Fund Managers Face Off in Quest for Mining Profits

San Francisco Hard Assets Investment Conference 2012 Online Review

Buy and hold or go for the tenbagger? Two successful money managers, Adrian Day and Brian Ostroff, sat down with The Gold Report at the Hard Assets Conference to share their forecasts for 2013. Although the two have very different investing approaches, they came to some of the same conclusions about the future of gold and the companies that could make it through the next cycle.

The Gold Report: Adrian, you are a long-term, value investor. That makes company selection critical. How do you evaluate what companies would fit your needs?

Adrian Day: We manage money in all areas, not just gold and resources. I try to find good quality companies, buy them when they're selling for less than their value and hold on to them for a long time. I tend to be a very patient holder so long as the company itself doesn't change course or make disastrous decisions. I'm much less concerned about the outside environment so long as the company is doing what it said it was doing and continuing to grow, or earn cash flow. We have some very, very long-term holdings. In fact I just sold HSBC Holdings Plc (HSBA:LSE), which was the first stock we bought in 1991. That is an extraordinarily long holding period.

TGR: What made you decide to sell?

AD: I have been concerned about HSBC for a little while. I think the culture has changed. It made some disastrous mistakes in the US sub-prime market. The potential criminal investigations in the US on money laundering and in the UK on mis-selling mortgages made me think that maybe it was just time to get out. And the overall environment, frankly, for banking stocks is not positive. So we decided to move out.

We apply the same philosophy to gold and gold stocks. I'm not a geologist; I can't look at a particular property and say, "Wow, that's a great property about to be drilled; let's buy it." I tend to buy companies that have good business plans, good management and good balance sheets, which I think can grow over time.

TGR: Brian, you describe yourself as more of a prudent speculator. How do you pick companies?

Brian Ostroff: Unlike Adrian, we are not generalists. We operate two funds. One is natural resources as a whole and one is specific to mining. Where our funds really differ is that most of our partners are technical. They are geologists, mining engineers, metallurgists and the like. That allows us to look at situations a lot earlier than more traditional investors. I have always said that if we are going to take a big position in a select company, we need to understand why it has the potential to be a tenbagger. We also like lesser-known or lesser-appreciated commodities. That allows us to be the first movers in a particular commodity, hopefully in the best companies in the space because we can do our homework before the rest of the investing public starts to turn on to the theme and we enjoy the quick lift.

TGR: When we last interviewed each of you, you were both pretty optimistic – or at least not negative – about the timing for buying select junior companies. After all the volatility of late are you still feeling that way?

BO: I'm still very positively inclined toward some of the juniors. The key to the juniors is that we need to see the seniors perform better. We got really bullish in the summer about the seniors, which is not usually our space, except as a catalyst for money to come back to the juniors. The seniors had a wonderful lift of 20%-30% off of their lows. A lot of that came from generalist funds as opposed to resource-specific funds. Unfortunately, what happened about three weeks ago was that just about every one of these major companies missed their numbers by a wide margin. A lot of the gains that came about from the summer have evaporated and I think a lot of the generalists' funds have exited the sector. That has probably pushed back the timeline for some of these juniors to wake up.

One thing, however, that is very encouraging is seeing some of the M&A activity, not so much the seniors buying the juniors, but mid caps buying into the juniors. I think that this will ultimately prove out the thesis that there is value in select juniors.

TGR: Is that one of the things you look for when evaluating whether the company could be a tenbagger or whether it is an acquisition target?

BO: Certainly, we try to understand what the drivers could be when we make an investment. One of our larger holdings, d'Arianne Resources Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE), which is actually a phosphate play, is an example of a company we believe could be taken out.

One of our largest holdings in the gold exploration space, Adventure Gold Inc. (AGE:TSX.V), is held for other reasons. Although the company could be acquired, for us it's more a matter of the parts being worth a lot more than the whole. The company has done a very good job cutting some deals on some assets while focusing on other assets that have been cheaper to move forward, thereby getting a lot of value from a little bit of money in the ground.

TGR: Adrian, in addition to juniors, you look at producers and royalty companies as well. What are you most excited about right now?

AD: Like Brian, I'm overall positively inclined to the sector, but Brian mentioned a very important word: "selective." It is so critical to be selective right now, particularly in the junior space as so many simply don't have enough money to last. Canadian companies can always raise the money. The question is on what terms. That is not good for the sector if they are issuing highly diluted shares. It increases the supply of stock without increasing the demand.

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