Craig Stanley Bets on Management, Good Assets
Source: Brian Sylvester of The Gold Report 10/1/10
Pinetree Capital VP of Research Craig Stanley believes that, above all else, junior mining companies need solid management and good assets. And he believes management, in particular, trumps good assets. "We have been known to back management teams even before they have a project, based solely on their history," he says. Pinetree has positions in more than 400 companies and, in this exclusive interview with The Gold Report, Craig names some of his favorite gold and base metals plays in the lot.
The Gold Report: Craig, in more specific terms, what do you do for Pinetree?
Craig Stanley: My job here is to aid in managing the existing portfolio. I am also involved in seeking out and researching new opportunities.
TGR: What's the total value of your investments?
CS: It fluctuates in and out of positions; as of June 30, 2010, we had 429 positions worth $318M.
TGR: It's a similar concept to a mutual fund in that you own a basket of companies. What are the advantages of Pinetree's approach versus a mutual fund?
CS: Well, Pinetree is actually traded on the TSX. So, from that position, say investors want to invest in a mutual fund, they'd go to a mutual fund company, buy units, and then redeem them when they want to sell. Somebody wanting exposure to Pinetree would just have to go onto the exchange and buy or sell the shares. Because of that structure, we don't have the same investment restrictions as most mutual funds. For example, we can invest in the smallest companies available, and we don't face redemptions. Because of this, we can hold companies for longer periods and focus more on the long term, which also lets us in private companies.
TGR: Yes, but how do you determine which companies you take an equity interest in?
CS: It's sort of the same factors that you hear bandied about, but it usually comes down to good management and good assets. And, ideally, it would have a good corporate structure, though that can always be fixed. By good management, I mean guys that have either experience finding deposits or a good, new concept. We like to invest in exploration stage companies, and good assets are those that have big exploration potential. I mean we're swinging for home runs. We're not worried about singles or doubles; we're looking for the big multimillion-ounce type deposits.
TGR: With precious metal companies, how much of a consideration is a rising gold price?
CS: It's a factor, but it's not the focus of what we do. We're not managers who chase the latest fad. Our mandate is to identify a sector that we believe has positive fundamentals, and then invest in the early stage companies that can benefit from those fundamentals. For example, even though gold has had a great run, and we are investing in companies during this run, it's not just because of this run that we're investing in gold. We have a long-term view of gold. Again, our focus, first and foremost, is on management and the assets.
TGR: And you have access to companies before they're even listed, right?
CS: Yes, that's right. The main benefit of someone investing in Pinetree is having access to our Chairman and CEO Sheldon Inwentash's amazing network of people. He has access to just about everybody in the junior mining business and that allows us to get in on the early stages of these companies. For example, with Colossus Minerals Inc. (TSX:CSI), our initial investment was in December 2006 at $0.20 a share and our average cost was $1.30 at June 30; and CSI's current market price is over $8.
TGR: That's impressive, but how does that work? Take our readers through the process of how Pinetree gets access to these companies at the seed-capital stage.
CS: We could invest in the private realm before the company goes public or, maybe, it's guys Sheldon has dealt with before or who have a proven track record of putting a private company together. Sheldon is able to invest in the early rounds before the company even goes public. In early stage companies, you want shareholders that are going to stick with you; you don't want guys in there who are just hoping to see the stock do a quick double, and then get out. We help companies get those longer-term shareholders.
We invest in the private realm, and then help the company go public. Maybe it's a management team that has great assets or a new exploration-stage property and it's going to do a reverse takeover (RTO) to put those assets into a shell (a company that's publicly traded but that has no real assets). I mean there are a couple of different ways you can go public, but the idea is we want to be in there early.
TGR: All right, let's get into some of the companies you have positions in. You mentioned Colossus Minerals, which has the high-grade gold/PGMs Serra Pelada Project in Brazil. That stock went from about $0.50 to a high of over $9. The CEO of Colossus, Ari Sussman, has since launched Continental Gold Ltd. (TSX:CNL), and Pinetree has a position in Continental. Is that a bet on management? Tell us about Continental.
