Announcer: The Small Cap Power Expert Interview featuring Mike Giordano.
Angela: Welcome back Michael. For the benefit of our new viewers, can you introduce us to your firm as well as your role there?
Michael: Thanks Angela. Thanks for having me back on. My name is Mike Giordano. I’m a portfolio manager at Stone Asset Management. I’ve been with the company for 10 years now, and we’re a mutual fund company with approximately $700 million of assets under management and I’m the lead portfolio manager in the resource sector. So I run both the resource fund as well as helping with the resource component of all of our other funds.
Angela: So, Michael, as we know the resource sector has been weak for some time now. Do you see a light at the end of the tunnel, and if so, what are some of the catalysts to this recovery?
Michael: Well, short term I do see a few more challenges given we’re in the middle of a deflationary cycle for the resource sector. However, long-term I do think things will get better. The low resource prices will ultimately lead to lower commodity prices as well as less production. That in and of itself will lead to less supply and demand will continue to do well with the global economy’s recovering. And that will ultimately result in higher prices. As well I do see mergers and acquisitions being a key catalyst to move the sector higher. And recently we saw Zijin Mining out of China make two acquisitions, one with Barrett’s property, gold property, and another one with Ivanhoe’s property in the DRC. So those are key catalysts as well.
And, in the energy space we’ve seen some acquisitions. Crescent Point just recently announced an acquisition of Legacy Oil. So that shows that there’s deep value in some of the resource plays out there. And companies with deep pockets are certainly stepping in so that coupled with an improving overall global economy should bode well for commodities in the long-term.
Angela: So given the fact that the U.S. Federal Reserve is expected to raise interest rates sometime in 2015, what effect do you think this will have on commodity prices?
Michael: Well, short-term I think it’s a bit of the negative because 15% of commodity price movements are dictated by currency. So as investors buy into the U.S. dollar because of higher interest rates, then that portion of investment dollars will flow into the U.S. dollar and away from commodities. However, if the Federal Reserve is raising rates that means the economy is strong enough to stand on its own, and this means more stimulus measures, more growth for global economies. And that means more construction and more infrastructure building, and that ultimately bodes well for all commodities, especially energy as well as copper, which are more tied to infrastructure growth.
Angela: Right. What’s your outlook for the oil and gas sector in 2015?
Michael: The oil and gas sector has been quite volatile, obviously, but I think short-term we see a bit of weakness probably into the mid-50 level from the current 57. And that’s because we’re still continuing to wring out the oversupply situation in the U.S. However, long-term we’re starting to see that some of the effects of lower oil prices on producers. So we’re seeing actual U.S. production dropping as well as some of the inventory levels dropping. So that bodes well for the supply picture. The demand picture continues to be healthy so that will mean higher prices in the future. You’re probably looking at $55 to $65 prices for oil by the end of 2015.
And, on the nat gas side we’re seeing the same supply and demand fundamentals where there’s current oversupply in nat gas, so prices of about $2.85 could see some short-term pressure. However, we’re seeing a warmer than normal spring, for example, and that will boost the demand for nat gas for air conditioning units. As well, we’re starting to see some demand from Mexico as they’re building pipelines to export gas from the U.S. to Mexico, so that bodes well for demand as well as emission controls. The U.S. has legislated that carbon be reduced over the next 15 years so that means less coal to be consumed and more nat gas. So longer term, I’m optimistic on the nat gas price.
Angela: What effect, if any, do you think that China will have on the gold market this year and into the future?
Michael: Well, China’s been interesting when it comes to the gold market. They’ve telegraphed to the world that they’re moving away from a more capital intensive to a more consumer-led economy. And this bodes well for gold for two reasons. One, the consumer itself is the largest consumer of gold now in the world. So they’re stepping in and buying jewelry as they see the attractiveness of holding gold. As well, the Central Bank of China have telegraphed that they would like to diversify their holdings in their treasury. So they currently only hold 13 million ounces of gold, and this compares to the U.S., for example, that holds over 230 million ounces. So if they were to diversify, they currently hold about 1.5% of their reserves in gold. If they were to jack that up even marginally, that will boost demand by quite a bit. So demand will pick up from China both from the consumer as well as the Central Bank.
Angela: So in your opinion, Michael, what are some of the biggest mistakes that investors make when putting money into resource stocks?
Michael: Well, I think one of the key things that I see, and it’s frustrating for me, is that investors want the grand slam home run of a stock pick, and when I tell them to expect returns of 8% to 15% they sort of become uninterested. So you really have to be patient with the resource game. These are long-term projects, and you got to do your homework in terms of knowing management, knowing the project, knowing the geography that the company is in. And, ultimately, you’ve got to be confident with the project itself and the company. So be patient, be more of a long-term investor, and not look for that grand slam home run.
Angela: Can you tell us what stocks you like at this time and why?
Michael: Well, I currently like several stocks in the junior to mid-cap space. The first one is TORC Oil & Gas Ltd. (TSX: TOG). They’re a southeast Saskatchewan as well as west central Alberta oil and gas producer. The southeast Saskatchewan is their stable Bakken production, which provides steady cash flow, and their west central Alberta is both Cardium, which is steady cash as well as some potential growth in the Monarch. So these are long-life assets with a lot of oil in place. TOG has recently made an acquisition of some of the Surge assets. So they’re good acquirers, and they have the kind of pension plan as a backer any time they want to do a deal. So CPP is a current 25% shareholder. So it’s TOG number one.
The second one I like on the gold space is Detour Gold Corporation (TSX: DGC). That is sort of small to mid-cap producer of gold in Detour Lake, which is northwest Ontario. They’re currently producing about 550,000 ounces of gold, but we can see that ramping up to about 650,000. They’re a low-cost operator insofar as the average cost is about $750 an ounce. And all in including exploration and whatnot you’re looking at about $1,000 an ounce. So it continues to spit out excellent cash flows. I think this would be an attractive acquisition for a company that doesn’t have Canadian exposure and wants to get into Canadian gold space. You know, excellent political jurisdiction. They own their infrastructure and have an excellent management team as well. So, it’s Detour Gold.
And one of the other ones, I’ll throw another oil and gas name in there, is Spartan Energy Corp. (TSX: SPE). Also a southeast Saskatchewan oil and gas producer. They’ve been growing by acquisition. They did a recap of a company called Alexander Oil, and then they bought some of the Renegade assets. So it is a company with an excellent balance sheet. They only have one time debt to cash flow so their ability to make an acquisition, I think, is quite good. And, essentially, it’s still a buyer’s market. So they can step in and make acquisitions on the cheap and grow their production. Currently producing about 900 barrels a day, but we can see that growing quite a bit. Most of it is oil, light oil, so that is what the market wants. And, once again, a management team that has done this before. Their prior Spartan companies have been sold, and we think they have an excellent track record to do this again, so Spartan Energy, SPE.
Angela: Michael, thanks for taking the time for today’s interview.
Michael: You’re quite welcome. Thank you.
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