Andrew Pullar, CEO of The Sentient Group, a private equity fund, says his plan for investment success is all about identifying companies with long-life, low-cost, world-class assets and supporting them through to production. In this interview with The Gold Report, Pullar plots the course for a handful of what he believes are world-class mining assets.
The Gold Report: Please sum up your current view of the gold equities market as gold hovers above $1,100/ounce.
Andrew Pullar: To come to terms with what has happened in the gold equities market, you have to understand what has happened to gold itself. The overwhelming contributor to a softer market is really a stronger U.S. dollar environment because that's not good for gold; the threat of higher rates in the U.S. will probably keep gold subdued for some time. The U.S. Federal Reserve indicates that even an uncertain global outlook won't delay a rate hike for much longer, so we see gold as a real asset that is behaving like a currency that pays zero interest. The big positive for gold is that you can't print it, so the price over the long term should correlate well to the increase in money supply. In other words, it should go higher.
TGR: Could raising interest rates hold any positives for gold?
AP: Raising rates may have one benefit for gold in that it could cause unexpected market turmoil, which is risky for investors. And investors don't like risk. But gold equities are hurting in anticipation of a softer gold market. Gold producers have had a couple of years to focus on cost cutting. The prospect of further low gold prices is keeping discretionary investors sidelined.
We're also seeing that there is little capital available for resource sector companies, which makes it tough for these businesses to implement operational improvements, and that causes a further drag on their share prices. It's not a great environment, but we think that over the medium to long term, there is light at the end of the tunnel.
TGR: Does that provide greater opportunity for The Sentient Group, given that there is less capital available and you have capital to deploy?
AP: It does. There are a lot of opportunities out there. I wouldn't classify all of those as investment-grade opportunities, though. Many of them don't meet our long-life, low-cost, world-class asset style of project that we're looking to invest in. Sentient is a private equity company that focuses on investing in and building companies in the natural resources sector. It's something that we've done successfully since 2001, and we don't do anything else.
TGR: You had success at Baker Steel Capital Managers as a portfolio manager. How has your approach changed with The Sentient Group?
AP: We still use some of the underlying fundamentals of company valuation. Baker Steel has a dynamic team of market experts who are very good at picking stocks and trading around a core position. Baker Steel took positions in a lot more companies than Sentient does, and it took smaller positions. Sentient, being a private equity fund, has the mindset of a business builder, so we take much bigger positions in companies. Sometimes we own the whole company, both public and private, and we don't have the luxury of trading away from a position if things don't go according to plan.
TGR: How do you justify such large ownership interests?
AP: It's about identifying something up front, making a judgment and then backing that judgment. Because we're a private equity fund, we have the luxury of having a much longer timeline. We make an investment with a view to being there for 5 to 10 years, almost a complete cycle in the mining industry. If that company keeps meeting the goals being set for it over time, then we are going to keep supporting it. Once again, our mindset is as business builders. You don't have much influence when you're a 5% shareholder. With a 20% stake, you can get a board seat and start to influence the direction of a company.
TGR: You talked earlier about investments that meet your investment hurdles. Let's talk about some. What are your preferred jurisdictions?
AP: Essentially, those would be Australia, Brazil and Argentina because that is where we have deployed the most capital. We have a big office in Sydney and a number of people from Australia, so that has been a logical place for us to go. Brazil is one of those jurisdictions where you can find a new district or a new basin, and those are opportunities you don't often find in countries that are considered more stable jurisdictions. Although Brazil has had highs and lows, it is a country that is supportive of the mining industry. These countries have an incredible mineral endowment. We look at geology first to establish whether there is potential to have a long-life, low-cost, world-class asset. These don't come along very often. When they do, they deserve capital.
TGR: What are some other ways that you support your investments?
AP: The due diligence we do up front is based on a risk matrix that is really quite complex. At every point, at every stage through the development cycle, we will reassess whether or not an asset is meeting its goals. We provide technical and financial expertise and, most importantly, we provide capital. At each stage, though, we'll be expecting at least a two times return.
TGR: At what point in the investment cycle are you typically exiting your position?
