Gold & Indexes Melt Up Into Earnings?
Do the past successes of resource company principals portend future successes as they migrate to other companies or projects? Investment Banker and Financial Advisor Paul Moase has been following the resource sector for 25 years. In this exclusive interview with The Gold Report, Paul discusses what he looks for first when selecting his potential investment opportunities.
The Gold Report: Paul, can you describe for our readers how you got into resource investing and how heavily weighted resource stocks are in your portfolio currently?
Paul Moase: I was a career investment banker and started on the corporate finance, investment banking side of things back in 1985. I've been following resource stocks in Canada since.
TGR: Are you still following them fairly closely?
PM: Yes. I'm on the board of Sea Dragon Energy (TSX.V:SDX) and I have investments and relationships with a number of resource companies. Resource stocks probably make up by dollar volume about 60% of my portfolio and they are predominantly mining.
TGR: What do you look for first in selecting an investment?
PM: At the end of the day I invest in people first. If you invest in people, they as a consequence will be in a particular part of the sector.
TGR: What part would that be?
PM: Right now if I look at what I follow and what I like, I would say it's substantially gold. I do have an interest and follow quite closely a small cap nickel company. I'm not a rare earth fan. I fear what happened in the tungsten business can happen in the rare earth business. This is where you have the Chinese controlling supply and prices. At the drop of a hat something you don't control could change the economics of the business quite substantially. So I like gold. It is hard to pick a commodity that hasn't already had a big run. I guess gold would be included in that.
The nickel company that I'm invested in is something called Continental Nickel Ltd. (TSX.V:CNI). It is run by some terrific people with very interesting work being done in Tanzania and it's cheap.
TGR: You've mentioned people a couple of times when you're speaking about your investments. How do those relationships start with these companies?
PM: Having been in the business 30 years, you get to know people. Quite frankly I don't want to invest in people who I don't like and trust. I know for example that at Sea Dragon or Continental Nickel or some of my other investments there are people I have developed relationships with over a number of years. I know and I believe that they're spending their time and money on the right things. They are not just chasing what may be hot today. They have a business strategy and program that I buy into.
TGR: Sea Dragon Energy does business in Egypt and North Africa. Why are you interested in that part of the world?
PM: If you took a look at my portfolio of resource stocks in general, not many of them are doing work in North America. The reality of resource investment is that you have to go where the resources are. It's hard to find a special new discovery in Canada or the U.S. these days. The chairman of Sea Dragon is Said Arrata, whom your investors may know as the former chairman of Centurion Energy Ltd. Centurion was a stock that went from pennies to be sold out for nearly a billion dollars to Dana Gas (private). Said is an Egyptian-born Canadian and has had great success in Egypt in the past with Centurion Energy and I think he can do it again.
TGR: You mentioned that you were substantially invested in gold. Are you seeing any new companies that you like at this time?
PM: I recently bought into a company by the name of Loncor Resources Inc. (TSX.V:LN), run by of Peter Cowley, formerly the president of Banro Corporation (NYSE:BAA;TSX:BAA). Loncor has much of the same management team that made the big discoveries at Banro. Depending on whom you talk to, all kinds of people were responsible for discovering the Geita mine. Peter was certainly on that team. He is a very well-versed African manager and someone that I feel very confident backing.
TGR: It sounds like you're investing mostly in the exploration companies.
PM: In the gold sector I think that's where you get the biggest bang for your buck. No disrespect to any of the miners in the sector, but they seem to find new ways to lose money. If you take a look at growth and value, you have the most opportunity in a high impact successful exploration stock; more for the value of your portfolio than a major producer taking their production up 10%.
TGR: How early do you come in with regards to these exploration companies? Are you involved in the IPOs?
PM: Often during the pre-public financing or private placement.
TGR: Are there any other gold companies that you currently favor?
