in our portfolio. It's a company that's basically run by a team of engineers, mining engineers, geologists, other geoscientists.
Meanwhile, some of the other companies have had — I guess — you would call it maybe a financier, someone who's got an economics background or a finance background, and may not be as completely familiar with the intricacies of maybe implementing the mine.
It may sound simple, but there's a lot of — I guess you could say — tacit knowledge things that has to be known to meet those expectations and get the job done right.
Steve Halpern: While looking at precious metals as an overall asset class, what's your outlook of short and long term?
Ralph Aldis: Well, in this scenario that we've been in the last couple of years where we've had unprecedented monetary policy - government's buying bonds and in many other countries in the world, you even have governments that are buying equities of the market.
And it's a scary situation, because central banks really have kind of become — -almost, you might say — more important than presidents or whatever. But the market seems to be hanging on every word that central bankers say.
I've never seen it in the past 25-30 years -- where you may have one or two Fed speakers a week, and whatever one of them sort of hints towards, the market all of a sudden takes a big directional turn.
Last Friday was a great example where one of the more dovish Fed members actually was cautioning about maybe low rates for too long. I guess what they were trying to get to is like a September rate hike is back on the table, and the market sold off 2%, so they altered the broader markets.
What I'm trying to get at, in terms of this overall scenario, these unprecedented policies probably makes reasonable sense to have some gold in the portfolio or some gold mining stocks.
You don't ever want to just load up on these things, because you really want to balanced portfolio where you have - you know - some equity, some bonds, some gold or gold stocks, because they're uncorrelated, generally, with the overall market, and it'll help lower the volatility of your total portfolio, and - you know - and so it's just good portfolio theory.
Steve Halpern: Now, as you alluded to earlier, your largest current portfolio holding is Klondex Mines. Where do they operate, and from your standpoint, what makes this such an attractive holding?
Ralph Aldis: Well, they operate out of Nevada, principally. They did do an acquisition earlier in the year of a property in Canada, so they're getting a little more diversification there. They have two mines in Nevada that are actually up and running right now.
The mine that they've purchased, called True North, in Canada. They've just this morning released their guidance for what they think that mine will do.
The previous operator had sort of gone into bankruptcy during the past two to three years where the gold markets were pretty bad, and they purchased it for a song — I think for about $30 million.
And that included all the mine infrastructure, all the equipment; it was a great deal, and they've also done one other transaction this year, just recently.
They bought the Hollister properties from Waterton Securities. Waterton is a private company, and that mine that they got, Hollister, is only about 12 miles away from their existing mill and operations.
What makes this special, and what makes Klondex special is two things: One is the management team, like as I told you before, all engineers, all scientists — they understand mining.
And in prior years, they actually had worked at these operations themselves when Newmont (NEM) had them, and so they're very familiar with the assets that they're working now.
The other thing that's very unique is these are actually very high-grade mines. Fire Creek, which is one of their main, highest grade properties, is running basically an ounce per ton, so you're talking about a ton of rock that's worth $1300 to $1400, and you can make a reasonable margin on that type of grade.
There's a term that they use in the mining industry sometimes called "grade is king", because it really allows you to have good flexibility, and that's what got me interested in the company over three or four years ago, when we started getting into this thing and buying it.
One, we recognized the grades were very good. Two, the management team that was starting to be put together turned out to be just a blessing in terms of just how the people — the skill sets that they brought to the table. They understand the cost side if you're asking about what is it going to cost; I mean; they actually have it in their mind.
They have a pretty good idea, because they're operators, and they know the costing, and they've got their own money also invested as operation, so it's been a big winner for us the last three to four years. I mean, it's been up every year when the gold markets have been down, so - I mean, that tells you something, that they're doing something right.
Steve Halpern: We only have a minute left, but there are two lower-priced, more speculative ideas that you pointed to. One is a junior miner called Rye Patch Gold (Vancouver: RPM), and the other is Jaguar Mining (JAG.V). For those comfortable with the risk of a very low-priced speculation in the mining sector, could you give your thoughts on these two companies.
Ralph Aldis: Rye Patch Gold had a unique situation where they bought the Florida Canyon Mine just recently. They've had land positions in the area around this Florida Canyon Mine, but Florida Canyon was being run by a private Japanese company. They mismanaged the amount of cash that they had there.
And so Rye Patch was able to negotiate an agreement to buy this mine from them, and then in the process, they raised a little bit of money to buy the mine, have the capital to get this thing up and going.
It is producing, right now, at low rates off the existing heat pads, but they're basically going and they're putting in the additional capital that was basically withheld by the Japanese firm, and these guys will be in commercial production in six months.
Their market cap is really in the range of like $120 to $130 million (Canadian). While for the level of production that they're anticipating to do, around 75,000 to 80,000 ounces, there's companies out there like Richmont Mines (RIC) that's trading for $631 million (US) of market cap.
And these guys, Rye Patch, only have $135 million (Canadian) market cap, and I see a valuation gap there.
The other one is Jaguar Mining, which a new CEO recently last year, and before he was there, he ran another private company that went public called New Market Gold. He was running the private company before that, and he is a real operator.
Jaguar's mines are in Brazil. Now, you might think, well, I wouldn't want to invest in Brazil; that place is in shambles. But you look at their stock market — it's up about 50% over the last year — and Rodney Lamont, who's the CEO, he lives in Brazil and works down there at the mine sites.
That's a really important aspect as opposed to sometimes you got these guys that are financers, and they live in Toronto, or they live some other place; they don't live at the mine they're in. Lamont gets his hands dirty and get the job done right, and he's been with Jaguar.
Their market cap is only $80 million (Canadian) and again Richmont is about $631 million (US), and they both have basically the same production right now of around 75,000 to 80,000 ounces per year.
So I think there’s a chance for a rerating, because people have shied away from Brazil. For Rye Patch, nobody knows the asset that they bought, but I think as the market starts to recognize this, these things will probably respond and will probably, I think, do well.
Steve Halpern: Again, our guest is Ralph Aldis of U.S. Global Investors. Thank you so much for your time today.
Ralph Aldis: Yeah. Thank you. You bet.
By Ralph Aldis, Portfolio Manager at The World Precious Minerals Fund
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