An Exceptional "Day"

01/13/2006 12:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

While our Top Picks report is not meant as a contest, we cannot begin without highlighting Adrian Day, whose top pick in our 2005 report, Virginia Gold, rose an astounding 251%. His favorites for 2006 are chosen not just for the companies, but for the people who run them.

"Warren Buffett has said that owning royalties is the ideal business, and perhaps this applies even more so in the capital-intensive mining business. Doug Silver is building a portfolio of resource royalties in his International Royalty Corp (CA:IRC Toronto), which is our aggressive pick for the coming year. During his long career as a consultant to the mining industry, Silver built a database of over 2,000 royalties. Taking International Royalty public  a year ago, he is attempting to consolidate the highly fragmented business.

"The company’s key asset is an effective 2.7% royalty Inco’s Voisey’s Bay nickel deposit, with revenues scheduled to start this quarter. This single asset should earn IRC C$16 million plus per year over a 30-year mine life. In addition, IRC owns about 60 royalties diversified among ten countries and 14 different commodities (including gold, base metals, oil and gas, and coal).

"The portfolio is generating modest revenues from some of these, while others are close to production. With the increase in the gold price, IRC’s revenues will tend to increase. With a market cap of only C$200 million, including C$15 million in cash, we consider the stock inexpensive. In addition, because of its aggressive business plan, we believe the company has high potential.

"For our favorite more conservative play for 2006, we turn to David Gladstone, who has generated high returns for investors over multiple decades, as CEO of Allied Capital, then chairman of American Capital, and now as Chairman and CEO of Gladstone Capital. His new company, which went public last June, is Gladstone Investment Corp. (GAIN NASDAQ). The company seeks current income and gains, primarily from loans with warrants.

"Loans are typically in the range of $10 million to $30 million, to established business frequently to fund buyouts and recapitalizations by established management teams. Mezzanine level investments in this small and middle-market segment is an under-served sector, compared with both venture capital and larger business loans; it is also the sector in which Gladstone had his roots. Due to his innate conservatism, the company has been slow to invest its IPO funds, and this has caused some frustration among impatient analysts. Hence, the stock has been weak since it came out.

"Gladstone has made it clear that he won’t change his credit standards and other loan criteria just to put loans on the books. That’s fine with me. If you are a patient investor and don’t need current income, this is a great time to buy. The risk is low, with the stock trading right around NAV (almost entirely in cash), and the outlook for dividend increases as the funds are put to work is very high. The ramp-up period for such companies can be lumpy, a great opportunity for patient investors."

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