AP: In a perfect world, we would exit a position when it first comes into production. We have to be cognizant that the new investor also wants to make a return on capital, so the point at which the development capital has been deployed and the company is now entering into a cash flow position suits a certain kind of investor. That is a good time for us to exit. In a down cycle, it's not as easy because companies generally aren't getting taken out early for a premium. So in the down cycle we just keep ticking off the goals, and we're making sure that the companies are meeting their development expectations. If they are achieving what they are meant to be achieving, then as we move through into a better market, we should be able to start exiting some of these companies close to the point at which they are reaching production.
TGR: Tell us about some companies in which The Sentient Group has positions?
AP: We own 100% of Enirgi Group Corp., our largest holding. It's a company with six divisions that own and operate world-class assets throughout the world. One area of focus is the development of a lithium resource at Salar de Rincon in Salta province, Argentina. Internal combustion engines are far more complicated and far less efficient than electric engines, which run on lithium-ion batteries; therefore, there's a real future for this industry. Enirgi plans to be a meaningful supplier of lithium to the automotive sector. We believe the recent shenanigans from Volkswagen AG (VLKAY:OTC) will only accelerate the transition away from internal combustion engines to electric in coming years. We have invested a lot of capital in Enirgi. It's still private, but we think it's going to be a real success.
TGR: Any others?
AP: Ferrometals BV is an earlier-stage version of Enirgi. It's in joint venture with Cancana Resources Corp. (CNY:TSX.V), and it's using the intelligent application of geology and innovation to explore for and develop a manganese project that we think has the potential to become a world-class manganese mine. It is early stage, but the grades are some of the highest anywhere in the world. We're excited about it.
TGR: You essentially structured Ferrometals as a vehicle to support Cancana. Is that correct?
AP: Cancana had an interesting opportunity, and we really liked that asset, so Ferrometals was established to enter a joint venture with Cancana. We have a position in Cancana, and we have a direct position in the project through Ferrometals.
TGR: What do you see in the BMC manganese project in Brazil that made you basically build a company in order to shape its development?
AP: If you look at the global consumption of manganese, the vast majority goes into making steel. There is, however, a niche market in the fertilizer sector that is not widely known. You need a specific, high-grade, high-purity product for use in the agricultural sector, and Cancana has that. The ore grade is higher than anything else we've seen. That led us to believe that this asset could help supply the fertilizer sector in Brazil. As you know, Brazil is an agriculture powerhouse that depends heavily on its micronutrients to support the sector. Manganese is an important part of that.
The second thing is that our experienced geologists identified a large exploration target in and around the existing tenements at BMC that could contain a large, high-grade manganese resource. That means it could become a long-life, low-cost, world-class asset. In addition, it's situated in an area that is central to the distribution of fertilizers in Brazil, so we can see other avenues of the business potentially opening up with time. We essentially funded a drill program and that's looking promising.
TGR: What's the timeline to profitability there?
AP: At the moment, a small amount of manganese ore is being mined daily, which then gets shipped to market. In the next couple of years the idea is to essentially prove up a large resource. An Inferred resource should be published sometime next year, and then that resource is going to have to be upgraded, at which point there will be a feasibility study. The big deposit has not been discovered yet-we have discovered areas of it-but we think that the really big one has yet to be unearthed. At the moment, we have an operational mine on site, which will be used to complement any financing that the company needs.
TGR: Manganese is not Sentient's only agricultural interest in Brazil.
AP: Yes. Before we made the investment in Ferrometals and Cancana, we had a private company called Brazil Potash Corp., which essentially controls most of a potash basin in the northern part of Brazil. You really can't find an opportunity like that elsewhere in the world. Brazil Potash is one of the companies that is going to be feeding the potash sector. Brazil imports 90% of its potash, which is ridiculous given the potash endowment in the northern part of the country. So, we believe we're onto something very good there. We completed a feasibility study on that asset, and it looks very promising.
TGR: What are some other positions you could tell us about?
