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A Robertson Stephens geologist helps pick mining stocks and sidestep disasters
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Eric J. Savitz
<Picture: J>ust say no. Sometimes, that's really the best investment philosophy. As some investors learned the hard way this year, doing nothing can be particularly wise when it comes to the dangerous world of Canadian mining stocks. The recent Bre-X mess and the smaller-scale but equally tawdry Delgratia Mining scandal have provided painful lessons in the dangers of succumbing to the allure of development-stage mining ventures. Occasionally, of course, the sector provides a stunning success story, like Diamond Fields Resources, which in 1993 found a huge deposit of nickel and other metals at remote Voisey's Bay, in Labrador, Newfoundland. That kind of find, though, is the exception to the rule.
All of which makes the investment approach of the natural-resources team at Robertson Stephens that much more intriguing. Paul Stephens, who runs Robertson Stephens Contrarian Fund, and Borden Putnam, a geologist who provides investment ideas to all of Robertson's portfolio managers, have been systematically investing in what Stephens calls ``growth golds.'' Less euphemistically, he's talking about speculative mining stocks, the kind of companies strewn around the Vancouver and Alberta stock exchanges like buried land mines. (For a look at the Alberta exchange, click here.)
In 1997, the stock market has been less than kind to the junior golds. Robertson Stephens Contrarian has about a fifth of its assets in stocks of that ilk; so far this year, the fund's growth gold holdings have declined about 20%. Overall, $1.2 billion Robertson Stephens Contrarian is off about 1.4% this year, while Robertson Stephens Global Natural Resources, with $160 million in assets, had slipped by 1.5%.
Even given the trouble in the gold sector this year, the Robertson funds have shown an almost uncanny knack for staying on the right side of one risky mining stock after another. In the case of Diamond Fields, Stephens stood by the company in the face of an army of doubters, many of whom took direct aim at Stephens's relationship with the Vancouver stock promoter Robert Friedland, who served as Diamond Fields' co-chairman. In the end, of course, both Friedland and investors in Contrarian made a ton of money on Diamond Fields, which eventually was acquired by Inco for more than $4 billion (Canadian).
On the other hand, when it came to Bre-X, which unlike Diamond Fields attracted an army of high-profile institutional investors, Robertson stayed out of the way. Actually, at one point, Stephens bought a small position in the stock for the Orphan Fund, a hedge fund he runs for Robertson. He sold the shares, though, long before they reached the radar screens of most investors. Says Stephens: ``We didn't own it for all the right reasons.'' And, Stephens says, his due diligence on Bre-X management made him queasy. Robertson also stayed away from Delgratia, which like Bre-X has seen its share price collapse due to apparently falsified test results.
Stephens deserves much of the credit for Robertson's smart positioning in the sector. He's got years of experience investing in both private and public gold stocks, providing him a priceless Rolodex and extensive insights into most of the industry's key players. At the same time, Stephens is no geologist, and contends you can't invest in the sector with any confidence without having someone who can visit mines, examine core samples, and discern the next Diamond Fields from the next Bre-X. For a while, that someone was a geologist named R. Edward Flood. However, Flood left Robertson in 1995 to become president of Indochina Goldfields, a Singapore- based mining outfit put together, with no little help from Stephens, by none other than Robert Friedland. Interestingly enough, Indochina Goldfields now ranks as Contrarian's second-largest holding and its biggest single gold-mining bet.
In any case, Flood's departure left Stephens with a hole to fill - and he chose Borden Putnam to fill it. Putnam has more than two decades of experience in mining, including stints at Newmont Exploration, Amax Exploration and, most recently, the consulting firm Mineral Resources Development. He talks with enthusiasm about core samples, chisels and assaying techniques. Where Stephens provides expertise at building relationships, tall, lanky, curly-haired Putnam chips in with detailed knowledge of rock-crunching. It's proven to be an effective combination.
