The Gold Report: What approach has Praetorian Resources Ltd. (PRAE:LSE) taken toward resource equities at this point?
Charlie Brooks: Praetorian Resources is focusing its attention on scalable and quality assets run by experienced management teams and wherever possible is trying to reduce its exposure to high levels of financing risk.
TGR: Can you explain what Praetorian is?
CB: Praetorian Resources operates exactly like a fund but is actually structured as an investment holding company. We hold 15 investments at the moment, a variety of junior resource companies. Polar Star Mining Corp. (PSR:TSX.V) and Maya Gold Silver Inc. (MYA:TSX.V) are significant investments for us. We also like A-Cap Resources Ltd. (ACB:ASX), which is a Botswana coal and uranium company.
TGR: Why does Praetorian have two tickers on the website?
CB: One is for the subscription shares, which is another name for, effectively, a warrant. It's basically a trading warrant. July 2015 is the expiry date on the 70p warrant from the IPO. So the PRSS is the warrant and PRAE is the ordinary.
TGR: Why wouldn't an investor, instead of taking a direct shareholding in either Maya or Polar Star, just invest in Praetorian and get everything at once?
CB: Investors have to make their own investing choice. I want to be careful telling investors what they should or shouldn't do. Praetorian is an investment holding company with a collection of assets in different jurisdictions.
TGR: What are some things you look for in a jurisdiction?
CB: One, a sensible mining code; two, a sensible fiscal regime; and three, a history of sensible practice. Chile, where Polar Star is, has a fantastic mining code and no history of exploitation of mining companies. Companies operate there very happily. Botswana is a very safe country, as is Morocco, although it is fair that recent moves by several African countries have increased the risk perception for the continent as a whole.
TGR: But these things are somewhat dynamic. Not too long ago, many people would have put Peru among the safest and most opportune places to invest. But now there are some question marks around Peru. Are you constantly monitoring that?
CB: This is true not just for developing countries. You can say the same thing for Australia and the tax changes there. Whenever you invest in a foreign country, you are taking a degree of sovereign risk. We do as much research as we can, but risk cannot be completely eradicated.
TGR: You are investing in Maya, and its assets are listed in Morocco, and there's very little history to go on as far as mining in that country. Do you think this adds to the risk of the Maya story?
CB: Any company with assets in a single country brings with it more risk than a company with assets in many jurisdictions. But when you invest in the junior mining space, do you want a company with assets all in a number of different jurisdictions with the logistical challenges and the costs that entails? Junior mining companies inherently tend to have one principal asset in one country where the majority of their value is based and that is the case with Maya.
"Whenever you invest in a foreign country, you are taking a degree of sovereign risk."
To be fair, we like Morocco as a country for investment and Morocco does have a mining history. A lot of phosphate has been mined there for many years. Morocco also has one of the largest silver mines in the world today (Imiter) and Kasbah Resources Ltd. (KAS:ASX) is developing a substantial tin asset there. The mining code is clear, the political landscape is stable and fiscally Morocco is internationally competitive. There's a corporation tax rate of 35% in Morocco and for mining companies that export their product there is a five-year tax holiday in place and a 50% discount on taxes thereafter. Specifically in the case of Maya and its Zgounder mine there is a 3% royalty rate and ONHYM, a state owned company, has a 15% free carried interest in the project for the first 6.5 million ounces silver produced.
One of the great things about Maya is that its COO, Noureddine Mokaddem, is one of the leading figures in the Moroccan mining industry. Noureddine has played a key part in the development of three of the four largest Moroccan mines and worked for many years at the state owned mining company. His in-country connections and reputation are excellent.
Along with Maya's CEO, Guy Goulet, Maya is more than capable of advancing its primary asset, the Zgounder mine, into production over the next 12 months. Furthermore, I think there will be a second material asset brought into the Maya stable soon, at which point Maya will have an ideal suite of assetsone near-term producing asset, one material development asset and one exciting exploration asset.
Maya is an early entrant into the Morocco mining space and investors will see the benefit of that over the next few years. In short, it is my opinion that you are buying a lot of company for a market cap of approx $25 million (M).
