Investment Summary and Outlook
Forbes & Manhattan Founder and CEO Stan Bharti, whose genius has guided dozens of junior resource companies to the pinnacle, discusses his approach in this exclusive interview with The Energy Report-and a few of his favorites. Among them is a company using a molecular-tagging technology to foil a practice that fuels terrorist activities and deprives governments of more than $100 billion in tax revenues annually.
The Energy Report: What led you to start Forbes & Manhattan, Stan? Where did you begin?
Stan Bharti: I graduated in engineering and had my Master's in Engineering from the University of London. I started my career in Africa, working in Zambia for two years as a young engineer. I came to Canada and worked for Falconbridge for about 15 years. After that I went on my own, setting up an engineering and contracting firm-BLM Inc.-that grew into a sizeable business with offices around the world, providing services primarily to the mining industry.
Then in '95 I got into public markets, starting with some of the assets BLM had acquired. I was in the public markets in the resource sector until it got into a real decline in about 2000, when we got into the tech sector-which was in an uptick-with Forbes & Manhattan. We came back to the resource sector in about 2002, when I saw that a huge bull market in resources was shaping up. Since that time we've been pretty much exclusively in resources.
TER: How does F&M define resources? Your portfolio of companies includes some in the financial sector, some agricultural, some that are traditional metals and mining.
SB: It's a broad definition. As a group, Forbes & Manhattan really operates in five broad divisions. The agricultural division really is mining resources for the agricultural industry, primarily potash and phosphate. Our oil and gas group, which is based in Calgary, has several high-impact exploration projects around the world. Third is the bulk commodities, where we've focused on coal and iron ore. The mining group includes gold and base metals. Then finally, the special metals-rare earth elements, vanadium, lithium-that really drive a unique part of the metal sector.
TER: Do you see all five of these in a bull market now?
SB: They go up and down, but they're all in a long-term bull market right now. I'm talking two, three, five years. We see potash prices, for example, going much higher. We're almost at $1,000 or $1,100 a ton. And a couple of years ago they were $600 or $700, still a good price compared to $100 or $200 a ton where they were for a long time. Same thing with iron ore. Iron ore prices are at an all-time high. But we see these bull markets as long-term trends, driven obviously by China and so forth, but more importantly just a secular trend in the evolution of mankind.
TER: What triggered this secular trend in the evolution of mankind?
SB: If you look at the last 30, 40, 50, 60 years, the economy goes between the hard assets and the financial assets. Those two sectors oscillate back and forth. The last hard assets growth period went from about the mid-'60s to 1980. We had a 15-year bull cycle and we saw the commodities all take off, all tied to inflation. The same thing's happening again. We see inflation. We believe it's going to come back because of the need to ingest dollars into the economies in the U.S. and western European countries.
Then we saw huge growth in the financial sector all the way until to 2001. That trend has now changed again, and we're back to hard assets. Whenever inflation comes back and governments spend in excess, people go to hard assets. I believe the best hard assets you can buy are commodities. They're real. They're fundamental. They're something you can touch and feel.
TER: When would you say this hard assets boom got started?
SB: I think it started in 2002. The first peak was 2007, early 2008, and then we got into a bit of a trough but I think we're in a 5- to 10-year bull cycle in hard assets.
TER: So Forbes & Manhattan is in synch with that cycle as a privately held merchant bank that essentially incubates, finances and then manages companies in the junior resource sector. But how does the F&M model differ from Pinetree Capital Ltd. (TSX:PNP) or 49 North Resources Inc. (TSX.V:FNR)?
SB: It's different in the sense that we actively manage our assets. There's a lot of leverage in junior companies. If you can get in early on, with what we call the seed stock-$0.10, $0.20, $0.30 cents-you see these seed stocks grow. Five key elements drive junior companies. One is a good asset. Second is management. Third is the ability to raise capital. Fourth is telling the story, promoting the stock. Fifth is good capital structure.
The difficulty with a lot of the junior companies is that they just don't have the management depth, the ability to raise capital to take these stocks to a level where they belong. We believe that by taking a junior company with a good asset-a good asset is key-and surrounding it with a lot of depth in terms of management, access to brainpower and capital, and working the asset over four to five years, the rewards can be phenomenal for our shareholders.
TER: You say you actively manage these assets to drive these returns. How so?
SB: We bring all the companies that we invest in into our shop. We surround them with our own lawyers, accountants, IR people, investment bankers, analysts. We have all of them in-house so that a junior company can operate like a major without the overhead of a major. We have more than 100 people in the Toronto office alone, for example-more than 25 geologists, 20 engineers, several securities lawyers, four or five investment bankers, two or three full-time analysts and accountants.
