The Gold Report: Mark, what do you think will determine your company’s success in 2012, especially regarding the junior resource sector?
Mark Raguz: What we need to see is the embracing of less risk aversion and the desire of investors to move further along the liquidity curve toward the junior resource space. There are signs this is starting to happen. In the meantime, we believe we can add value by drawing on our expertise in the resource sector and filtering out the best names, whose value might be realized over time.
TGR: How do you determine the best names?
MR: We see things very early and we look at a lot of different names. Finding the gems becomes a lot easier as we have a lot of experience in this area and a lot of comparables to use because of the amount of companies we look at. My goal is to draw out the best management teams with the best assets, given our exposure to most of the names in the space.
TGR: Based on your experience in previous cycles, when does capital tend to return to the mine commodities sector after a dip?
MR: These cycles tend to work in 18-month spurts. You get a good 12-month run, but at some point fantasy gets ahead of reality and the juniors tend to take a breather. Of course, when the exuberance goes away, so does the liquidity. This leaves a lot of investors trapped near the top, holding a lot of paper. The subsequent liquidation takes up to a year and a half. There are a lot of indicators suggesting that we have gone through this phase and that interest in juniors is reviving again, as gold in particular appears to be ready for another leg.
TGR: What makes you think gold is ready to advance another leg?
MR: Late last year a lot of liquidity dried up. People got off their positions and this was exacerbated by tax-loss selling. A lot of our names got beaten up. In January, we started to see many of those names return to levels that we feel are more in tune with a renewed positive cycle.
TGR: Are there certain events, perhaps a debt deal in Europe, which might bolster the gold price?
MR: I think the debt deal will be helpful, but maybe not for the reasons you might think. The risk of a successful deal comes with a question: If Greece does not have to pay, why do I? The Irish are asking it; the Portuguese and the Spanish will soon be asking the same thing.
The possible, immediate consequence is a sharp spike in gold, silver and other commodities, along with a flight from currency, falling equities and debt valuations or even maybe a banking crisis. While it probably would not last long, it could be long enough to shake things up.
While this might play a role in investor behavior, generally speaking, confidence will continue to return to the market. It has definitely started to in the last couple of months. So, solving each political event will definitely help, but I do not think it is critical.
TGR: Why should investors return to the junior resource sector now?
MR: Geopolitical issues notwithstanding, the fundamentals driving supply-and-demand imbalances have not changed. Consider Fukushima. That took a bite out of the invested capital in the uranium space but Japan is continuing with nuclear power, as is China. For the first time in a very long while, the U.S. just approved a nuclear plant. All of that bodes well for the fundamentals, which I believe are why investors should return.
TGR: What themes might retail investors be able to target in the space this year?
MR: Stick with the fundamentals. Certain commodities will face different supply-and-demand imbalances over the next decade, the uranium story being among the most acute. We see no evidence of demand for precious metals subsiding. In the last few weeks, we have seen some buoyancy in the iron ore names in our portfolio. Those are some things I like going into 2012.
TGR: You have many positions in small-cap companies seeking gold in Northern Ontario.
MR: I really feel that this jurisdiction is one that is occasionally mistakenly overlooked; I really like Northern Ontario as an exploration jurisdiction.
TGR: Why is Northern Ontario experiencing such a renaissance now?
MR: Money tends to flow to the more glamorous jurisdictions, whether it be South America or Eastern Europe. Ontario has been kind of picked over. But given the volume of dollars going into exploration in Ontario, there is no doubt in my mind that a lot remains to be found. I would rather be here than anywhere else.
TGR: Are you bullish on the REE space in general?
MR: Last year we saw a little exuberance in the run-up of REEs, but I think there are fundamentals driving demand for REEs. As long as we’re positioned in the best-of-breed names, I think we will do well.
TGR: Is that an overarching philosophy? I ask because you hold positions in a number of companies that would not be considered best of breed.
MR: We are a long-term investor. It may seem that some of our names are not in that category, but we feel that as long as we look for quality assets, time will eventually be on our side moving into a positive cycle.
TGR: What is the timeframe for that?
MR: As I mentioned before, with these 18-month spurts, I think we are coming out of a period of reduced liquidity that tax loss selling exacerbated, which leaves us well positioned moving forward.
TGR: When you and your fellow analysts got together at the beginning of the year to map out strategies, what was the general feeling at that meeting?
MR: My biggest takeaway was the renewed optimism. Last year was a tough one, as you mentioned. Going into 2012, a lot of our core positions caught that bounce that we have been expecting for a long time. We are moving along with our core strategies.
TGR: Mark, thank you for your time and insights.
Mark Raguz is an analyst with Pinetree Capital Ltd. He was previously in research at GMP Securities and was the president of New Texmont Explorations Ltd., a private company involved in mineral exploration. He has served as a director of various TSX Venture listed companies. Raguz is a graduate of the Lassonde Mineral Engineering Program at the University of Toronto.
Article published courtesy of The Gold Report – www.theaureport.com