TGR: Are you trying to get anybody on board for coverage of this junior?
CB: Praetorian is willing to look at junior stocks like Maya and invest in them prior to the involvement of the leading broking houses. However, it is my opinion that in 2013 at least one more significant institutional investor will get involved with Maya. As part of that investment, I'm sure we'll see investment banks brought in, to drive the story forward. I genuinely believe that 2013 will be the year that Maya matures as a company and becomes properly covered and properly backed by the institutional market. The future looks bright for this company.
TGR: Are there are certain commodities that you consider hot or that could become more in demand?
CB: We like to take a contrarian view, so I'm not always looking at those commodities that are in fashion. Uranium is one we talk about internally as improving over the medium term. It is down in the dumps at the moment, totally unlovedwith some justificationafter the recent disasters. But over a medium or long term, $40/pound (lb) uranium is not sustainable. Most companies in uranium processing and development will need a considerably higher price than
$40/lb to develop those assets.
"High levels of continued political unrest and currency debasement makes gold an appealing option."
TGR: Are there certain commodities you're avoiding?
CB: There isn't any commodity that we would avoid. If the project stacks up, we will look at it. However, at different stages of the cycle some investments are more appealing than others. Right now, for instance, high capital expenditure plays such as bauxite and low-grade iron ore projects are less interesting to us because capital is so tight and therefore raising the necessary sums of debt and equity is just not realistic. You have to be pragmatic and realize when you have a $50M market-cap company, it is going to be unable in today's market and for the foreseeable future to raise hundreds of millions of dollars of construction expenditure.
TGR: We've seen gold rebound since the outcome of the U.S. election. At what trading range do you see gold in throughout 2013?
CB: I think it will be well underpinned in the short term, and we're certainly bullish on it. I don't think we're going to see any significant rebasement from these levels. High levels of continued political unrest and currency debasement makes gold an appealing option.
TGR: Could you outline some of the selection criteria your company uses when choosing which resource companies to invest in?
CB: We're looking for the assets that in tough markets can get funded, and those are ideally $40/lb to develop those assets.
TGR: Could you outline some of the selection criteria your company uses when choosing which resource companies to invest in?
CB: We're looking for the assets that in tough markets can get funded, and those are ideally $40/lb to develop those assets.
TGR: Would you prefer to see a geologist or someone with a financial background as CEO or managing director?
CB: As long as the overall team has the skills to succeed, that's enough. In today's world CEOs need to be more investor focused than ever. There are so many companies out there; it's extremely important that the CEO has the enthusiasm, drive and air miles to get around and tell the story to the institutional and retail markets because otherwise companies just disappear.
TGR: How long do you usually remain in your positions?
CB: When we invest, we intend to take a long-term view. We're investing in the smaller end of the market, which is illiquid. Some people would say it is private equity investment because there is no secondary market when you're buying 5%, 10%, 15%, 20% stakes in companies. We work with management teams. We sometimes go on the board; I'm on the board of Polar Star. We try to do everything we can to assist them and make sure that they understand our views on corporate governance and the need to minimize central office costs during these tough times, and hopefully we all agree.
TGR: Is buy and hold dead?
CB: I don't think so because especially in this type of market and this time in the cycle, if we're buying positions at these kinds of levels, there are a lot of companies whose share prices are down 5075%. Good and bad companies alike are being sold off.
I think it's an excellent time to be investing with a buy-and-hold strategy in companies. You can buy significant stakes from distressed sellers in a number of companies. We're looking at a couple of examples of that at this very momentfunds in liquidation, large private investors looking to get out of the sector. We're very happy to be contrarian, buy into the bottom of the cycle when things are unloved and the share prices are down, and adopt a buy-and-hold strategy. That's the way you can make multi-times returns.
That's what we have tried to do with Polar Star. This was an opportunity because Polar Star simply ran out of money when its near-term production asset was just getting into commercial production, and we came in and provided it a rescue bridge finance facility followed by a $6.5M equity fundraising.
