₪ David Pescod's Late Edition December 4, 2007
AN INTERVIEW WITH PETER HODSON
OF SPROTT ASSET MANAGEMENT
(As of November 30, 2007)
Peter Hodson has had an amazing run. He’s got one of the best performing funds out there and what are you going to do Peter to make sure you keep this record high. I mean, we have these superstars that come and go?
Peter Hodson: I am certainly a little cautious as we go into December because I don’t want to blow it in the last 31 days, but we have some good stock pickers at Sprott and you really only need one or two ‘just hit them out of the park type of names’ and I was fortunate in the last couple of years to get one or two a year.
David Pescod: Are there sectors of the resource business that you are a little bit nervous about right now?
P.H: I think it’s way too early for natural gas. There are so many problems there. You have bank issues, you’ve got drilling issues, you’ve got cost issues and you’ve got commodity prices. A lot of people are saying it’s bottoming, but if you go back to 1994 through some of these other cycles, you can be a long way from the bottom even after it looks cheap. So, it will recover but we might be nine months early. You have to let the lack of drilling sort of self-correct the problems. So that is an area of concern.
We as a company are also concerned about large scale mining projects. While it helps our commoditiestheme over the next ten years when a mine doesn’t go into production, for the individual names involved, it can be devastating. So NovaGold suspending their Galore Creek – that stock would be dead money for multiple years now until costs change or prices change and we don’t see that happening. So any large, open pits, large capital expenditure, low grade – these are all very, very suspect companies at this point in time and you may see the producers get much more favor over the next couple of years. Other than that, I think we are okay. A lot of people are talking about overall rollovers of commodity prices, but we are not too concerned about that.
D.P: Are there certain commodities that you are in love with right now?
P.H: I am not the expert on chrome, but it’s one of the most attractive areas that we’ve been checking into.
There are not that many chrome companies to buy, but just like steel, it rose in value over the number of years you had all the takeovers. Chrome sort of follows. We think uranium has bottomed. It may not have a huge run in the short term, but I think the worst is over as we have actually less production now than we did three years ago, despite billions and billions of dollars being thrown at these uranium companies. We are pretty intrigued by coal. The coal prices are recovering - we are seeing lots of shortages. That’s nothing new, but finally the stocks have actually started to react in a positive way.
D.P: We’ve had an enormous correction in a lot of stuff because of this asset-backed mess in the United States that has affected us worldwide. We’ve also got some natural resource stocks at half price these days. When is this going to end and how much better are things going to get?
P.H: That’s a good question because with the assetbacked crisis, investors worldwide are assuming that everything is almost worth zero. Even asset-backed paper is worth more than zero. I don’t know what that number is, but when you presume the worst, you generally don’t get the worst and that’s what happening in the world. As far as the commodity names, the thing that’s different right now is investors are now assuming that a U.S. slowdown will take down the rest of the world. Three or four months ago, that probably wasn’t the overall assumption, but again, we just don’t see it happening. We had 5% growth in the U.S. even in the third quarter. Sure, there might be a slowdown, but even if they went down to -1%, the rest of the world is picking up the slack and on the supply side, there’s just nothing better. You are not seeing the new developments, you are seeing mines being suspended, you’re seeing grade problems, you are seeing electricity problems, water problems, political problems (with all the changes in royalty regimes) so stocks are cheaper because of overall fear of a slowdown, but I think this year won’t be nearly as bad in reality.
D.P: One commodity that I forgot to ask you about… Goldman Sachs with all their wisdom in asset-backed paper, has now suggested gold is going to fall off next year. Any thoughts?
P.H: It could have a little bit of a setback, but I don’t see how it could have a really significant correction in the face of worldwide declining interest rates and worldwide paper printing that’s been going on. The U.S. basically has told us that rates are going lower and the rest of the world is sort of accommodating the U.S. and you’ve got this massive amount of money that’s been thrown at the system because of what the problem is. And that will create a means to go to gold and should help the gold price and hurt the U.S. dollar. One thing in the short term is a little bad for gold if the U.S. doesn’t implode. If the U.S. can pull this one out, whether it’s a super SIV or changes in the ARM market where they reset mortgages and things like that, or just any sort of rate cutting regime to help the U.S., then you could get a pretty good short term rally in the U.S. dollar because everybody in the world is betting against the U.S. dollar. I don’t think it would change the gold move in the long-term, but you could see a pretty good down move in gold if the U.S. dollar decided to go up one day.
D.P: Time to get into some specific stocks. Bankers Petroleum’s Abby Badwi has decided to take on another big challenge and he is just back from Albania and apparently likes what he sees. Your thoughts on the company and some people concerns about stock roll-backs.
