Outsider Club Founder Nick Hodge interviews fund manager and best-selling author Marin Katusa about how to approach resource stocks and the merits of Brazil Resources.
Nick Hodge: Hi, this is Nick Hodge here. I'm the founder of Outsider Club, and also the managing editor of the stock advisories Early Advantage and Like Minded People. I have a special guest on the phone today to talk a little bit about the gold markets, and one of our holdings in that market in particular. Our guest is Marin Katusa. He's the president of Katusa Research. He's also a fund manager, and author of the New York Times best seller The Colder War. Marin, thanks a lot for joining us today.
Marin Katusa: My pleasure.
Nick Hodge: Before we started recording we were talking a little bit about your fund, and some of the readers may not know that you are a fund manager. They may know you more from the newsletter space, or the conference circuit, but could you tell us a little bit about the fund that you run, and why you think it's unique in the space?
Marin Katusa: For sure. First of all, myself and Doug Casey are largest shareholders. Me being number one investment dollars wise, and number two is Doug Casey. We're the largest fund focused on natural resources in Western Canada. We also have the top performing fund over the last seven years in the sector, in our country. Vancouver is where my head office is. That's the hub for the financing of the junior resource sector. Because I run the largest fund there's not a deal that I don't see that the bankers are working on. Being in the epicenter of the natural resource sector gives you a bit of an advantage, and we're solely focused on natural resources, and this is a fantastic time to be invested. Especially in gold. You're correct. Like I'm partners with the Cambridge House guys where we run the world's largest investment conference for natural resources for the retail audience, and it's all about access to the best deals in the industry.
Nick Hodge: Congratulations on the performance of the fund. I know until really the past six months or so it's been it's been a tough slog for the natural resources base. You want to talk a little bit about how you've been the best performing fund in that sector in tough times, and what you look for to generate that fund performance?
Marin Katusa: You bet. I had the benefit, or the luxury, or just damn good luck of being mentored by some of the best people in the industry. Guys like Rick Rule, big shareholders, and Doug Casey where they have 40 years of success. The key is never to be overexposed in any one sector, have cash when others need cash, so then you structure the deals on your advantage.
It's also understanding how to do sector rotation. There's always a bull market somewhere, and right now gold is a great place to be, but you also have to look at other sectors that aren't getting as much attention, so ... Luckily we got out of oil, and I told everyone to get out of oil. I've avoided the coals. Something that you and I talked about a few years ago at a conference.
It's about being exposed to the right areas, but most importantly Nick, it all comes down to backing the absolute best people in the natural resource sector. This ... Everyone thinks that you have to find a good gold deposit, which is true, in the right jurisdiction, but without having the best management team in the world running that company that has the best gold deposit in the best jurisdiction you're going to fail. Because investing in average people you're not going to get average returns, you're going to get sub-average returns. So focus on the people running the deal. That really comes down to the secret of my success.
Nick Hodge: That's actually too good of a segue to pass up, because one of the companies we were going to talk about today is Brazil Resources. I was going to ask you a little bit about is it time for a gold bull-market yet, and negative rates, but maybe we can just tap-dance around some of that stuff as we talk about BRI? Why do you like Brazil Resources so much? Why does ... First of all how much of the company does your fund own, and then maybe a little bit about why you like the stock, and then we'll talk about gold, and negative rates as we go?
Marin Katusa: For sure. There's no secret. We're a reporting issuer in the company, which means over 10% of the company of Brazil Resources, ticker symbol BRI, and it all started with the management team. I've known Amir for over a decade. This is one of the few people that have actually taken expiration projects, and put them into production. Nick, in geology courses in university you learn about how one in every 3,000 projects ever becomes an economic producing mine. The odds of putting something into production are so low. It really comes down to Pareto's Law: finding the right people. It's not like it's just good luck. There's patterns to success. There's the millionaire's mentality, and I knew because of his past successes he's also the largest individual investor in the company. Let's go through the thought process of how I play this.
