Streetwise Reports: Brian, you are a partner in Windermere Capital. Would you give us a brief introduction to the firm?
Brian Ostroff: Windermere operates two funds that are involved in the mining space. We are different than most funds in that most of the people involved have a technical background. Our partners in the fund are the former ore and concentrate trading team from the Pechiney Group. When Alcan bought Pechiney, they did a management buyout. So it today is a global offtaking group of traders focused primarily on the base metals. Its team is made up of mining engineers, geologists, logistical experts and people who really understand the business.
Windermere is the financial overlay. My colleague Chris Wright and I are the financial overlay, where we look at particular opportunities and, between the technical expertise and the financial expertise, make some decisions. We operate more like private equity. We are not active traders. We get involved in situations, very few, but the ones we get involved in we are usually the largest shareholder. We're there for successive rounds of financing and look to advance companies usually to some liquidity event. In a lot of cases, our positions are so large in these companies that, again, it's not something that we can necessarily get out of in the open market, so we try and drive the companies to some type of liquidity event.
SR: How many companies do you tend to have positions in at any one time?
BO: Typically it's not more than about a half-dozen. There are typically two or three real drivers in our portfolio. It's very concentrated. It's really the private equity model more than the traditional hedge fund model.
SR: The last half dozen weeks have seen a large movement upward in the gold markets, and, more recently, in silver. Generally, what do you see going on in the precious metals and in broader commodities?
BO: Yes, we are starting to see some life come into the precious metals, probably long overdue. But I think this is a move that is not a flash in the pan and there is going to be some substance to it.
My logic behind that is gold is an interesting commodity; it's fairly emotional. If you ask people what is it about gold that attracts them, you get a variety of answers. It's a hedge against inflation; it's a hedge against uncertain times and geopolitical unrest. Myself, I'm in the camp that gold is a currency. You basically have a choice. You can buy U.S. dollars or sterling or yen, or you can buy gold.
As I look at the world today, I see a whole bunch of central banks looking to devalue their currency. Whether it's the U.S. or Canada or Europe, you basically have a rush to zero when it comes to the currencies. Gold doesn't have a central bank, and there's no one who can control the value of gold. And so gold in essence cannot participate in this rush to zero. So today, as an investor, as I choose currencies, there's really, in my mind, only one currency that makes sense, which is the one that can't be devalued. And so I think that's why we're starting to see a greater interest in gold.
I'll add one other thing. Those who have historically not been fond of gold, one of the arguments they use is they want a return on their investments, and the problem with gold is it does not provide a return. The big change in that argument is today roughly $13 trillion of debt trades at a negative yield. In other words, investors basically pay governments for the pleasure of buying their bonds. So although gold does not give a positive yield, relative to all these other instruments that give a negative yield, all of a sudden, gold is providing a yield. So it seems to me that the backdrop is extremely constructive when it comes to gold.
You mentioned silver; I am a big fan of silver. One of the things that has been curious to a lot of people has been the relative underperformance of silver. We commonly watch the silver-gold ratio, which got up as high as 93, meaning it would require 93 ounces of silver to purchase 1 ounce of gold. Historically speaking, that is extremely high. Numbers would typically be around 60. So there is an opportunity for silver to catch up. And over the last few days, I think that's what we're starting to see.
I'll also add that silver tends to be more of a speculator's commodity, a retail commodity, whereas gold tends to be a big institutional, central bank commodity. Gold tends to move first, which we've seen, and then ultimately silver starts to play catch up. It is more volatile, and it moves a lot more dramatically. I think we're starting to see some catch up.
I think there was a lot of doubt around the early moves in gold that we've been seeing now for the last four to six weeks. Investors have been burned before. They've heard for a long time about why the precious metals should move. So all of a sudden, gold started to move, and it moved and it moved, but I don't think the speculators were buying it right away. But now, it seems as though this move is for real, and that has maybe enticed the more speculative end of investors to come in. And they tend to do it more with silver than they do with gold.
SR: Are there any other commodities you would like to talk about?
BO: A lot of your readers probably don't watch the agricultural commodities all that much. Quite honestly, over the last few years they probably haven't missed much, but to me, that's been an area that has been interesting. At the end of the day, food is really what matters. Whether gold is $1,200 an ounce or $2,000 an ounce really doesn't change anything for everyday living. People need to eat and livestock needs to be fed, etc. So it usually goes under the radar. The last five or six years have not been a particularly good time for the ag sector in general.
But we are definitely starting to see some signs of life. Corn as recently as about a week ago traded at a 40-year high. There are some events going on meteorologically that affect agriculture—a tremendous amount of flooding in the Midwest that has basically submerged farmland, drought in central Canada, swine flu in Asia. We're starting to see that play out in the food chain through grain prices and some other agricultural commodities.
Ultimately, the beneficiary of this is going to be fertilizer. Without fertilizer, there's no food. The fertilizer market went through a very tough time from 2012 through 2017. But in 2018 things started to get considerably better.