P.H: Yes, we made a lot of money with his team at Rally Energy and as I get older, it is definitely easier to bet on the jockeys that have already won a horse race. So this is a very similar situation to Rally. He’s taken the heavy oil assets, he knows what he’s doing, it’s an attractive regime, and it has all the classic kind of management team parachute in and fix the problem that the old management team couldn’t work with. So we are fully supporting him and not worried about the roll-back at all.
This is a two or three year story and the fact that he only retired for 7 ½ weeks or something like that, I mean this is an entrepreneurial-spirit team and we fully expect him to have some good success here.
D.P: Some people worried about the roll-back thought that they could get it on the cheap, but you mention there are institutions that can only buy higher-priced stocks?
P.H: That is true, but with a situation like this, if you are betting on an asset and a management team, we fully expect that this stock could go up three, four or five-fold under the right conditions over a few years. Why save ten cents if you are going to miss a double? This is not our style.
D.P: Some of your favorite stories of the day today would be? Resources preferably, but if you have something that’s going to be five or ten baggers, hey, we’ll listen to anything!
P.H: I will throw one non-resource name at you that has a pretty interesting scenario and two other ones. Yamana Gold – here is a situation where everyone loves to hate Yamana and in the meantime, they will be going to a few million ounces of gold over the next couple of years.
It’s not a situation where their mines have to raise billions of dollars so it’s not a NovaGold situation. The Meridian assets are great and the Northern Orion assets are great. They have proven that they know how to buy in the past with Viceroy and various other acquisition and you’ve got about the fourth or fifth biggest company in the world now building future production and yet it still gets that typical Yamana discount because no one can believe that this guy can do what he’s doing. So you gotta like that, for sure.
Uranium – UEX’s last grades were spectacular and as I’ve mentioned I think the uranium sector has bottomed, so that’s a good sector.
And then one that we really like is called Points International.
It’s a points exchange system where you trade your reward points with someone else and this company gets a piece of the action along the way as they facilitate their trade, like any stock exchange might. The partners that they’ve signed up with are incredible. They’ve actually signed up Microsoft and Google to offset the travel and tourism type of market. We think potentially they’ve got a global monopoly and if they don’t screw it up, a few years from now, this could be a very, very big company.
The stock is hitting new highs daily, so people are taking notice, but they need no cash. They’ve upped their guidance by 50% two weeks ago in this type of market which is pretty impressive so again, they are not there yet, but as far as potential it doesn’t get much better than that.
D.P: You’ve been so hot for the last while, that we will ask you for a couple more stock picks, particularly if there are some more resources stories you are following…
P.H: I don’t want to sound like it’s the same old, same old, but it’s pretty hard to go into new names when I have names like Hudbay Minerals sitting on $7.00 or $8.00 per share in cash. Thompson Creek is still a big, big potential winner because throughout this entire year, up and down, craziness at times, the price of moly has done nothing but go up and the leverage to Thompson Creek on higher moly prices is huge and that stock has been beaten up for various reasons, but it’s just a cash flow generation machine. Same with Hud Bay, even though zinc has been cut in half, they are still going to earn $2.00 + dollars per share and they are still going to cash flow $600 million a year.
Some one will buy Aurelian Resources one day. Fourteen million ounces in reserves will not sit around and not get bought. There are all sorts of political issues in Ecuador, but it will get resolved and a buyer will come in. Perhaps even before it gets resolved, just to have it on their books.
D.P: Now about your Fund. You have one of the top-performing funds in the country. How well has it done over the last period?
P.H: Certainly November was no fun. We are down about 8% in November, but in September we made up for that, we were up 13% in September and 11% in October, so it is a high-beta fund, when it goes up, it goes up fast and when it goes down, I try to limit the downside, but it certainly is not going to be a fund that stays flat in a down market.
D.P: Over the last year?
P.H: On a one-year return to October 31, we are at +49%.
D.P: From what I understand, you don’t get that in T-Bills?
P.H: No.
D.P: For someone looking at the fund, you can be bought through any brokerage house in the country right?
P.H: Yes. If you are a stock buyer, you actually love these periods of time. Warren Buffett says it better than I do, but why would you want the market to go up if you want to buy a stock? It just doesn’t make any sense. I’ve seen an awful lot of panicking over the past six or seven weeks and I saw panicking in August and buying was the right thing to do then, as it was all the way back to 1987. Whenever you go opposite to a panicked market, you typically will make money
D.P: Thank you very much Peter!
Thanks Colin P.
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