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Stan Bharti: Hard Assets Heyday
Source: Karen Roche of The Gold Report (8/11/10)
With hard assets in favor these days, Forbes & Manhattan Founder and CEO Stan Bharti believes the best you can buy are commodities—they're "real, fundamental. . .something you can touch and feel." In this exclusive interview with The Gold Report, the fellow who has guided dozens of junior resource companies to the pinnacle discusses his formula—and a few of his favorites.
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.
TGR: 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 mining group includes gold and base metals. 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 projects around the world. Fourth is the bulk commodities, where we've focused on coal and iron ore. Then finally, the special metals—rare earth elements, vanadium, lithium—that really drive a unique part of the metal sector.
TGR: 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. I think we'll see gold go to over $2,000 an ounce. 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.
TGR: 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 again. 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. Obviously gold plays a different kind of a role; it is not just a commodity but also a hedge for the fiat currencies.
TGR: 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.
TGR: 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, in terms of access to brainpower, capital, and working the asset over four to five years, the rewards can be phenomenal for our shareholders.
TGR: 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.
TGR: 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 Kurdistan in northern Iraq. The seismics and everything look good, but until we drill the assets we don't know how big the oil discoveries will be. When exploration isn't successful, there's a problem.
TGR: Barring dead ends in exploration, what other factors help determine an asset's success?
SB: Obviously metal prices have to stay strong. In 2008 and 2009, metal 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 fundamentall,y 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.
TGR: 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.
TGR: 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 or Sulliden, for instance, you're better to buy Aberdeen. It's a great way to play the entire group of companies.
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.
TGR: 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.
TGR: 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.
TGR: You indicated that each of the five sectors that F&M focuses on will go through its own kind of up and down cycle within this bull market. Which of the sectors are currently in their up cycles and trading at the high versus which are still low and you're expecting to take off?
SB: With what's going on in China, there's a lot of interest in rare earth elements. China produces over 90% of the world's supply, especially the heavy rare earth elements. We've created Dacha Capital Inc. (TSX:DAC; OTCQX:DCHAF). It's a fabulous model for rare earth elements because instead of trying to buy an asset, we got special licenses to be able to buy the actual rare earth elements, the actual product, in China, then we move them Hong Kong or Singapore and put them in storage. It's a very tiny market, and we think we can be one of the lead players in capturing part of the market and in eventually trading rare earth elements as demand for them increases and prices go higher. We raised $25 million in Dacha not long ago, and have spent about $15 million buying some of these materials. They're inert, so we can store them for a long time.
As almost every analyst will tell you, rare earth elements are in huge short supply. With oncoming growth in technology and environmental issues, the rare earth element demand will be big. In fact, we believe that at some point, the U.S. will make some of the rare earths strategic metals, which will require the Pentagon to have them in storage. So Dacha has a lot of leverage. It's a very strategically, interestingly created company.
TGR: One of the interesting viewpoints about Dacha is that it trades more like an ETF than a rare earth exploring company.
SB: Yes, and that's a good thing because the market is saying, "I'd rather own Dacha than wait five years for a mine to go into production with all the risks of having to find the management team, get the capital, get the permits, spend the money. Lots of companies that have good assets are still four or five years away from production. Dacha can supply you the element today. We are lucky that we have these special relationships in China and an office in China that allow us to do that.
TGR: You were talking about gold earlier and stated that you think gold could go to $2,000. F&M has some pretty exciting gold companies in the portfolio. Could you tell us about some of them?
SB: Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF), which has about a million ounce resource, is surrounded by some of the biggest operating gold mines in Peru. Barrick Gold Corporation (NYSE:ABX; TSX:ABX) has Lagunas Norte on one side. On the other side is the Yanacocha mine, which Newmont Mining Corporation (NYSE:NEM) operates.
Sulliden's right in the middle, with a big land position and the same geology. Right now we're doing a feasibility study. We expect to have the Shahuindo Gold Project in production by late 2011 or early 2012, and then it will produce 150,000–200,000 ounces a year. More importantly, the exploration looks very good. We've drilled some holes there that have expanded the resource, and have a big drill program of 20,000–30,000 meters getting under way. Between now and the end of the year we expect to double the resource to 2 million ounces. Peru is a stable country well known for mining. The fact that we're in one of the hottest gold camps in the world is very exciting.
TGR: You also have a presence in primo gold country around Val d'Or, right?