When it comes to fertilizer, I'm a big bull on phosphate. Phosphate is a necessary component of fertilizer but unlike potash and nitrogen, which are pretty abundant, phosphate is not as abundant. In fact, most of the world is in deficit. North America, South America, Western Europe and most of Asia all have to import phosphate, and that phosphate comes from the Middle East and North Africa. We know historically the Middle East is not necessarily the most stable place in the world and any type of supply disruptions could really be an issue.
I know people don't think about fertilizer much. And, as I always say, gold is sexy and oil is sexy, but you can't eat gold and you can't drink oil. At the end of the day, this is what really matters. For five years, no one paid much attention to phosphate and there wasn’t any growth in production. It just didn't happen because prices weren't there. But demand continued to grow every year regardless of price and, all of a sudden, that demand started to overwhelm the existing supply. In 2018, the price of phosphate went up 25%, and I'm pretty bullish going forward.
SR: Let's talk companies that are on your radar.
BO: I was just talking about fertilizer, so let's start there. Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE) is near and dear to my heart. Windermere owns just under 20% of the company. A couple of years ago, aside from my role at Windermere, I also became CEO of Arianne.
We talked briefly about phosphate, and I think it's extremely compelling. Arianne has been able to advance its project in what has been arguably a very difficult time. They say that the cure for a low commodity price is a low commodity price, and that could definitely be said about phosphate. As the price continued to decline, more and more projects were given up on and expansions didn't happen. And again, today we're sitting at a place where people are now starting to ask where are we going to get the phosphate from.
So, unlike most phosphate, which comes from the Middle East and North Africa, Arianne's project is in Canada. It is today the world's single largest greenfield phosphate deposit and makes a very high-purity and environmentally friendly phosphate. This type of phosphate continues to be in demand, particularly as people tend to look a lot more at some of the environmental factors. It also sells for much higher prices. This project, over that five-year downturn, continued to move forward. Today, it is fully permitted. It has a collaboration agreement with the First Nations, has signed a couple of offtake agreements and is moving forward on the financing of its project. Also, of significant interest, about a month ago Arianne signed a memorandum of understanding (MOU) with a large Chinese group.
When it comes to phosphate, China has been viewed as being in equilibrium. It is a large producer of phosphate, and, of course, it's a large consumer of it. Industry analysts now believe that China is heading into a deficit. I think that this is a game changer for phosphate and phosphate pricing. Today, India is the world's largest importer. It has 1.3 billion people. China now looks like it's going into deficit. That's also over a billion people. Just those two countries alone represent about 35% of the world's population. With the Chinese now looking as though they're heading into deficit, they, too, are going to be out there looking to secure phosphate supplies.
With Arianne being the world's largest greenfield deposit, it is I think a natural place for the Chinese to look. This MOU has been executed, and we are working toward a final agreement that in exchange for offtake and participation in the project, the Chinese would provide a large degree, if not all, of the financing. We will see where that goes.
I am encouraged. Arianne is a best-of-breed project, shovel ready. Today, it trades with a market cap of only about CA$60 million. It's funny because Arianne was basically orphaned. As the phosphate market, from 2012 to 2017, declined, Arianne continued to move its project forward, but no one was paying any attention. So today, even at that CA$60 million market cap, it's a fraction of what it was many years ago. The market cap today is lower than it was before the company had a bankable feasibility study, before it had its collaboration agreement with the First Nations, before it received its permits, before it had its offtakes, before it did this MOU. So to me, that is just incredible. The company trades at 4% of its net present value for a fully permitted, shovel-ready, best-of-breed project. To me, that is just as cheap as it gets. The one thing that arguably held it back was the overall macro, as we talked about earlier, and I think that's changing, and the company should get a lot of attention.
SR: Upon completion of financing, how long would it take Arianne to get into production?
BO: It is a two-year construction period, at which point the company will then be producing 3 million tons (3 Mt) a year of concentrate. That is an extremely large mine. At today's pricing, that would represent close to $500 million a year in revenue. In fact, it is projected to be the only large-scale independent phosphate mine to come into production over the next few years. Most mines are actually owned by the companies that make fertilizers; it's a very vertically integrated business. But Arianne is independent, which I think is of interest to companies that are short phosphate rock and are looking for access in.
SR: Let's go on to other companies that you're excited about that would benefit from a rise in commodity prices.
BO: I'd like to turn my attention to a couple of silver names. As I said, I definitely have a soft spot in my heart for silver. Although gold may be the big brother, I think the opportunities really are in silver. One of the reasons for that is it is hard, short of getting into physical silver itself or an ETF, to find a decent equity way to play silver. Over the last few years, during the downturn, what we've seen is a lot of the silver companies go out and do deals in gold assets, such that as investors now look at how they can get exposure to silver, it is more and more difficult.
So in that area, one of our names that I like very much is a company called Defiance Silver Corp. (DEF:TSX.V). Windermere has been involved in the name for quite some time. It owns the San Acacio project in Mexico in Zacatecas. San Acacio was a past-producing mine over its extended history. That mine had produced 100 million ounces (100 Moz) of silver. It sits on the Veta Grande vein, and that vein has produced 200 Moz of silver.
