The 2018 International Mining Investment Conference, sponsored by Cambridge House International, is about to wrap up. Attendees were treated to the usual line-up of guest speaker presentations. Some of these presentations were more generally market-oriented, while others were specifically investment related.
In the latter category was a presentation on May 15th by Benj Gallander: How to Profit Handsomely From Commodities. Gallander publishes the subscription-only newsletter, Contra the Herd.
For resource investors like the Stockhouse Community, it sounds odd to talk about resource investing as “contrarian” investing. Yet the fact remains that despite all the talk about “strong economic growth” – especially from U.S. media – commodity markets have never regained the strength they enjoyed in the Great Spiral that abruptly came to an end in 2008.
Soft commodity prices (in most markets) translates into muted investment in these resource sectors, by investors and companies alike. In turn, with minimal new supply coming online in many of these markets, this has led to supply deficits and the erosion of inventories.
Resource investors understand that these resource sectors – especially in mining – are highly cyclical. The current, general weakness in commodity markets cannot endure. The longer that depressed conditions remain (and inventories shrink), the stronger the subsequent rebound. This is the nature of markets.
Enter the Contrarians. In a May 15th presentation at IMIC, Benj Gallander explained his “contrarian” philosophy. As with all contrarian investors, the starting point is in looking for “unloved” companies and/or sectors.
That part is easy. Any investor can spot unloved companies simply by looking for stock charts that closely resemble train-wrecks. More difficult is to identify companies that are poised for a turnaround. In this respect, Gallander identified three areas of focus:
Balance sheet
Insider ownership
Catalyst
In looking at a company’s balance sheet, Gallander isn’t only looking for strength. As he explained to his audience, all investing is a risk/reward proposition. Companies that have little “risk” in their business model generally also offer little “reward” for investors – because such companies tend to always be fully priced.
Gallander is looking for some blood in the water: an otherwise-strong company that has been faced with adversity in one context or another. It’s such adversity that depresses a share price, creating the opportunity for value investors to climb aboard and await a revaluation as the “ship” gets back on course.
Gallander also looks for strong insider ownership: an indication that a company’s stock is in “strong hands”. That translates into other investors with the patience (and the nerve) to wait for a depressed stock to be revalued higher by the market.
Finally, Gallander must see some catalyst that points to a near-term turnaround. What has changed about the sector in which the company operates? What has changed about the company itself?
Based on those criteria, Contra the Herd delivered three “contrarian” picks to investors who listened to this 20-minute presentation at IMIC 2018.
Sprott Inc.
Formerly known as Sprott Asset Management, Sprott Inc. (TSX: SII, OTCQX: SPOXF, Forum) is Eric Sprott’s primary wealth management vehicle. This company used to be more broadly based in terms of the sectors in which it was active. This investment philosophy has been changed to an exclusive resource focus.
While Sprott Inc. has already delivered strong returns for investors over the past year, Contra the Herd sees much more potential for this company (and stock) as resource sectors cycle back to bull market conditions.
Major Drilling Group
Major Drilling (TSX: MDI, OTCQB: MJDLF, Forum) is a more typical contrarian pick. While the share price has picked up in recent weeks, the one-year performance for this established drilling company is mediocre, at best.
Contra the Herd is touting MDI as a strong contrarian option for resource investors precisely because this is a service company. As activity in the mining and energy sectors heats up, these companies start sending in the drill rigs – and that translates into profits for Major Drilling shareholders.
Alacer Gold Corp.
Despite continued weakness in the price of gold (and a general downward trend for gold stocks), Alacer Gold Corp. (TSX: ASR, OTCQB: ALIAF, Forum) doesn’t immediately look like a contrarian investment. It has traded sideways over the past year and has actually moved higher in recent months.
A 3-year chart provides a better picture here. Like most gold mining companies, Alacer’s share price has sagged over this timeframe. So what makes this company a “buy” (according to Contra the Herd) versus many other profitable gold mining companies from which investors can choose?
Two factors. First there is jurisdiction. Gallander frankly acknowledged that with Alacer’s gold mining operation based in Turkey, this company is being significantly discounted because of investor uneasiness with this jurisdiction.
Then there is the “catalyst”. For Alacer Gold, this is a new, major “sulphide project” designed to add a large gold-sulphide operation to the already robust gold-oxide mining at the Alacer’s Çöpler Gold Mine.
Resource investing as contrarian investing? A decade ago, investors would have laughed at such a proposition. Today, however, after a full decade of generally anemic commodity markets, the building blocks for the global economy are now viewed as “contrarian” investments.