AP: North American Nickel Inc. (NAN:TSX.V) is a company that has the Maniitsoq nickel-copper-cobalt-PGM sulphide project in southwest Greenland. It is district scale. Recent drill results showed an intersection of 23.7 meters at 1.98% nickel with 0.62% copper and 0.19% precious metals. You don't often get mineralized intercepts for nickel like that. Maniitsoq is a sulphide resource over a huge area. It's almost too much ground. Sentient likes North American Nickel because it's district scale and it could, again, be a long-life, low-cost, world-class asset. There really are not many massive nickel sulphide projects around the world, so when you find one, you take a good look.
TGR: Greenland doesn't have much of a history as a mining jurisdiction. Is that a concern?
AP: I was in Greenland about four weeks ago because I wanted to see this project firsthand. I was tremendously impressed with the attitude of the local officials toward mining in the region. They are tremendously supportive. There are a number of mining projects and a couple of mines. The geology is amazing. Most of Greenland is covered by an icecap that is about 3 kilometers thick. The eastern side has a problem with ice flow but on the western side there is clear, year-round access to Maniitsoq. In addition, it's quite easy to identify structures through the use of typical exploration tools like aerial electromagnetic surveys. The company has been quite innovative about using sophisticated aerial surveys to identify additional gossans. I was blown away with the country's potential. A lot of companies in Greenland are struggling to raise capital. We've identified North American Nickel as one that's worthy of investment. We're sticking with it.
TGR: You also have a position in a company that's exploring for gold in Finland. Tell us about that one.
AP: Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE) has some gold projects in Finland. It's the only place I've ever seen visible gold outcropping at surface. A couple of our geologists went there for a site visit and identified what could truly be high-grade resources. Now, one of the problems is that the initial areas that were being explored were coming up nuggety, so it was difficult to piece together a decent resource. But the extent of the gold mineralization was incredible. The company re-evaluated things and then started looking farther east at another deposit where we think Mawson has found something meaningful. It's near-surface mineralization, which means it's open pittable, and high grade. I'm watching those results carefully. In this environment, if you're going to develop a gold project, it has to be in the lowest-cost quartile because those are the only ones that are going to get funded.
TGR: Is it anywhere close to Agnico-Eagle Mines Ltd.'s (AEM:TSX; AEM:NYSE) mine in northern Finland?
AP: It's a little bit further south than Kittil??. There are a few companies operating up there. Finland is a country with tremendous potential, and it actually has a mining history. They have been mining there for a long time. The thing about Finland, though, is you have to be the best corporate citizen you can be there. As with all the projects that we invest in, you need to make sure that things are happening to the highest standards because there are very tight environmental standards that need to be adhered to. It's a case of being a good corporate citizen.
TGR: Can you tell us about a project in Panama?
AP: I was once on the board of Pershimco Resources Inc. (PRO:TSX.V), which bills itself as the next gold producer in Panama. Its project is heap leachable, and there is upside potential from the gold oxide resource; you don't find many gold oxide resources these days. The idea is that the existing resource could be multiplied a couple times over just by stepout drilling on some of the additional oxide targets. It also has the potential to host a large copper porphyry system, and a lot of work has been done to understand the geology of that.
Pershimco still needs one significant permit and financing. If it had all of its permits and capital, it could be in production in 12 to 18 months. Building the mine would not take long because it's relatively small and a lot of the infrastructure is in place. It is a near-term producer, assuming that it has the capital and the permits.
TGR: What is one thing investors should constantly remind themselves about in this space in this market?
AP: The big clock keeps turning, and cycle lows will turn into cycle highs with time. World-class assets don't come around very often, so if you're lucky enough to find one that comes with a strong management team and decent jurisdiction, back your judgment and try to ignore the volatility.
TGR: Thank you for talking with us today, Andrew.
Andrew Pullar is chief executive officer of The Sentient Group. Prior to joining Sentient in 2009 he worked as a portfolio manager for Baker Steel Capital Managers in London and Sydney. Prior to that, Pullar was a senior metals and mining analyst at AME Mineral Economics in Sydney. He previously worked in London and Sydney as a mining engineering consultant and has fulfilled various mining engineering and production roles at De Beers and Gold Fields in South Africa. Pullar holds a degree in mining engineering from University of the Witwatersrand, a South African Mine Managers Certificate and the UKSIP Investment Manager Certificate (IMC).
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