Etienne Moshevich, editor of Alphastox.com, looks at three things before he decides to get excited about a company: people, projects and structure. In this interview with The Mining Report, Moshevich explains his ground-up approach to evaluating junior resource companies and names the names that are set to rake in the profits.
The Mining Report: Alphastox.com follows junior equities in everything from gold, silver and diamonds to uranium, oil and gas. Why did you choose those particular market segments?
Etienne Moshevich: If you invested wisely and at the right time—meaning in companies that have the right management teams, the right projects and the right capital structure—there's a lot of upside in those segments. Every day I come to work, there's a new opportunity for me to relay to my subscribers.
TMR: Alphastox.com is part of the larger Transcend Resource Group. How do you remain independent in your coverage?
EM: I'm totally open in terms of my disclosure for every company I feature.
If I think a company offers good growth opportunity, I want to feature it, to help it build a track record. I'm very open about whether I've been paid, whether I own stock and at what price or if I'm just looking at becoming an investor. I often feature companies that don't pay me or that are not Transcend clients.
TMR: In a recent research report you wrote that the junior mining sector is "not where it was in 2009, but it's definitely getting better." What makes you think that?
EM: In the last three months, more money has poured into the junior markets than in all of 2013. A lot more financings are being done. Banks are starting to raise money for exploration and development plays. Investors see that the game is back on; the institutional side is showing more interest.
The retail side is starting to follow along. You see transactions like Goldcorp Inc.'s (G:TSX; GG:NYSE) bid to take over Osisko Mining Corp. (OSK:TSX). You see Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) buying 50% of Osisko's assets. People see quality assets getting the recognition they deserve, and the market is reacting.
TMR: You've written about mitigating risk in the junior resources market. How can investors reduce risk in their resource portfolio?
EM: To lower risk, number one, you have to diversify. Out of the 10 junior listed companies one invests in, some lose market share, and a couple may stay even, but you really hope one makes it big—hopefully big enough to pay off all the other losses and then some. That's the name of the game.
However, the amount of capital needed to invest in several companies at the same time can pose a problem. Second, many retail investors don't have the necessary expertise to invest in the right company at the right price. That is why investors would greatly benefit by investing in a public vehicle that has the right management team to intelligently invest their capital. Zimtu Capital Corp. (ZC:TSX.V) is a perfect example of this. By investing in one entity like a Zimtu Capital, you not only gain exposure to a number of different companies and decrease your risk, but you are also investing in an undervalued company where its asset value is worth more than its current market cap.
Which brings me to my next point: Invest in companies that are fundamentally sound—companies that have cash in the bank, companies that are trading below cash or asset value and companies with the right structure. With the right capital structure, if the company were to make a real discovery, investors will get the appreciation and the valuation they deserve. Bottom line, you need to invest in companies with sound assets, whether that be cash or a project with real assets that can be objectively valued.
TMR: How do you determine which companies fit that profile?
EM: I look first at capital structure, even before looking at the people and the project. Oftentimes, companies with great management and great projects don't get the valuation they deserve because there's too much stock out there.
I need to know where 70–80% of the stock is before deciding to get involved in the deal. If you have investors with similar mindsets all rowing the boat in the same direction, you have a higher chance of success.
When it comes to people, I look at track records. I look for success; not just one discovery, but multiple successes.
TMR: How much do you like to see owned by the management team?
EM: I need to see at least 10% management ownership. If it's not good enough for management, how can it be good enough for others to invest in?
I make sure management is writing a check at the same level that I'm writing a check; that management is buying stock in the market and putting it out on its Canadian Insider reports.
TMR: How do you react if management starts selling?
EM: I don't come to any conclusions right away. I speak with the CEO and get his reasons for the sale, then decide whether I'm positive about the sale or not. Often, management will sell some stock, but will come back into the private placement if the company is doing one. I'm fine with that.
Generally however, I try to make sure that a lot of the management stock is tied up so it can't be sold easily. If management sells into the market, no matter what the reason, the market will react negatively. It damages confidence. You can't blame the market for that.
TMR: Let's turn to your thesis for the oil and gas sector for 2014 and beyond.
EM: Oil and gas prices are going higher. I see a narrowing spread between West Texas Intermediate (WTI) and Brent. Canadian companies are now paying for their operations in Canadian dollars, but are getting paid back in U.S. dollars. Geopolitical issues are creating higher demand for North American supply. The gloom and doom that hung over the sector due to worries over Canadian oil and gas production are fading. These are all positive signs.
Given increased demand for natural gas, I see those prices stabilizing in 2014.
TMR: Which companies do you follow in the oil and gas space?
EM: Crocotta Energy Inc. (CTA:TSX) is one. It's about a $350 million ($350M) market cap company that does about 10,000 barrels oil equivalent per day (10 Mboe/d). The company is targeting its Edson play in Alberta and the Montney play out of British Columbia. Crocotta is taking a conservative approach to growth, going after stable and proven fields.
Jagercor Energy Corp. (EM:CNSX; JAMTF:OTC) is basically a shell company right now; it has no asset. However, I invested in its last private placement at $0.20/share because I'm betting on the management team. The company is run by Matias Bullrich. He spent 11 years at Morgan Stanley structuring energy deals in Argentina, which is where Jagercor is looking for an asset. I'm betting on Bullrich and CEO Edgardo Russo, an ex-YPF guy, to pick a good asset and get it financed.