"It's an excellent time to be investing with a buy-and-hold strategy in companies. "
Polar Star has an excellent suite of copper and gold assets in Chile, including Montezuma, which is 100%-owned by the company, and also a joint venture agreement with BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK). In addition, Polar Star has one production asset, the Chpica mine, which is in the process of ramping up production. Finally, it has a number of non-core assets that in time could be put together and vended out into a new company simply because Polar Star doesn't have the balance sheet or the management time to focus on all of its properties. It's a lot of company for the $25M market cap.
Praetorian led the refinancing of Polar Star at a $0.10 issue. It's now the largest investor, owning just over 10% of the company. Polar Star's shares are currently trading around $0.15. We are very bullish about the future. We're not buying this for a move from $0.10/share to $0.15/share. We think there's a considerable amount further to go. We like it because it has a producing asset that is already pushing out free cash flow that will be increasing considerably over the next 1224 months. That will fundalong with the money we raised at the equity issue, which was $6.5Mthe exploration of the Montezuma project.
TGR: I'm not familiar with the details of the joint venture with BHP Billiton.
CB: Details of the JV with BHP Billiton were released to the Toronto Stock Exchange back in April 2012. In short, the JV encompasses 170,000 hectares of exploration land. Polar Star doesn't need to make any financial commitments right now. BHP Billiton is currently investigating the acreage and has until July 2013 to select which parts it wishes to progress with.
TGR: How long will the money that Praetorian raised carry the company?
CB: The current aggregate remuneration for the new board in Polar Star is approximately $100,000/year. Polar Star's head office costs have been slashed and are in the process of being cut further. With the recent $6.5M of equity raised and the cash flow produced by its operating asset at Chpica, Polar Star should not need to come back to the market for more money unless we want to significantly accelerate the exploration work being undertaken at Montezuma.
TGR: So that's basically an exploration and development play.
CB: And a production story. Polar Star's Chpica mine is in production.
TGR: What sort of cash flow is it generating on an annual basis?
CB: I think it is better to talk about throughput. The mine is currently processing about 170 tons per day (tpd), going quickly up to 275 tpd in early 2013 and then a decision will be made in mid-2013 about whether to expand it again to 500 tpd. The mine only came into production in the middle of 2012.
TGR: Do you generally see more opportunities in explorers, developers or mine producers?
CB: It depends. If you're going for the explorers, you've got to be aware of how much capital they're going to suck up. If it's an explorer with a very large balance sheet, that is fine. We might take a position on the secondary market but certainly are cautious if the model is to constantly dilute the equity to fund exploration spend.
TGR: Could you give us some insight into the appetite for junior resource equities among London's institutional investors?
CB: Most of the larger institutional investors are getting out of junior resource equities at the moment. Raising equity capital, even debt capital, is extremely difficult at the moment, and unless the companies have a proper control of costs, corporate governance and a strong asset base, they will struggle to raise capital over the short to medium term.
TGR: Barack Obama's re-election win seems to have soured the investment market in the U.S. Do you believe that's a buying opportunity, or do you believe investors should steer clear until the dust settles and perhaps even until this "fiscal cliff" problem seems to have ended?
CB: There's a lot of risk in the market. The junior resource market is tough at the moment, and anybody who thinks there's going to be a quick rebound is going to be mistaken. The retail investor needs to be extremely careful before throwing money into the market because a lot of institutions are getting hit with redemptions or are just fed up with losing money in the junior resource space, so there is a momentum away from it. Money is coming out of the sector and not into it at the moment. That, for a long-term buy-and-hold investor, provides a lot of opportunities. But you need to do your due diligence before investing in what is a high-risk and specialized area.
TGR: Thank you so much for your insights.
Charles Cannon-Brookes is the investment director of FSA regulated Arlington Group Asset Management Limited and the investment manager of Praetorian Resources Limited, an AIM listed closed ended investment company focused on the natural resources sector.
Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.
DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold
Report: Maya Gold Silver Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Charlie Brooks: I personally and/or my family own shares of the following companies mentioned in this interview: Praetorian Resources Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: Praetorian Resources Ltd. I was not paid by Streetwise Reports for participating in this interview.
