The Energy Report: AlphaNorth Partners Fund's Class F Shares was recently ranked No. 1 in the Globefund database, with 43.4% return over five years. How have you been able to beat Standard & Poor's (S&P), the Toronto Stock Exchange Venture Index (TSX.V) and the S&P/TSX Total Return Composite? What's your secret?
Steve Palmer: We strive to be ahead of the curve on our calls. We do a lot of bottom-up stock picking—we look to identify promising situations before everyone else does. We typically invest in companies before there is analyst coverage or significant institutional ownership. We've had some decent wins with this strategy, I must say.
TER: What do you look for in under-the-radar firms?
SP: We are growth-oriented. We look at firms with a lot of upside potential and minimal downside. We like to invest in private placements, where we typically get the additional leverage of a warrant.
TER: How deeply do you investigate a company before you buy its shares?
SP: We usually meet with management before we buy shares. We do a technical analysis overlay on the stock to determine if it is a good entry point.
TER: You recently remarked that energy stocks were the best performing sector in 2014. Is that mainly due to oil and gas performance?
SP: The energy sector in Canada is dominated by oil and gas. When I made that reference, I was referring to the BMO Small Cap Index. The energy sector in that index has performed quite well year to date.
TER: What's driving that performance?
SP: Resources have been generally weak during the last three years. The energy sector is the first sector to rebound from the downturn. We are starting to see strength in the precious and base metals sectors, but energy was first to regain momentum. The price of oil has been quite strong, at over $100/barrel. In North America, natural gas inventories dropped to very low levels last winter. That caused a rebound in the price of natural gas, which has certainly helped the related energy stocks.
TER: Is that rebound also due to growth in the manufacturing base in North America?
SP: The primary driver was the inventory decline due to a very cold winter. But manufacturing is picking up with the general improvement in the economy, and that is an excellent development for energy stocks.
TER: Are the ongoing global conflicts affecting fossil fuel prices in North America?
SP: Conflicts around the world are impacting the oil price a little bit, motivating a premium. But this is not the case with natural gas.
TER: Why not?
SP: Our natural gas resources are largely sold directly into the North American market. Elsewhere in the world, natural gas can be significantly more expensive. In China and Japan, for instance, natural gas consumers are paying approximately $12/thousand cubic feet ($12/Mcf), which is three times the amount that North American consumers are paying.
TER: How will exporting natural gas from Canada and the U.S. affect global prices?
SP: Over the longer term, we will see a convergence in the price if liquified natural gas (LNG) becomes pervasive. It will be arbitraged out, just like oil. You can transport oil anywhere; the price is generally the same throughout the world. It will be the same with gas.
TER: What are some examples of bargain energy stocks in your portfolio that are outperforming?
SP: Blackbird Energy Inc. (BBI:TSX.V) is a Canadian energy play that has performed well for us this year. It is still under the radar; there is no analyst coverage or significant institutional ownership. Its Elmworth property targets the Montney formation. Blackbird has accumulated 31 sections of land there, and is looking to drill before the end of the year. Right now the company's production is quite modest, at only 170 barrels per day (170 bbl/d). Wells in the Montney can produce 1,000–1,400 bbl/d. Blackbird has a very good chance of success. There are other larger companies near the Elmworth property— Encana Corp. (ECA:TSX; ECA:NYSE) and NuVista Energy Ltd. (NVA:TSX)—all of which have successfully drilled in the area.
Primeline Energy Holdings Inc. (PEH:TSX.V) is working on supplying gas to China. It is partnering with the Chinese National Oil Company (CNOC) to construct a pipeline to bring offshore gas to an onshore processing facility. It just recently started flowing test gas, and should ramp up production shortly. The gas price is significantly higher in China than it is in North America, so the cash flows from gas sold in China will be quite substantial for Primeline.
Mart Resources Inc. (MMT:TSX.V) is a good mid-cap name that pays a dividend. It is producing oil in Nigeria. It has experienced significant pipeline losses due to a lot of theft: Its current pipeline is in a swampy area that is difficult to monitor for theft. But in August, the company plans to switch pipelines. Using the new Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) pipeline will allow Mart to avoid high pipeline losses while increasing production. Importantly, Mart has some wells under development that are not producing at the moment, but that will be tied into the new pipeline when they come on line.
TER: Is Mart joint venturing with Shell?
SP: Mart has access to Shell's new pipeline. Once it starts flowing product through that pipeline, its net production should increase materially. Mart has very aggressive plans for increasing production in the near term. Most of Mart's wells are verticals, which produce 2,000–3,000 barrels a day (2–3 Mbbl/d), but it has drilled a horizontal well that should produce significantly more than the vertical wells, and increase its overall production. The results on the new horizontal well will be released in the near term.