I found a guy who is incredible. Great track record. He's put millions of dollars of his own money into the company at prices higher than where it's trading. Then he goes and puts together a great team. A great leader can't do everything. He knows that, so he has to find great people around him. That's what Amir did, and then the business plan to me was brilliant. In a depressed gold market go after incredible assets on a nickel, or a dime on the dollar where other companies have blown themselves up. That is why we've put tens of millions ... We hold tens of millions of dollars in this company, and every year for the last five years I've increased our position, because I believe in what he's doing.
For example, you know my background as a mathematician. Little metrics. If you own a company you want your value to grow. A big problem with the resource sector is companies dilute the shareholder's to advance their projects. If you're a shareholder of the company you have to ask yourself, "Is my share in this company increasing it's gold exposure, or is my share decreasing, because of the dilution?" I created something called the gold growth per share metric, and Amir's the number one – in BRI – metric on the stock exchange for ... If you're a shareholder every year your gold growth per share has increased, so your value is increasing.
Then you look at other analysts in the industry. Some of the top analysts at investment firms. You got Rob Chang at Cantor Fitzgerald. He's come out with over $3.50 per share target on this, because of just the current assets, and even says it's going to go higher. Then you look at the Uranium exposure. This thing's going a lot higher, so when you hear a guy like Doug Casey say, "We're long, and strong," and he expects the stock to go to $10. When someone who has 40 years of experience, one of the world's greatest speculators who's made hundreds of millions of dollars, when you find the right person, at the right time in the market, with the right business plan, at the right time in the cycle go long and strong, and that's what we're doing with our fund.
Nick Hodge: That was a long answer, so let's break that out a little bit. There was a ton of good stuff in there. Let's start with the gold growth per share. If you just continue to finance your company, and you continue to issue more shares, and your resources, or your assets aren't growing then of course you're being diluted out of the asset you invested in to begin with. With BRI, with Brazil Resources they've taken this bear market over the past couple of years to really add ounces in the ground. Just look at the Whistler acquisition, the property up in Alaska. That's taken BRI to over 10 million ounces indicated and inferred. I think something like 13 million ounces of gold equivalent.
Marin Katusa: Spot on, Nick. What people have to understand, and differentiate is a lot of companies claim they have ounces in the ground, but what are the quality of those ounces? Now a very good friend of mine just sold his company for over $125 million in Argentina. It's called GoldRock (TSX-V: GRM). If you take their deposit in Argentina, and compare it to just one of the projects in BRI that everyone's even overlooking called the Sao Jorge Project, if you compare it apples to apples, you look at the grade BRI wins. You look at the cap ex BRI wins. You look at the cash flow BRI wins. You look at the IRR BRI wins. You look at the permitting process BRI wins. You look at the jurisdiction BRI wins.
Now I'm not knocking Gold Rock. They sold it. They made their shareholders good money, but my point here is that the majors, and the mid-tier producers are looking around the world and going, "Wait a second. There's not that many high-quality projects left." When you have a project in BRI that nobody is even talking about, and it is a superior project than a company that just had one asset, and sold for over 125 million, then you start looking at the value of what this really has.
Another interesting point, over $250 million US has gone into the project. Probably closer to 350 million that Amir's picked up, so other people spent that money, and that's called value investing in the resource sector. That's how guys like Ross Beaty have made people billions of dollars. Exactly the model that Amir's doing with BRI.
Nick Hodge: It's worth noting that the market cap for BRI is sitting at $200 million Canadian now, so less than the money that's already been sunk in those projects to begin with.
Marin Katusa: Exactly.
Nick Hodge: Something else that I picked up on in your previous answer was the mention of Rob Chang covering Brazil Resources. Rob is traditionally known, I believe, as a Uranium analyst, and you mentioned the optionality that Brazil Resources presents ... They own an asset up in Western Athabasca called REA, or R E A. You want to talk about that for a second?
Marin Katusa: For sure. Let's be very clear here. I think this is either serendipity, or just good luck. When Amir did his strategy he came across this project, and the partner is Areva. That's France's largest yranium company. This project surrounds the Maybelle deposit, which is one of the highest grade Uranium deposits on the planet. And it hasn't even seen modern technology in the last few years drilling it, because Areva's been so distracted with their issues that they've had in Niger and Africa.