PM: One company that I quite like is Victoria Gold Corp. (TSX.V:VIT). They have changed that company significantly over the last 24 months by making acquisitions and increasing their resources. They're moving the company ahead with a very capable and hard-working management team. Banro is a company I still follow quite closely and I think it's going to have its day in the sun yet. Again related to the very same area of the country, there is a company by the name of Kilo Goldmines (TSX.V:KGL). Kilo's CEO Klaus Eckhof was responsible for a lot of the early success of Moto Goldmines. I believe that his team, led by Peter Hooper, can do it again.
TGR: Do you factor in the political risk in Africa or do you look beyond that again to the long term?
PM: Is your political risk higher trying to permit a mine in Montana or in the Congo? Is it more difficult in northern B.C. or Burkina Faso? I'm not convinced that the political risk in many of these strange jurisdictions is greater than it is in our own backyard. The reality of the business is that the easy and big stuff in the more stable areas of the world has been found. Quite frankly, you might not like the jurisdiction, but that's where the resources are. Tanzania 20 years ago was a "no go" zone and it's a major gold producer today, and so is Ghana. I guess one hopes that these places come around and there's some stability and prosperity, but you don't have to look very far in North America to cite examples of projects that have been shut down for reasons that aren't necessarily that evident.
TGR: What are your thoughts about the decoupling of oil from the U.S. dollar? How relevant is that in your world?
PM: I don't know if it's decoupled, but if it's not, it should be. Today oil is hovering near eighty bucks per barrel. If you'd told anybody in North America 15, 10 or 5 years ago that oil was going to be at these levels for a sustained period of time, they would've probably locked you up. But that same seventy-five bucks doesn't buy the producers what it used to. I'm not sure exactly how this is going to manifest itself, but there's increasing pressure to receive something other than dollars for oil. But what will that be? I don't know the answer. I'm fond of saying that the U.S. currency is what Churchill said about democracy. The U.S. dollar is the worst form of currency except for all the others. My view as a Canadian sitting up here is that the issues in terms of money supply, credit and housing aren't solved in the U.S. by any measure. So, there's probably going to be some continued pressure on the dollar. That having been said, where do you go? The euro seems to be a basket case as well. The other currency markets are not big enough. So I think we are going to see a day where you start to trade oil in some basket of currencies. I don't think that's going to be very far off. Somebody once said to me that you'd only have to know once what that relationship was going to be or what was going to happen. Then I wouldn't be in Canada doing this interview. I'd have an island in the Caribbean somewhere sitting there each March.
TGR: Many pundits are saying that there's an oversupply and a low demand for natural gas worldwide. If you met the right people, would you invest in a natural gas company considering those potential factors?
PM: There are a couple of things at play here. One is the advent of Liquid Natural Gas (LNG) and these big LNG plants that are springing up. That's having an impact but for the most part gas is a local commodity. They're trying to globalize it with these LNG , but for the most part the pricing of natural gas depends on very local issues. Certainly that's the case in North America. The North American price for natural gas has got to do more with whether or not we have a severe cold winter in the northeast. This has a lot more impact in local gas prices in North American than a new discovery in Papua, New Guinea.
TGR: Aren't we importing LNG from the Middle East from countries like Egypt?
PM: Absolutely, but the percentage of North America's use of gas that LNG represents is still very small. It's not affecting the price, I don't believe.
TGR: So, if you met the right people and you liked what they were doing, would you risk investing in natural gas right now?
TGR: Thank you for your time.
Paul Moase, with more than 25 years of investment banking experience, is an independent financial advisor to oil and gas and mining companies globally. Mr. Moase has held senior financial positions as Managing Director of Capital Markets at MGI Securities; Director of Investment Banking at First Associates; and Director of HSBC Securities, Mergers and Acquisition Group. He is a Director of Sea Dragon Energy Inc. and is a member of the Toronto Stock Exchange Listings Advisory Committee. Mr. Moase holds an MBA from the University of Western Ontario.
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1) Ellis Martin of The Gold Report conducted this interview. He personally and/or her family own none of the share of the companies mentioned in this interview.
2) None of the companies mentioned in the interview are sponsors of The Energy Report or The Gold Report.
3) Paul Moase: I personally and/or my family own shares of all the companies mentioned in this interview. I receive director's fees from Sea Dragon Energy.