CS: Well, here's an example of using Sheldon's contacts. When I joined Pinetree in 2009, Continental was based here in our office; I mean it started off as a concept of Sheldon backing Ari. Sheldon gave him office space to get the company moving and helped with sponsoring the shareholders. Continental was a concept Ari had, and he was able to use his contacts to acquire ground in Colombia. We were able to leverage our relationship with Ari to get in early on Continental; so, we were there before it even went public.
Ari is a great guy; and he has Victor Wall, a very well-known and -respected geologist, as his special advisor. I just visited Continental's Buritica gold project . It's in Colombia on a very large land package; it's the same belt of rocks that host Medoro Resources Ltd.'s (TSX.V:MRS) Marmato Project or AngloGold Ashanti Ltd.'s (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD) La Colosa Project. There are some small, artisanal gold mines already on this huge land package, wherein locals are going in and high-grading some veins. But, yes, it's a bet on great management and amazing exploration potential-and, in this case, there's also a great corporate structure.
TGR: What do you mean by a "great corporate structure?"
CS: There aren't many shares outstanding; as I talked about earlier, we want folks that have good management and good assets, but I didn't mention good corporate structure. You don't want to have these companies that constantly issue hundreds of millions of shares. I know that's sort of a model in Australia, but here we want to focus on companies that have tighter share float. For example, if you have good drill results and you've got a tighter float, you get more leverage in the share price. I also find that, in a rising share price environment, if you have too many shares, it's like trying to herd cats to get the stock to move. Ideally, we want companies that have a nice, tight share structure. That also means management knows how to finance properly. It's a lot easier to create shareholder value with a tighter float. Now, that's not a hard and fast rule; companies sometimes come in with a great management team and great assets, but have a poor corporate structure. However, that can be fixed by, perhaps, rolling back the stock. It all depends.
TGR: Does Continental have drill results coming out soon that could move the share price?
CS: Yes. They are in the midst of a 25,000-meter drill program, though that will be just the beginning. I expect continuous results from these guys.
TGR: Is this strictly a gold project, or are there other metals in the mineralization?
CS: There might be some byproduct silver, but it's primarily a gold project.
TGR: What about Colombia as a jurisdiction?
CS: Colombia has really turned the corner from a political-risk standpoint, and the geology is amazing there. It's relatively under-explored. We have seen a lot of companies list up here on the TSX that have done very well in the oil and gas (O&G) sector, and now we're also seeing that in the mining space. There are still pockets that you probably want to stay away from, but there are a lot riskier places in the world than Colombia right now.
TGR: What about some of your other PM holdings?
CS: The first one I would mention is a company called Auryx Gold Corp. (TSX:AYX), which is focused on gold exploration in Namibia. Sheldon has great relationships with people both in Namibia and South Africa, and we were able to leverage those relationships. We were there at the table when this company was formed.
Auryx's flagship is the Otjikoto Gold Project. It already has more than 2 Moz. in the indicated and inferred resource categories. We think the exploration potential is great, that this will be a mine and, eventually, a key asset for a midtier gold producer. Auryx is still relatively unknown in the market because it's still fairly new.
Another one at a bit earlier stage is Gold Canyon Resources Inc. (TSX.V:GCU), which has a gold project in northwestern Ontario called Springpole. The company has had some great success drilling it this year; it brought in Technical Advisor Quinton Hennigh, president and chief geologist for Evolving Gold Corp. (TSX.V:EVG; Fkft:EV7), because the geology is an alkaline gold system, which is what Evolving is looking at in Wyoming and which Quentin has a lot of experience with. Drilling this winter will be key for Springpole. It's partly covered by a lake, and it's hard to drill right underneath the lake. When the lake freezes up, the company can put the drill right on it and drill underneath the lake. And I think that will show that results thus far are great, but deep. It's a low-grade deposit at around 1 g/t. It's going to be an open-pit target; but so far, the mineralization only starts deep-that doesn't mean the deposit doesn't come to surface.