We caught up with Putnam recently at Robertson's downtown San Francisco headquarters, in a 25th floor conference room with a stunning fog-free view of San Francisco Bay. Alcatraz Island - The Rock - loomed in the distance. Tagging along with Putnam was Andy Pilara, manager of the firm's natural-resources fund, and apparently the designated chaperone for the chatty geologist.
Snaring face time with Putnam is no mean feat. Since joining the firm as chief geologist in early 1996, he has racked up an incredible number of air miles, visiting some of the most remote, least hospitable burgs on the planet. Before Robertson puts a dollar into any gold- mining stock, the firm dispatches Putnam to the scene - and he makes repeat trips to monitor the operation. As a result, he travels almost non-stop.
Over the past eight months, for instance, he's made three jaunts to Africa, inspecting prospects in Tanzania, Zimbabwe, Kenya, South Africa, Mali, Burkina Faso, Ghana and the Ivory Coast. (At the moment, he's there again, visiting mines in Ghana and Niger.) In between, he's been shuttling back and forth to Asia, Latin America and Eastern Europe, with stops in Mongolia, Kazahkstan, Armenia, Mexico, Guyana, French Guiana, Suriname, Brazil, Burma, Russia and Indonesia. And he's made a pair of trips to Australia. In all, Putnam figures he spends 75% of his time on the road, no little part of that strapped into rickety helicopters and tiny chartered planes, balancing in human-powered longboats, and hiking through dense forest.
``I can't say it's glamorous,'' Putnam says. ``Most of the time it takes 24 hours or more to get there, and then you're immediately whisked off to the field in a helicopter or four-wheel drive, and dragged off through the jungle.'' On one trip in Tanzania, he says, the landing gear wouldn't drop; the pilot had to crank it down by hand. ``Another time, we had to hike eight kilometers through the Indonesian rain forest. People had to pull off leeches. Then, we got to a river, they put us in longboats and dragged us 12-15 kilometers down the river. You never drink the water. There's no phones, no faxes. It's like you disappear for three or four days at a time. It's the curse of the geologist. You go where the rocks are.''
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Borden Putnam: seeking things miners don't mention, ``faults they may not even know about.''
The Robertson Stephens approach to gold investing focuses on the firm's obvious advantages - a willingness to spend time in the field and an intimate understanding of who's who in an industry with managements, to put it delicately, of widely varying quality.
Robertson also gets involved with these companies far earlier in their life cycle than most other investors do. ``You need to understand the exploration potential of the growth gold companies early in the discovery process,'' Putnam explains. ``You grow as the company grows. We help them build their companies, like merchant banks, or venture capitalists,'' often investing long before a new company files for a public offering.
Before the firm will ante up any cash, Putnam hops on a plane. When he reaches a mining site, he looks at more than just the geological evidence. ``First, we want to see how good are the people,'' he says. ``Who are these guys? Are they focused on the project? What's they're background?'' He also pays attention to logistics. ``Are there roads? Phone lines? How good are the local people? Do they have the right training and equipment?'' And he tries to get management to dispense with the PR. ``I get them to stop telling me the pat story, and to tell me about the geology, the evidence of mineralization,'' he continues. ``They tell you a lot of things, and then I go out to try to verify, and to look for things they didn't mention, looking for faults they may not even know about.''
The real work in Putnam's excursions involves drill cores, the samples pulled from the ground. Before mining occurs, gold explorers drill hundreds or even thousands of core samples, all just a few inches across, but several thousand meters long. ``Typically, the core is laid out in boxes in sequence,'' he says. ``A lot of the time you can find me on my knees, on the ground, with my hand lens. I spend a lot of time scratching the samples; you can tell a lot from their color, their hardness, and how they streak when you scratch them. You can discern certain minerals by how they streak.''