Looking around it their partner is Areva. It completely surrounds the Maybelle. I believe that the value here alone is over $100 million. I was thinking this morning when I was walking to work... If you look at ... Compare what BRI has just in their Uranium asset, companies with half that type of project that BRI has with the uranium traded at over $100 to $200 million dollar market cap just 10 years ago in the last uranium cycle. This alone when you look at the value, their partnership, the strategic land location, Maybelle does not work without the land that the REA, or REA has, so this is strategic, and as a shareholder whether it was serendipity, or strategy from Amir's part, or just good luck I don't care.
There's significant value there, and I look at it just like a free lottery ticket, because just the gold assets they have the company's worth over two times where it's trading now. Easily two times at current prices. You look at theSao Jorge Project, we're out over $1,300 in gold. This project flies at $1,200 gold, and that's what I really want to emphasize here Nick, is the reason why I hold such a large position is people talk about optionality. I understand that, and I believe in the optionality play. There's a lot of companies out there that trade at a billion dollar market cap with about the same type of ounces that BRI has. They need $1,500, $1,600 gold to fly.
If you look at what BRI currently has ... For example, take Sao Jorge in Brazil. That needs lower prices than we have in today's gold market for it to be very successful, and it has huge optionality. I like having an optionality that works at lower prices not needing it to go $400, $500 higher. That's important.
Another interesting thing that people don't realize is BRI's in the top seven when it comes to ounces in the ground of all the non-producing gold companies in the world that are publicly listed and traded. Once the big funds clue in that the big up-side is in this gold market ... Nick, I'm sure you know this, but your readers may not know. In the last 30 years the big sovereign wealth funds and pension funds, they've never owned as little gold as they own today. If they just go from 0.2% holdings to 0.4% gold holdings we're going to see a bull-market like we've never seen in our lifetime. This is a great time to be exposed to gold stocks.
Nick Hodge: Yeah. No, I think it's a ... That's a perfect way to wrap up, so you know you have all these trillions of dollars world-wide. I think I read this week that some $10 trillion of bond holding world-wide are now having negative yield. That capital's going to look for a friendlier home some where, and the gold market is so small that ... Like you say just a small amount of that capital looking for a safer home in the precious metals markets could send the underlying metals prices, as well as the related stocks up by many multiples. That's the last question, or the last point I wanted you to put on this interview is with the mineral bank, with the asset bank that Brazil Resources created ... Sao Jorge is economic project at 1250 gold lower than we are now. What happens as these negative interest rates, as the actions of the European Central Bank, and the Bank of Japan, what happens as all these underlying fundamentals perhaps bolster the price of gold? What gold price do you see, and what leverage does a company like Brazil Resources offer for the rising gold price environment?
Marin Katusa: Some of the most respected, conservative money managers are now recognizing that gold is a place to preserve your wealth. When you talk about all of the private wealth there's over 4500 family offices just in the US that have over 50 million in assets under management that have pulled out of the hedge-funds, that are looking to just preserve their wealth. If you're a Brit holding pounds this past 24 hours you sure wish you had exposure to gold not to your currency. There's no doubt that we are in a deflationary market for these currencies. They're all looking at depreciating their currency value, and the only way to protect yourself in that is having quality assets. There's no better currency to hold in a depreciating currency market than gold.
You're going to see a huge race into gold, and look depending on the people's risk they'll either buy gold, or gold ETFs, the producers. You will see it in every cycle. People are looking to get that return, and they want exposure to the upside, and you're going to see companies either buy out, make a hostile bid for BRI, or BRI's going to spin out like what happened with Ross Beady's company in Lumina. Where many companies came out, because a problem with BRI is this: It has too many quality assets in it, and investors don't understand that the sum of the parts is much greater than what it's trading at today. We will see eventually Amir sell Sao Jorge, or maybe sell the Uranium asset, or spin it out. I don't know what's going to happen, but they'll be significant shareholder valuations here that we are going to realize.
Nick Hodge: It's exciting times ahead for gold markets, gold speculators, gold bugs, and especially BRI, and it's shareholders. Appreciate you to tell us a little bit more about your fund, and the back-drop of the Brazil Resources story today. I know I'm always a little bit smarter each time I talk to you, so thanks again.
Marin Katusa: Always a pleasure, Nick. Take care of yourself.
Nick Hodge: You as well, Marin. Thanks a lot.