SmallCapPower.com spoke recently with Adrian Day, CEO and Portfolio Manager at Adrian Day Asset Management, who provided some insight into the current state of the natural resource market in addition to revealing some his top junior resource stock picks.
Small Cap Power (SCP): Welcome Adrian! Please tell us a bit about your company as well as your role there?
Adrian Day (AD): Adrian Day Asset Management manages accounts for clients on a discretionary basis. We manage money in both global markets as well as specifically gold and resource markets. We give individual management to clients that tend to be relatively well off and we’ve been doing this since 1991.
SCP: I understand you’re a value investor. What does that mean to you?
AD: Good question. To me, buying value means you are buying something at a lower price than what it’s worth. I try to avoid two extremes: I try to avoid the value trap of buying something that’s very undervalued on a book value or PE basis, for example. That is, bad companies that are perennially undervalued. I prefer to focus on good-quality companies where for some temporary reason, or what I see as a temporary reason, they have fallen below their intrinsic value. And that might be a market reason. We try to avoid making too many assumptions about the future so long as we’re comfortable with a company’s product or service, and if it’s selling below what we see as intrinsic value then we will buy it. What I mean by that is choosing a company in an industry with a great future.
SCP: Which natural resources do you think will outperform during the next one to two years?
AD: The truth is natural resources, like a few other sectors, are very difficult correlate with traditional value investing. Because it’s a cyclical industry, anytime you do see natural resource companies that are true values on a traditional Graham and Dodd valuation method, they are probably companies you do not want to invest in or it’s completely the wrong point in the cycle to be investing.
That being said, I’m very bullish on gold from a risk/reward proposition. I don’t necessarily think gold has the best potential in the coming years but on a risk/reward I think it’s very strong. I also like platinum and palladium, but particularly palladium because it has more attraction on the demand side from China than does platinum. I like copper a lot. There has been an increase in production in the last couple of years including, but not only, from the big new Oyu Tolgoi mine in Mongolia, which is one of the world’s Top 10 mines. So anytime you have a new mine of that magnitude come on stream, you are going to have a supply problem for a little while. But I think it’s a very short-term phenomenon in terms of excess supply. Most of the mines are depleting at a very rapid rate. So if you go ahead three years to 2017, you will find that we are depleting on an annual basis more or less the equivalent of the Number Two producer in the world. We are depleting on a natural basis at an alarming rate – we need an Oyu Tolgoi every few years, and I don’t think we’re going to find that. I’m also keen on uranium but for the longer term. So the real key for investors, particularly in uranium, is when do you position yourself so that you are not chasing prices too late.
SCP: If you were to put together a portfolio of resource stocks today, what would it look like?
AD: First of all, I recognize that mining itself is an extremely tough business, so I always look for companies that have a way of mitigating the risks that are inherent in the mining business. So I like the royalties a lot – like Franco Nevada or Royal Gold – they would be some of the largest holdings at the right price because they are superb companies even though they are not cheap but they are great companies, have great balance sheets, and a great business model. We’d have a few gold mining companies, a few copper mining companies, a few diversified mining companies. Relatively few of the big-cap mining companies, frankly. We’ve avoided the smaller producers for awhile. In a bear market, it strikes me, that anything that could go wrong with a big mine can also go wrong with a small mine, but the small mine doesn’t have the margin of safety.
I think we’ve bottomed in most of the commodities. I think we’re on the way up – slowly, hesitantly perhaps. So, when prices are going up I think that’s a perfect time to be in some of the small and mid-tier producers. And, lastly, we are very keen on the exploration companies, particularly if they have a way of mitigating the risk inherent in exploration. And so I like the prospect generator companies a lot rather than what we call the ‘drill-hole plays’. So we buy a lot of prospect generators, companies such as Virginia Mines Inc. (TSX: VGQ) and Altius Minerals Corporation (TSX: ALS) – the risk in that business is a lot less.
SCP: Finally, which junior resource stocks do you like at this time and why?
AD: I like Almaden Minerals Ltd. (TSX: AMM). Great people, great balance sheet, but they’ve also made a discovery that seems to be getting bigger.
And, I like Reservoir Minerals Inc. (TSXV: RMC) a lot. Reservoir made a discovery in a joint venture with Freeport, a copper discovery in Serbia. Truly an astonishing discovery, growing tremendously. They have 100% ground adjacent to that discovery and this summer they are about to put $5 million into a drill program. They have a very strong balance sheet. The discovery with Freeport in and of itself is a great deal for Reservoir. They wind up, if Freeport exercises all their options, with 25% of the property on a free carried. But if they hit something attractive on the 100% ground then I think we are going to see another huge jump up in the stock price.
SCP: Thank you for your time Adrian.
AD: Thank you.