So a CEO of a junior company can access that expertise without having to really pay much for it because that expertise is available to 20 or 25 companies. So this is almost like an incubator or a venture-capital (VC) model but in the public marketplace.
Forbes & Manhattan is also different in that I am on the boards of all these companies, typically the chairman, because I want to make sure I influence their strategy and vision. I'm also typically the first investor at the seed level in these companies.
TER: It does sound a bit more like an incubator VC type of model, except that with a VC model, if you invest in 10 companies, you might expect five to be so-so, three to do pretty well and two to explode into 10-baggers.
SB: This isn't so much the case with us. It's not the VC model like on the West Coast , where of 20 companies you invest in, 10 will work-but there's always a risk. Every F&M company has the potential to be a multi-billion dollar company, but some things have to kick in. Some of the assets we have are exploration assets, for example. With an exploration asset, sometimes you drill and don't hit. We have two fabulous oil and gas assets in the Kurdistan Region in northern Iraq, with proven successful partners such as Niko Resources (TSX:NKO). The seismic acquisition and geological work look very attractive, but until we drill the assets we don't know how big the oil discoveries could be. When exploration isn't successful, there's a problem. In Kurdistan , one of our companies, Vast Exploration Inc. (TSX.V:VST), is drilling its first well and we should know results over the next several weeks.
TER: Barring dead ends in exploration, what other factors help determine an asset's success?
SB: Obviously commodity prices have to stay strong. In 2008 and 2009, commodity prices essentially collapsed. The financial markets have to be good to be able to raise capital, and again, in 2008 and 2009 a lot of the companies that were in the process of raising capital couldn't do it. And you have to be able to deliver results. So you have to go through these gyrations, but fundamentally, all the companies in our group have a good asset and in a bull market with the right environment should give good returns to shareholders.
TER: Because you cannot guarantee success, how do you suggest investors play the Forbes & Manhattan game? Should they buy a little bit of all of your companies? Are you planning on creating a fund that represents a bit of each company that they can invest in?
SB: I think individual investors should look at all the companies but pick the sector they like. If they like agricultural sector, if they like the gold sector, if they like the base metal sector or the bulk commodities and then within that sector decide what stocks they like. They can be certain that within the group, a lot of support is available to these companies financially, technically, strategically. That should give investors more comfort than buying another junior on the Toronto Venture Exchange where that support may not be available.
TER: It's curious to see that F&M, a merchant bank, has another merchant bank in its portfolio.
SB: Many people on the street, so to speak, and many funds in the financial sector find a lot of the juniors that Forbes invests in-or that I invest in personally-too small. Raising $5 million to $10 million isn't enough for big funds to come in. So we created Aberdeen International Inc. (TSX.V:AAB), and raised $100 million or so in Aberdeen. The model for Aberdeen is that any time I invest in a junior company at the seed level, Aberdeen co-invests with me. This gives investors indirect exposure to all of Forbes companies.
Aberdeen typically invests only when I'm involved with deals. It's like having a pool of capital that invests and gives a shareholder an upside on all of Forbes' companies. Interestingly about 60% of Aberdeen's portfolio right now is gold. So not only do you get exposure to gold, you get exposure to the Forbes' group of gold companies. If you're not sure you want to play Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF) or Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF), for instance, you're better to buy Aberdeen.
So Aberdeen is there any time I invest at the seed level. That should give the investor comfort that he's in there at the seed level, too. We just put some money into one of our coal deals through Aberdeen, too.
TER: So this is a way that I was referring to earlier that someone can play the Forbes & Manhattan. . .
SB: Yes, they could. They could, absolutely. Aberdeen is also trading at half net asset value. Its NAV-and we publish it every quarter-has been between $0.80 to $1. It's trading at about $0.40 now, so there's a lot of leverage in Aberdeen.
TER: Does Aberdeen invest in companies that are not part of the F&M group?
SB: Generally no. Sometimes a company is in trouble or needs money, but we typically only put in capital when we want the company to come into our group. So it can happen but it's rare. Generally that's not the Aberdeen model.
TER: Another company in your portfolio doesn't deal with a commodity per se, but rather security systems. Can you tell us a bit about that?
SB: You're talking about Eurocontrol Technics Inc. (TSX.V:EUO). It is a commodity company but it has a different twist, because it has a unique patent on fuel-tagging technology. The single largest source of terrorist funding in the world is through oil. About $100 billion worth of oil, perhaps more, is illegally sold or shipped or transported. This $100 billion loss is primarily to governments because governments collect taxes on oil. Whether it's terrorists or the mafia, they find ways to take oil illegally and avoid paying taxes. So through a wholly owned subsidiary called GFI (Global Fluids International), Eurocontrol has a product that was developed in Israel that molecularly tags fuel. This innovative molecular marking system detects any change in the fuel content along the pipeline from the refinery with 99% accuracy.
