Steve Palmer: Bearish on Gold, but Bullish on Select Juniors
Source: George Mack of The Gold Report (5/9/11)
Get in cheap while companies are relatively unknown and then pick up doubles, triples, or better when they hit the big time-that is AlphaNorth Asset Management Founder Steve Palmer's investment strategy. In this exclusive interview with The Gold Report, Steve shares some ideas for spotting big growth potential.
The Gold Report: At the end of March you had CAD$100 million under management. This gives you tremendous flexibility with small-cap companies. How much can you manage and still maintain your small-company focus?
Steve Palmer: Since inception of the fund, we have said we would limit new investments once we reached CAD$100M. As a result, we gave notice several weeks ago that the Class A and D shares will be closed to new investors after June 30.
TGR: Do you anticipate opening a new fund?
SP: Yes, in early May we filed a preliminary prospectus for a new mutual fund-the AlphaNorth Growth Fund. This fund will have more of a mid-cap Canadian equity focus.
TGR: You managed a large-cap fund for a major asset management firm. You never had any problem with liquidity of shares in that kind of situation. But is that your chief concern in the micro- and small-cap space today?
SP: Yes, liquidity is always an issue when you're investing in small-cap companies. So, it's prudent to limit the size of the assets under management. Otherwise liquidity can detract from performance. Currently, our focus is small caps because they offer the best long-term returns. Our small-cap assets have reached a level now where I don't want to go too much beyond, or it will start negatively impacting the returns we can generate.
TGR: I know you're long-biased, but what makes you a hedge fund?
SP: Well, the AlphaNorth Partners Fund structure also gives us the flexibility to use leverage and to short stocks, unlike the mutual fund structure. But most of the money is made from the long side. I've listened to other managers brag about making 50% on the short sale. But, if I only make 50% on a position, I'm disappointed. I'm trying to get into something that has lots of potential and make multiple times my invested capital. So, that's why we focus on the long side.
We use the shorting to hedge our market risk, lock in gains in positions that are not freely trading or make outright negative bets on a company. So, that just helps limit the downside. But, the strategy of the fund is not to have every month be consistently positive. We're trying to maximize returns over the long term.
TGR: Your January performance was up 5% or 6%. February was an outstanding month when the fund was up 23%. March up about 1%. How did April shape up?
SP: The fund returned 11.7% in April, so it was been a very strong month, especially in the context of the TSX and the TSX Venture, which were both negative during the month.
TGR: In your last interview in December, you had some short positions in gold equities. You were right at the time. By the end of January gold had plunged by about $100/oz. from mid-December. I'm wondering if your outlook has changed. Do you think gold is overvalued today?
SP: Well, the value of gold is very arbitrary. I've always used it as a play on the U.S. dollar. And, in recent weeks the U.S. dollar has gone down fairly significantly and as a result gold has rallied. We do still have a short position on COMEX gold, a small position. That helps to hedge some of the risk of our junior gold equities that we own. So, of all the commodities, it's probably my least favorite. The major reason for that is that I think investor sentiment remains unanimously bullish on gold, and that's bound to turn at some point.
TGR: Steve, you're looking for equities that have a driver other than appreciation of the underlying asset. Isn't that right?
SP: Right. For someone who is actually negative on the commodity, some would say I have a surprising number of junior gold investments. But, they're, as you say, more driven on stock-specific catalysts. They're more discovery stories versus the senior gold producers, which are cash-flow driven and where the price of gold directly impacts the value. The juniors are impacted to some degree by the gold price, but whether gold is plus or minus $50/oz. from where it is today is not going to materially change the outlook for a company that's on the verge of a big discovery, for example.
TGR: One of your investment theories is finding value through inefficient markets. Can you still find hidden nuggets in these piles of small-cap resource companies?
SP: Yes. A lot of opportunities exist in Canada. The TSX Venture Exchange alone has more than 1,600 listings. There is no shortage of good opportunities in Canada.