TGR: Do you want to discuss some others?
CS: One I was going to mention very quickly in the gold space is Temex Resources Corp. (TSX.V:TME, FSE:TQ1). I bring that company up for a few reasons: small market cap; it has a 60/40 joint venture (JV) with Goldcorp Inc. (NYSE:GG; TSX:G) in Timmins; and right now, it's drilling the highest grade, past-producing mine in the Timmins gold camp, which is the biggest gold-producing region in Canada.
Temex was quiet for over a year because it had to redo its JV with Goldcorp. But now it's drilling and it's also drilling a deposit in the Shining Tree area of northern Ontario. This area has gotten a lot of press lately because of a company called Creso Exploration Inc. (TSX.V:CXT). Again, we own it, and Franco Nevada Corp. (TSX:FNV) just put some money into the company. Creso had some great results earlier this year, and it's really awakened the camp.
Another one is Queenston Mining Inc. (TSX:QMI). I had the opportunity to go up there a few weeks ago. I think the exploration potential is really good, especially with its Upper Beaver project. It is drilling really deep and has had some great hits down there. I think the exploration potential is great. The idea behind Queenston will probably be one centralized mill, fed from four different types of deposits. Gold up in northern Ontario doesn't get much better.
TGR: We've covered some of your PM companies, but what about some involved in base metals?
CS: Sure, one is called Valley High Ventures Ltd. (TSX.V:VHV), which has a JV with a company called Levon Resources Ltd. (TSX.V:LVN; Fkft:L09; OTC:LVNVF) down in Chihuahua, Mexico. Levon holds 51% and VHV holds 49%. At this point, the mineralization is very similar to Goldcorp's Peñasquito mine; but so far, the company hasn't hit the higher-grade gold. It's more of a silver-lead-zinc deposit. I was there in the spring, and this thing's big. We'll see whether it has the grade to carry it, but it's really big. It's just one that investors should keep their eyes on.
TGR: Any parting thoughts on the junior mining sector and what it offers investors?
CS: The junior mining sector is a very large and varied sector, and there are pockets of both great quality and opportunity. There are also lots of mediocre and promotional companies out there; so, you have to be able to pick your spots. Of course, you're always looking for the companies that have great management, which includes guys who know how to finance properly.
You want to look for great assets, and you just want to look for stocks that trade. I mean some of these shares hardly ever trade, and that's likely a function of management. They just don't know how to finance properly. They don't know how to get proper sponsorship behind the stock. This is not like a position in one of the banks or something. If you take a sizeable position in one of these junior companies, how are you going to get out if it doesn't trade well? All that falls under what I like to call 'strong management.' I still think the fundamentals for gold are great-even at these levels-and the junior miners are the right ones to give you great leverage to that gold price.
Craig Stanley, vice president of research, joined Pinetree Capital (PNP:TSX) in January 2009 as resources analyst. Pinetree is a diversified investment, financial advisory and merchant banking firm focused on the small-cap market. Its investments are primarily in the resources sector: uranium, oil and gas, precious and base metals, potash, lithium and rare earths. Craig aids in the management of Pinetree's existing portfolio, as well as researching and analyzing new investment opportunities. Prior to joining Pinetree, Craig worked both as a buy-side and sell-side analyst, the former at a firm with over $1 billion in mining investments in actively managed mutual funds, exchange-traded closed-end funds and flow-through limited partnerships. Craig holds a master of science in geology from The University of Western Ontario and is a member of the Society of Economic Geologists, Society for Geology Applied to Mineral Deposits and the Prospectors and Developers Association of Canada.
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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: Colossus, Continental, Evolving, Franco Nevada, Goldcorp and Queenston.
3) Craig Stanley: I personally and/or my family own shares of the following companies mentioned in this interview: Temex. I personally and/or my family am paid by the following companies mentioned in this interview: Pinetree.
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