Two years ago, no one in the oil and gas sector was bullish on Argentina because of the YPF SA (YPF:NYSE) expropriation. Today, a lot more positive sentiment and capital are going into the country. Chevron Corp. (CVX:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and Wintershall Holding GmbH are paying between $7.5–10K/acre. Yesterday, YPF and Chevron signed an agreement to invest $15 billion ($15B) over 35 years. That's giving more confidence to the space.
TMR: Jagercor dropped 7% in one day in early April. Is volatility like that common with these stocks?
EM: Yes. If you're looking at it as a penny stock, that means the stock went down two pennies from $0.27 to $0.25/share. That might not seem like a lot, but yes it is 7.5%. Investors need to be aware that penny stocks are risky. Your portfolio can go up 10–50% or down 70–80% in a day. You have to be patient.
TMR: Are there any other oil and gas companies you want to discuss?
EM: I follow Cub Energy Inc. (KUB:TSX.V), which has assets in Ukraine. The company is doing about 1,800 boe/d. Mikhail Afendikov, its president and CEO, has lots of experience in the region. The company just announced that it is drilling its O-11 development well. Cub owns 30% of that well.
TMR: KUB-Gas LLC owns the other 70%. What's the relationship with KUB-Gas?
EM: KUB-Gas is Cub Energy's subsidiary. Cub Energy has a 30% ownership interest in KUB-Gas.
TMR: This story is really about the netbacks isn't it?
EM: Yes. Cub's netbacks are very high, something I look for when evaluating oil and gas companies.
I took a position in Taipan's latest financing at $0.36/share. The company has assets in East Africa. Africa Oil Corp. (AOI:TSX.V) got a massive valuation for its discovery in the same area. If Taipan does the same, the market will react and move the stock a lot higher.
High North is targeting its Montney wells in Alberta. The company just closed about $8.5M on a convertible debenture led by GMP Capital Inc. High North is doing about 350 bbl/d now. We saw great results from its first two Montney wells and I expect more from the third well that it is drilling now. President and CEO Collin Soares has been very successful with privately held companies. He has the right people in place to guide High North on the public side.
TMR: Is it easier for companies to get financing through private placements, given that capital is more difficult to come by these days?
EM: Definitely. Sentiment is becoming more positive. Investors are more willing to put money into the right deals. Companies are more able to raise money without having to restructure. But both retail investors and the investment banks are a lot pickier in terms of which deals they decide to raise money for. That weeds out a lot of the deals that should not be in the game in the first place.
TMR: Uranium is another energy play getting fresh attention. Is that just about Fission Uranium Corp.'s (FCU:TSX.V) big discovery in the Athabasca Basin or is this a larger story?
EM: In the long term, the outlook for uranium is positive, and the discovery that Fission and Alpha Exploration Inc. (AEX:TSX.V) made in the Athabasca Basin is huge. There were only three big winners in 2013 for investors, in terms of penny stocks going to multiple dollars: Zenyatta Ventures Ltd. (ZEN:TSX.V)went from $0.30 to $5/share, Alpha went from $0.20 to over $7.50/share and Fission from $0.20–0.30 to close to $2/share. When investors saw that two of the three big winners were in the uranium space, they started moving there.
TMR: Beyond the discovery itself, it was about the discovery being a different deposit model in a structure thought to be barren of uranium mineralization. This could be a game changer, no?
EM: I agree; it opens a lot of doors. People forget that Fission was spun out of Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX). Fission is exploring assets that Strathmore had not. This gives people hope that the majors may have overlooked properties and that a junior could leap to being a developer and vastly expand its market cap.
TMR: What other companies operating in the basin could benefit from this renewed interest?
EM: Skyharbour Resources Ltd. (SYH:TSX.V) is one. It's run by Jordan Trimble. When the company got into the uranium sector, it syndicated with a few partners. Now, it's the largest landholder around Fission's discovery. Skyharbor is fully funded for this program.
TMR: To some investors, Jordan Trimble might seem rather young. What would you say to them?
EM: He is young, but I'd much rather invest with somebody who's willing to work and market his company every single day. I don't care how old somebody is. Skyharbor stock more than tripled from $0.04 to $0.14/share over the last year, so he has made his investors substantial profits. All that matters are the returns, and Jordan Trimble has delivered them so far.
I judge people on track record and what they can bring to the table. He is an extremely hard worker. He brought a lot of contacts from the market side into the business when he stepped in as president and CEO. He's always willing to tell his story, nonstop.
Trimble has the right team in place. Skyharbour has the right advisors helping run the field and exploration programs, people like Thomas Drolet, Rick Kusmirski, who ran JNR Resources Inc. (JNN:TSX.V; JNRRF:OTCPK), and Jim Pettit, the CEO of Bayfield Ventures Corp. (BYV:TSX.V). These are successful people. Any successful company needs one guy who knows the geology and the project inside out, and can lead a drill program. You need guys with capital markets experience and capital markets contacts. Jordan brings those contacts to the table.
TMR: Skyharbour just acquired 60% of the Mann Lake uranium project. What do you make of that?
EM: I think Skyharbour got a great project at a cheap price, for $15,000 and 1M shares. It offers investors a nice bonus property. Mann Lake gives Skyharbour another chance to make a discovery in the basin.
Next page: Other companies in the Athabasca Basin