By the time Putnam joined Robertson, the firm had long since dumped its Bre-X shares. Nonetheless, Putnam examined the situation for himself. ``When I joined, Busang was already happening,'' he says. ``It was the hot topic. I constantly had to defend the fact that we didn't own it. So it was one of the first things I looked at. I was wonderfully intrigued, but I couldn't get the story filled out to my satisfaction. By that time, Bre-X had withdrawn from face-to-face meetings with institutional investors. I participated in two or three conference calls they had, though, and I asked a lot of pointed questions, which they never answered.'' Among other things, Putnam thought it odd that the cores Bre-X drilled were so far apart. ``They said: `Because that's how we laid them out.' While the market credited them with a great many ounces of gold, banks wouldn't have lent them money with data of that quality.''
In the case of Delgratia, Putnam said he had doubts about the Nevada location where the company claimed to have a promising find: ``There's an area surrounding Las Vegas which is the Bermuda triangle of gold deposits. Money goes in, and nothing comes out. Oil scams arise in the same area.'' It didn't help, either, that Delgratia wasn't willing to provide very much information. ``They wouldn't send me maps, or even tell me what county their site was in. They claimed they were still acquiring ground, and didn't want to compromise their competitive advantage. They said: `Trust us.' I said: `No, trust me.' '' Not buying, he says, ``was a lay-up.''
Putnam also kept Robertson out of another controversial stock, International Precious Metals. While that company claims to have a significant gold find in Arizona, the state contends the site has little or no gold. ``It's an area I won't traffic in, companies that require exotic analytical techniques to prove they've got something,'' he says. ``They claim you have to use their technique, or you won't find gold. Well, if I can't use a straightforward industry standard practice, it's too complicated for me.''
The revelation that Bre-X had essentially nothing at Busang pummeled shares of Indochina Goldfields, which has its own large site nearby, in the Kalimantan region of Borneo. Putnam, however, remains confident that Indochina has the real thing. ``The two sites are geologically independent,'' he observes. ``The eastern half of Borneo already has two operating gold mines with proven reserves of two or three million ounces of gold. It's a legitimate place to explore.''
As of the end of March, Contrarian had just over 4% of its assets in Indochina Goldfields. The fund also has stakes in other companies tied to Robert Friedland, including Bakyrchik Gold, First Dynasty Mines, DiamondWorks, Armada Gold, and Vengold, plus Royal Group Technologies, which makes building products.
The Robertson funds have sizable positions, too, in other less-familiar names, such as Farallon Resources (one of the largest holdings in the Robertson Stephens Global Natural Resources fund). Traded in Vancouver, Farallon has a large gold prospect in Mexico.
Putnam says the site - ``thousands and thousands of hectares'' in Guerrero State, between Mexico City and Acapulco - includes ``massive sulfide'' outcroppings, indicative of zinc, copper and high gold content. He believes it contains ore close to the surface, suitable for relatively inexpensive open-pit mining. Putnam contends that Farallon, with a market capitalization of about $200 million (Canadian), ``is worth substantially more.''
The geologist feels similarly about Etruscan Enterprises, a Toronto-listed miner with a promising property in Niger: ``They made a very exciting discovery, which they're developing in a joint venture with Placer Dome. It's very early in the process, but they've already found on the order of three million ounces of gold in eight months of drilling. The upside is quite promising.'' As one measure of the property's potential, Putnam notes that Placer has paid Etruscan several million dollars in cash up front, in return for the right to acquire a 51% stake in the project for $50 million.
Also in Africa is Sutton Resources, which is drilling in Tanzania. Putnam contends it has found ``massive sulfide gold,'' deposits similar to Etruscan's. ``They're early in the discovery process, but they're finding excellent grades. It looks like it could be bigger than their wildest expectations.''
Putnam and Stephens agree that there's no way to invest safely in speculative gold stocks without a high level of expertise. Tempted to start fiddling with chancy Canadian mining issues? Putnam advises that you buy shares of a precious-metals fund instead. Or just say no. |