TGR: Investing in orphan companies sounds precarious. If there is no analyst coverage and people aren't writing about it, you really have to know a lot about the company. What's your main safeguard in the due diligence process?
SP: Well, we usually meet management before investing in a company, and we assess the business plan and the current value of a company. At the end of the day, it depends on the risk compared to the reward opportunity. So, we try to get in on situations that have minimal downside risk; in other words, very cheap valuation and strong management. We also want to see strong backers who are going to make things work one way or another. If it doesn't work on one asset, they'll find another one and then make it work over the long term. And on the flip side, we want to have lots of upside potential. So, quite often we get involved in private placements where you can buy a unit that is a share-and-a-half or a full warrant, which provides you additional leverage to gains if things really work out.
TGR: Where are you finding the value and growth that you seek today?
SP: One that we participated in very recently where we were existing holders already is Ryan Gold Corp. (TSX.V:RYG), which recently raised over CAD$50M. We added to our position. The Yukon has been the site of several significant discoveries over the last couple of years. Most of those properties were vended into several companies by Sean Ryan. Now he is exclusive to Ryan Gold, which is going to have one of the largest exploration programs in the Yukon. His systematic approach to conducting soil samples and drilling has been highly successful.
The odds are extremely high that something very significant will be found on Ryan's large property position. They have multiple targets already. The soil sample results are similar to those that have led to other discoveries by what was then Underworld Resources Inc. and Kaminak Gold Corp. (TSX.V:KAM). It's hard to see how they will not find anything significant.
TGR: You're partial to the Yukon region?
SP: The whole Yukon area, yes.
TGR: Anything in the Yukon you currently like?
SP: Well, I guess I could talk about Taku Gold Corp. (TSX.V:TAK; OTCBB:TAKUF). We still own that position. It has a much lower market cap than Ryan Gold, but it is well positioned in the Yukon as well. I think the shares are a good value at current levels. Also, we've owned Golden Predator Corp. (TSX:GPD) for a while, and it's done very well. It reported recently with some very good drill results that caused the stock to go up. There is already a discovery on the property, and some additional drilling will expand the resource.
TGR: Do you like Golden Predator enough to keep it?
SP: Yes, I just recently purchased in their latest financing.
TGR: You own one that has not traded for a while, I think.
SP: Yes, Puget Ventures Inc. (TSX.V:PVS) has been halted for, I think, it's been about seven months now. It's taking a long time, but I guess there's a lot of paperwork and bureaucracy involved in merging this private Russian company, Imperial Mining Holding Ltd. that has a significant cobalt asset, with the existing Puget assets. The new name will be Global Cobalt Corp. My understanding is that that's pretty much complete. I think we're a couple of weeks away from all that paperwork being finished. Some funds will need to be raised to get it relisted on the TSX.
TGR: Thank you, Steve.
SP: Thank you as well.
Steve Palmer has served as president, CEO and a director of AlphaNorth Asset Management since founding the firm in the fall of 2007. The company currently manages a long-biased, small-cap hedge fund. Prior to founding AlphaNorth, Mr. Palmer was employed at one of the world's largest financial institutions as VP of Canadian Equities, where he managed assets of approximately $350 million. He managed a small-cap pooled fund from its inception in August 1998 to August 2007, achieving returns that Morningstar Canada ranked #1 in performance (35.8% over nine years versus 10.0% for S&P/TSX Composite Index and 13.0% for the BMO Weighted Small-Cap Total Return Index) over the same period. Mr. Palmer also managed a large-cap fund that ranked in the first quartile of performance for years 1-5 and 10 at the time of his departure in August 2007. Prior to this, he worked as a portfolio manager at a high net-worth investment boutique. Starting his career as a research associate in January 1995, Mr. Palmer quickly progressed to research analyst. He has a BA in economics from the University of Western Ontario and is a CFA.
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1) George Mack of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Golden Predator and Puget Ventures.
3) Steven Palmer: I personally and /or my family or AlphaNorth funds may own shares of the companies mentioned in this interview. I and/or my family are not paid by any of the companies mention in this interview.
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