SB: Yes, that's Alexis Minerals (TSX:AMC; OTCQX:AXSMF). It's a small producer, with the Lac Herbin Mine in Quebec yielding 30,000–35,000 ounces a year. But in addition to being a small producer, Alexis has key plays in two other areas. Rouyn in northern Quebec is one of the largest historical gold copper camps in the world. It had more than 20 mines operating within an area of less than 800 square kilometers. All went to depth of about 2,000 feet. They stopped in the '80s because of the metal prices. Nobody did any exploration below a depth of 2,000 feet. We optioned these assets from Falconbridge, which became Xstrata Plc (LSE:XTA), and now Alexis has 100% of this exciting camp. We're confident that we'll be able to have major discoveries at depths between 2,000 and 6,000 feet. So in terms of blue sky Alexis is phenomenal.
The other thing that Alexis did last year was acquire a company called Garson Gold Corp., which has the fabulous Snow Lake Mine in Manitoba. Previously known as the New Britannia Mine, Snow Lake was a historical producer for many years, and had not been fully explored. It was shut down in the early 2000s and still has close to a million ounces in a resource. It's fully permitted and the previous owner spent $200 million on a plant. We think we can activate it for $30 million to $40 million and produce 80,000–90,000 ounces a year at a pretty good cash cost—below $600 an ounce.
That is what makes Alexis very attractive. Small production, expanding production and huge blue sky both in Snow Lake and Rouyn.
TGR: It's easy to see why you're excited about Alexis. Any others you'd like to tell us about?
SB: Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF) is a producer in Mali, West Africa. We paid $20 million to Nevsun Resources Ltd. (TSX:NSU; NYSE.A:NSU) for two mines in which they'd invested $170 million. We've had some challenges, but we got the mine going and it should produce 75,000–80,000 ounces this year. Next year we expect that number to increase to above 100,000 ounces, so Avion's potential is very good.
More importantly, we have a big land position and already a resource of 4 million to 5 million ounces that we think we can expand significantly. We've been getting very good drill intersections.
TGR: Speaking of Africa—which I believe is the world's leading supplier of vanadium—do I understand that one of your companies is in that business?
SB: Correct on both counts. South Africa is currently the largest supplier. But our company, Largo Resources Ltd. (TSX.V:LGO), has a very large vanadium asset in the Bahia State in Brazil. That's one of its two main assets, and the vanadium pentoxide is very good grade there—1.5% to 2%, whereas the typical grade in South Africa is 0.5%
Vanadium prices are very strong now, too. They came off in 2000—from as high as $65, $70 per kilo—but have come back. Vanadium is a unique metal. There's a lot of demand for it, particularly in steel.
Largo's Maracás operation in Brazil is open pit, fully permitted, feasibility done. We're just finalizing the capital. The impressive thing is that Brazilian banks are putting up most of the capital. When it goes online, targeted annual production of 5, 000 tons of ferro vanadium (FeV) will make Largo a huge player in vanadium.
TGR: You mentioned that Largo has two main assets. What's the second one?
SB: Then the other thing we have in the Yukon is a tungsten/molybdenum deposit, Northern Dancer. This is an open-pit project, and in terms of tungsten, it's one of the largest undeveloped deposits in the world. We're doing the feasibility on it, and think this will really take Largo to the next level. We've also acquired a second tungsten deposit in Brazil, the Currais Novos Project.
When prices fell in 2008, Largo's stock got really hurt, but we believe that with steel going higher, these metals particularly have a lot of legs in the longer term. That should be good for Largo, which fundamentally has a lot of leverage to all of these metals—vanadium, tungsten and moly.
TGR: 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. One that I really like a lot in gold right now is Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF). It's a big Australian company. We acquired it two years ago for very little in the height of the financial crisis. Huge land position, 2,500 square kilometers, over 5 million ounces. The previous owners had spent hundreds of millions of dollars on these assets, which we acquired for less than $50 million.
With a little bit of capital we were able to start the mine. This is the first year we're putting it into production. We had some growing pains in the first two quarters, but the mine is performing well now. Crocodile Gold is doing almost 100,000 ounces this year and expects to go to almost 200,000 next year. Once we get to 250,000–300,000 ounces—which this asset has the ability to do over the next three to five years—Crocodile Gold will be a perfect takeover candidate by a major. So there's a great story.
TGR: 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 Gold 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: Largo, Crocodile, Dacha, Alexis, 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.