The Gold Report: Welcome, Paul. Would you tell us a little about Montreal-based BT Global Growth and your investing philosophy?
Paul Beattie: BT Global Growth is a hedge fund that I cofounded 10 years ago. We're focused on the Canadian capital markets, especially international companies listed on Canadian exchanges. The business is abroad, but the company may be listed here. We find this to be the most inefficient part of the Canadian market.
We are long and short on all sorts of things and we don't use leverage. We look for companies that are trading three and four times cash flow and have enterprise value:earnings before interest, tax, depreciation and amortization (EV:EBITDA) as low as three times or four times, if we're lucky and find these opportunities. Then, of course, there are stocks in the same sector that have monumental valuations and trade at 50 times or 35 times cash flow, and it makes no sense. We short one against the other, and over time it works.
And on top of that, we short other things. The Japanese government wants the yen much lower, so we short the yen against the U.S. dollar. We've been doing it for years, and we'll probably continue to do it for years.
We have macroeconomic views that tie into a lot of the main themes. They work as good hedges on the existing portfolio. We've been compounding at 10+% a year, year-in and year-out, and the stock markets have been doing about half that. We're never fully exposed to the market, but we manage to do almost twice the return.
We're very proud of the fact that we survived the disastrous year of 2008 when financial markets imploded, and the commodity bust three or four years later. We wouldn't have made money if we weren't on the short side. In fact, we're the only fund in Canada that from the day Lehman Brothers declared bankruptcy; we were up every single month for the next 20 straight months. That's through the worst of the worst.
And then stocks got so cheap in March of 2009 that we were sitting around asking, What on earth are we going to short now because there's value everywhere? It didn't take long to switch.
TGR: Investing in Canada-listed companies, you must be active in commodities.
PB: The extraction business is a great industry with lots of great opportunities. We think that the cheapest stocks in the world are often listed in Canada, but their operations are abroad.
Take a look at some of our favorite companies—Parex Resources Inc. (PXT:TSX.V), which is in Colombia. It's a good-sized business, a $2.25 billion company, with great growth and great cash flow. It has a relatively cheap valuation, around five or six or seven times EBITDA. It offers huge growth and good management. The stock has been doing great.
And if it were a Canadian operation and not in Colombia, it would trade at probably twice the multiples. Colombia, in fact, is a great place to invest. That's where the oil is, and that's where the growth is. So we own Parex.
Red Eagle Mining Corp. (R:TSX; RDEMF:OTCQX; R:BVL) is an absolutely terrific story. It went from drilling the very first exploratory drill hole to test for gold to producing gold in five years. In this industry, that is a record. It did it on budget and on schedule. That's very impressive. Red Eagle says it is going to announce commercial production sometime in the next few months, but it could be as soon as in the next few weeks. We think it's going to be a very profitable mine.
We focus on the cash flow. We think Red Eagle trades at a tremendously cheap cash flow multiple. The EV:EBITDA is less than 3. Next year in 2018 it'll be less than 2, which is just too low for any company anywhere. So it has a great future, and the valuation is very compelling.
One criticism everybody has is when starting up the mine there are lots of risks. We went down and met with the construction people and mining engineers. Plants like this have been built all over Latin America, and it's actually not that complicated. The plant is up and running. I think there are some 15 similar type plants in Latin America, so it's not like Red Eagle is reinventing the process.
The tricky part will be to get the ore out of the ground and through the plant. But when you pull it out of the ground and you put it in a plant, it takes three days to figure out how much gold is coming out the other end. Three days, not three months. Red Eagle has very smart people and very good operational people. We think it's all about the input. Red Eagle is going to ramp up extracting the ore. If the numbers go the way management thinks, this is among the cheapest mining stocks in the world.
TGR: What other extraction companies are at the top of your list?
PB: We do like the gold space. Since Mr. Trump was elected, gold has been quite volatile. At one point, everybody said the stock market is going to rally and gold stocks are not going to do well. Mr. Trump hasn't addressed anything about the deficits. So when he's talking about cutting taxes and spending more on infrastructure, this has to be financed one way or other. We don't see Donald Trump as bad for gold. In fact, we could develop a very bullish case. Since the election gold came off a little bit, down $150 or so, but the gold stocks, a lot of them just fell in half. It was almost like panic selling.
One favorite gold company, in addition to Red Eagle, is Kirkland Lake Gold Inc. (KL:TSX; KLGDF:OTCQX). Kirkland Lake merged with Newmarket Gold Inc. We loved Newmarket, which is in Australia; Kirkland is in Canada. You put the two together, but for some reason lots of shareholders were not happy, so there was this period of uncertainty. The stock fell down to valuations that just don't match the size of the company. The political risk is minimal. It has multiple mines in Australia and Canada, and good management. It just made no sense that it was trading at dramatic discounts to all the other midsize gold companies.
Our target on Kirkland is much, much higher. I think the stock is good for 30% or 40% upside just to get back to where it should be trading vis-ŕ-vis its competitors. So it's very compelling. It's one of our biggest holdings now. Looking at the EV:EBITDA, Kirkland should be trading two full multiples higher. We think $12 to $13/share is going to happen just based on the comps. So that's a great company.
TGR: Do you want to discuss any other commodities?
PB: Yes, there is zinc. There's this whole thesis that we are going to have a global deficit in zinc. People have been talking about that for three years, and it really wasn't happening. These things take time. But it sure does look like it's happening now. I think we are in a deficit. And the beauty of all of that is there are very few ways to play that metal on the company side. So it doesn't take a lot of work: Buy anything related to zinc that's producing.
Our favorite zinc producer is Trevali Mining Corp. (TV:TSX; TV:BVL; TREVF:OTCQX). It's the only pure-play zinc opportunity listed in Canada. If you like zinc, play this. It's not expensive at these levels, but if zinc does have a global shortage, then zinc prices are going to spike. When it spikes, Trevali has to do the same. We own a lot of Trevali; the stock is not expensive. Trevali offers good management and good people, and has two operating mines, one in Canada, one in Peru.
TGR: Thanks, Paul for your insights.
Paul Beattie is the cofounder and managing partner of BT Global Growth Fund LP. From 2000 to 2006, he was the cofounder and managing partner of a boutique investment bank, Stable Capital Advisors. He has extensive experience in private equity including raising investment capital for alternative asset funds from within Canada and abroad. Beattie was the founding executive of Telesystem International Wireless in 1994 and its predecessor company in 1992, and was Vice-President, Mergers and Acquisitions, involved in all aspects of financing activities. Beattie began his career as investment banker from 1986 to 1991 at Merrill Lynch Canada Inc., in the position of Vice-President, Corporate Finance, and was involved in a diverse range of advisory assignments and capital markets activities. He holds an MBA from INSEAD, France, and a Bachelor of Commerce (Honours) from Queen's University, Canada.
Want to read more Gold Report interviews and articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent articles and interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Red Eagle Mining Corp. and Trevali Mining Corp. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Paul Beattie: I own, or my family owns, shares of the following companies mentioned in this interview: All. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Red Eagle Mining Corp. Funds managed by BT Global Capital hold shares of the following companies mentioned in this article: All. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.