What interested us about the San Acacio mine was historically the mine had produced down to a depth of about 175 meters (175m). We know that the neighboring mine had produced down to 300m. So for us, there was a decent level of comfort that we had a lot more mine life to go if we went to depth. That was the original reason for us getting involved in the project.
But in addition, one of the things that was very exciting to us and that we believe provides a lot of upside is that with Defiance's property, there is a lot of potential laterally. Historically, the company had mined over a footprint of about 1 kilometer (1 km), but Defiance owns roughly 5 km of what could be lateral extension. So for us, the safe bet was at depth with the excitement being the ability to extend laterally. We are continuing to do some work there. It is I think a pretty exciting project. It is a silver play in Mexico, where I think that there is a lot of opportunity and interest.
Just as an idea of how starved the overall equity markets are for decent silver plays, back in that period that I talked about, late 2015 to middle 2016, Defiance was a well-known name, and when activity came back to the sector, which it did, Defiance at that point had moved, over that six-month period of time, from about $0.07 trading up close to $0.70. The project has continued to advance over the last couple of years during the tough times.
But now with interest coming back to the sector and people starting to look for silver names, I think Defiance will grab its share of attention. In fact, just over the last few days, as the silver market has improved, some attention has come back to Defiance, and the stock has started to perform much better, as well it should. Again, I think any decent silver asset in this upcoming market is going to perform extremely well.
SR: Do you want to go on to another company?
BO: The third company I'd like to talk about is Megastar Development Corp. (MDV:TSX.V). Megastar is early stage, but it's a very interesting situation. Your readers may be familiar with David Jones. He is a very accomplished geologist with many finds to his name in Mexico. He was responsible for the discovery of Los Filos, which is Mexico's largest gold mine, and El Limon, Torex Gold Resources Inc.'s (TXG:TSX) producing mine. He was on the board and involved with Cayden Resources Inc. at the time that it was acquired by Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), and he had done most of the work around Switchback, which is owned by Gold Resource Corp. (GORO:NYSE.MKT) in Oaxaca.
Jones had developed a geological theory of what was going on in Oaxaca and based on these theories and work he had done on Switchback, he had assembled three properties in Oaxaca. Jones and I have known each other for a very long time. He alerted me to what he believed was some of this potential in Oaxaca and these properties and a deal was done to vend them into Megastar Development. Megastar can earn 100% of these three properties by doing some work and issuing some shares.
Unlike typical transactions where assets get vended into a company and then the company raises additional funds, Megastar had cash. With that, the company did not suffer that initial dilution usually seen in transactions of this type, but also flew under the radar screen. It was only about six weeks ago that the company did raise some funds, a small amount, to allow Jones to do some further work.
So now, Megastar is starting to get a little attention and the company just started to put out some of the results from his early-stage work. Jones is extremely excited by these initial findings, and they very much seem representative of what Jones was looking for and consistent with what we see at the Switchback mine and also Fortuna Silver Mines Inc.'s (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) San Jose mine in that district as well. Jones believes this is all part of a trend that had come to be as a result of the same event that created similar geology and that the opportunity is very strong.
I should also say that Megastar recently announced Bob Archer, the co-founder and CEO of Great Panther Silver Corp., joined the board. Archer knows very much what it is to found and build a successful silver company. He and I know each other quite well, and I alerted him to some of the things that Jones was up to. They had spent some time together, and I think Archer got pretty excited by the potential here, Jones' theories and certainly these initial findings.
It is very early stage, of course, but it's also a very small market cap. Today, the company is probably trading under a $5 million market cap for something that looks pretty exciting, and with a great pedigree between Jones and Archer. And for investors who like that early stage, where it's high risk but very high return, Megastar would definitely be on my shopping list.
SR: Any parting thoughts for our readers?
BO: I'd just say I understand investors' skepticism. It's been a very tough period of time. Certainly, a lot of speculative money has fled the sector, going into things like cannabis and cryptocurrency and has really kind of taken the luster, if you will, off of the small-cap mining space. I do believe that we are at the early stages of a trend change. I think that as this sector starts to perform better, a lot of money can come in, and because the sector is as small as it is, you can really see some outsized gains.
SR: Thanks for your insights, Brian.
Brian Ostroff is a managing director at Windermere Capital, where he focuses on the junior and mid-tier mining sectors. He also serves as CEO of Arianne Phosphate. He brings over 25 years of small-cap mining expertise to the table, having served at RBC Dominion Securities and as a managing partner at Goodrich Capital, an M&A advisory firm.
Disclosure:
1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
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3) Brian Ostroff: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Arianne Phosphate, Defiance Silver and Megastar Development. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: Arianne Phosphate as a result of my employment as CEO. Windemere has holdings in the following companies mentioned in this interview: Arianne Phosphate, Defiance Silver and Megastar Development . I determined which companies would be included in this article based on my research and understanding of the sector. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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