Imagine, for example, a gas station. The refinery can add our product, and anywhere along the supply chain, all the way to the gas stations, they can measure and sample the fuel, and they can tell whether what's being pumped at the gas station is legal or illegal fuel. This may not be a big problem in the Western countries, but it's a huge problem in Third World countries. For example, India alone estimates $10 billion to $20 billion in illegal fuel sales; gasoline sold at service stations where the government is not recovering its taxes. We know that a lot of the funding for terrorist in Iraq comes through illegal shipments of oil.
Eurocontrol is a very interesting company. Typically a government or a large private oil company will take out on a contract. Eurocontrol supplies this product and charges $0.01 for every liter of fuel tagged. We haven't been able to get the market to understand the Eurocontrol story properly, but that's beginning to change. The company is slowly expanding, with contracts now in Uganda, Tanzania, Nigeria and Romania. I think in the next two to three years, the prospects for Eurocontrol are very good.
TER: If I'm a refinery, what's in it for me to tag the fuel?
SB: Suppose one of your managers decides to do a side deal and starts selling fuel to some gas station or somebody else and as a result avoids taxes. Then the refinery could be liable for selling fuel illegally. Or if you happen to be shipping fuel on a truck and the driver stops somewhere along the way, sells half of the fuel and fills the tank with water, you supply poor fuel to a gas station. The refinery would also be liable for that. It's an attractive proposition for a refinery, for a small amount, to ensure the product that goes to the end customer is what is coming out of the refinery.
TER: Excellent. Are there other gems in this portfolio that have real compelling stories?
SB: They all do. We go through some struggles, ups and downs. But they generally all have a good asset base, good leverage. In the agricultural sector we have a private company, Brazil Potash. We raised $25 million privately. We're drilling it now. Once the drilling is completed we're going to IPO this-we hope this year or early next year. We think it'll be a huge IPO.
This is in one of the largest potash basins in the world-we estimate more than10 billion tons in this 400-kilometer-ong Amazon potash basin-and Brazil Potash owns 90% of the basin directly. This basin could rival the Saskatchewan Basin, and geological, seismic and borehole surveys all indicate scale, geological properties and age similar to the Saskatchewan basin. So it's a big, big play.
TER: Any other potash plays in the F&M portfolio?
SB: We have one public company in potash-Allana Potash Corp. (TSX.V:AAA) in Ethiopia. It's a great company. It's in the Danakil Depression, where the geology is also similar to Saskatchewan's. It's surrounded by BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and an Indian company, Sainik Coal Mining, and has 43-101-compliant resources of more than 100 million tons. We expect to put that into production shortly and think that Allana also will be a great takeover candidate in the next 12 to 24 months.
TER: Stan, do you have any other thoughts you'd like to leave with our readers?
SB: The only other thing I want to mention is that sometimes people who don't understand Forbes and our model say we're charging our companies too much, Stan's too involved in a lot of companies, he's spread himself too thin, he issues too many shares. We don't take any more fees than anybody else. We believe very much in a model where you have a small base fee for all the management and very big bonuses based on results. Results may be the share price going higher, making a big discovery, arranging a big financing. We believe in that model, which is really the model on which the whole financial sector works. Really, our intention is the same as everybody else's-to add shareholder value. Sometimes the market gets confused. Any time people have any questions, just call us we'll be happy to answer them.
Stan Bharti, business consultant, professional mining engineer and international financier, has amassed more than 30 years' experience in business, management, operations, public markets, finance, mergers and acquisitions-the whole nine yards. He also has amassed more than $3 billion in investment capital to help propel junior resource companies to wealth-creating heights for their stockholders. He has been instrumental in acquiring, restructuring and financing scores of promising startups as well as struggling producers, from Europe to the Americas to Australia. As Financial Commentator and Market Analyst Peter Grandich puts it, In a business where failure is the norm, people like Stan Bharti. . .have separated themselves from the also-rans. Serving on the boards of numerous companies, both public and private and often as chairman, Stan devotes the lion's share of his time to the premier merchant bank he founded, Forbes & Manhattan, Inc., where he is president and CEO.
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1) The Energy Report Publisher Karen Roche conducted this interview. She personally and/or her family owns the following companies mentioned in this interview: Dacha, Pinetree and Aberdeen.
2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Vast, Allana Potash, Sulliden, 49 North Resources, Eurocontrol Technics, Aberdeen and Avion.
3) Stan Bharti: I personally and/or my family own shares of all the companies mentioned in this interview. I personally and/or my family am paid by all the companies mentioned in this interview.
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