TER: You have been consistently bullish on graphite. Why?
SP: The markets for graphite are growing tremendously. One of the major areas of growth in graphite demand is for use in batteries, and the electric car is experiencing an upsurge of growth. Tesla Motors Inc. (TSLA:NASDAQ) is very popular. Elon Musk has made a lot of comments about ramping up production and starting a massive lithium battery plant to facilitate his enterprise. That will clearly increase the demand for graphite.
TER: What graphite firms do you hold in your portfolio?
SP: We like Canada Carbon Inc. (CCB:TSX.V). It is progressing very quickly toward production at its Miller graphite project in Canada, which is only an hour away from Montreal. All the necessary mining and transportation infrastructure is in place. The company has done significant testing on its graphite resource, determining that it can refine the product to a very pure concentration level, which will command superior pricing. Canada Carbon is now processing a bulk sample, and will be able to market its graphite product in the near term.
We also like Mason Graphite Inc. (LLG:TSX.V; MGPHF:OTCQX), which is progressing toward production. It has a very sizable resource, and the management team is very experienced in the graphite space.
TER: How is Mason's stock performing?
SP: In the last couple of months, the company's stock has been relatively flat. I attribute the current flatness to a general lack of interest in junior resource companies from retail investors. Retail investors are still pretty gun-shy of junior explorers and developers in general. Mainstream investor focus has been on large-cap companies, particularly the U.S. large caps. The typical investor figures if he can make 20% on a U.S. large cap, that's good enough, so why take the extra risk of investing in a junior mining company?
This will change as retail investors start to chase returns, as they always do. We believe the TSX.V will really heat up in the fall. The smart money has already started getting back into the junior sector.
TER: Why will the junior markets heat up in the fall?
SP: Simply put: Summer is normally a slow period for the stock markets. A lot of people are away, so many companies hold back news until people are back at their desks in September. Volumes are light.
TER: What's your outlook for base and precious metals?
SP: The short story is that the junior metals market in Canada has been in a significant downtrend since the spring of 2011. Since then, the TSX.V has lost almost two-thirds of its value. The performance rebound started first with technology and life sciences companies, followed by the energy sector. Base and precious metals are the last two sectors to rebound from the historic downturn, and they are set to explode going forward, in our opinion.
TER: Do you have any companies in the base metals and precious metals sectors that you want to talk about today?
SP: Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX) has rebounded significantly off its lows. It owns a very high-grade gold mine in its Colombia property, so its margins should be high. By the way, we tend to avoid companies where there is little room for error in terms of cost of production versus the selling price.
TER: During the long downturn in gold, have you held on to junior gold stocks, or are you in and out of the market with the juniors?
SP: We sold a lot of our junior precious metal holdings awhile back. For several years, we have not played much in the gold space. It got very overheated, with the consensus view that gold was going to multi-thousands of dollars an ounce. We disagreed and focused on other areas. This was the right call and turned out well for us.
TER: The AlphaNorth funds have performed extraordinarily well. Are there certain sectors that you concentrated on?
SP: Our success is due to a combination of factors. We try to sell at the right time to maximize our gains. During the downturn, we minimized damage in sectors like precious metals and the resource commodity space. We were among the first to invest in sectors that have performed great, like the life sciences and technology. We have had good success in bottom-up stock-picking. We have been fortunate to have picked some well-positioned, cheap stocks and sell them at the right time.
TER: For H2/14, do you have any advice for investors in terms of portfolio investments?
SP: This summer lull that we are currently experiencing is a great time to invest, because the stock markets will likely reenergize in the fall. There is going to be a rotation into resource juniors that have not performed. Positive returns follow well-measured risk.
TER: Good talking to you, Steve.
SP: Thanks for your interest.
Steve Palmer is a founding partner, president and chief investment officer of AlphaNorth Asset Management, and currently manages the AlphaNorth Partners Fund, AlphaNorth Growth Fund and AlphaNorth Flow-Through LPs. Prior to founding AlphaNorth in 2007, Palmer was employed as vice president at one of the world's largest financial institutions, where he managed equity assets of approximately CA$350M. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies, from its inception to August 2007, achieving returns that were ranked No. 1 in performance by a major fund-ranking service in its small-cap, pooled-fund category. He also managed a large-cap fund, which ranked in the first quartile of performance among other Canadian equity-pooled funds. Palmer earned a bachelor's degree in economics from the University of Western Ontario and is a Chartered Financial Analyst.
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1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his 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: Continental Gold Ltd., Mason Graphite Inc., Royal Dutch Shell Plc, Mart Resources Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Steve Palmer: I own, or my family owns, shares of the following companies mentioned in this interview: None. 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: None. AlphaNorth may own shares in any of the companies mentioned. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
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