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Bullish on Commodities, From Natural Gas in India to Oil in South America to Uranium in East Africa

Commodities / Resources Investing Jul 30, 2009 - 07:14 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticlePrimevest Capital Corp. President Ryaz Shariff reaffirms his long-held status as a commodity bull in this exclusive interview with The Energy Report, telling us to expect significant upticks in the markets once demand resumes. Having shifted somewhat from the mining sector last year, he also talks about some of the energy plays he likes these days—from natural gas in India to oil in South America to uranium in East Africa.

The Energy Report: When we interviewed you back in December 2007, you mentioned an analytical tool and techniques that you felt would apply not only to small caps but also the international marketplace. Have those served you well since then?

Ryaz Shariff: I don’t think anything really served well in the later part of 2008, unless you were heavily short. We certainly felt the pain by being involved in some of the smaller stories and the hedging vehicles we’d typically used in the past didn’t compensate for the immense erosion of value in the small stories. These analytical tools and techniques have given us long-term opportunities to make significant money. They are intact and will make us money in the future, but last year was definitely an aberration.

TER: We should note, of course, that as of June 30 this year, your year-to-date was 29.2% return, and 19% since the fund’s inception.

RS: That’s right.

TER: In reading your online commentaries, you are very bullish on commodities and have been for several years.

RS: I travel the world to solidify my thesis on being long-term commodity bull and I’ve always maintained that this market is really characterized by the lack of supply and the focus should be on the supply side situation and not necessarily the demand side. Where I went wrong last year was in expecting the emerging markets, China in particular, to pick up the slack on the demand side from the Western world. I was clearly wrong on that. But having said that, I still believe strongly that we continue to have a supply-side issue, both from under-investment over the past decade and aging technical expertise on the human resource side, so I expect that when demand returns—which, of course, it will—we will have significant upticks in the commodities.

TER: Do any particular commodity sectors interest you?

RS: We typically focus on copper, oil and, to a lesser extent, zinc. We have done very well in the oil and gas sector in the last six months or so. I also am reasonably bullish on the uranium sector. There is certainly a case to make for the agricultural commodities as well, but historically we focus most on base metals.

TER: As a long-term bull on commodities, what do you consider long term?

RS: I’m looking at longer term as two years plus. In the short term, we’re seeing a strong tug-of-war between the bull case and the bear case over the economic situation on a worldwide basis, but when demand returns and the recession is over, the supply-side fundamentals will come into the spotlight. Again, that’s where the real opportunity lies on the commodity front.

TER: How do you take advantage of that opportunity now, though?

RS: We’ve never been forecasters of where markets go or actual prices of products, but we look and ask how we can make money in a particular time. We’ve been taking a longer-term approach with some of our catalyst-driven situations and then hedging out some of the systematic risk of the markets to receive benefit from those situations if markets go up and when those catalysts are realized, but also protecting downside by eliminating some of the systematic risk in our portfolio.

TER: So you’re putting hedges into your portfolio.

RS: Absolutely.

TER: One of your commentaries mentioned that as of May your portfolio was about 25% shorting and in June you felt more comfortable adding positions for a longer-term outlook. What happened that made you willing to put something down for a long term?

RS: We went into second quarter with a 25% short position, intending on keeping that stance for the near future. But when the markets rallied, we adjusted that position upward to about 35%. I felt more comfortable taking longer-term positions because risk tolerances over the last three or four months returned to the markets and we were in a position where—whether the markets were up or down—specific catalysts on the individual companies were being rewarded. So we were out of the panic-selling mode where fundamentals were irrelevant at the end of last year and into an environment where fundamental catalysts were absolutely being realized and reflected in the share prices. That was a big change.

TER: So you basically returned to a more value-driven investment model, where if something happens, you see an increase in price rather than all up and all down.

RS: Yes, and we do feel comfortable taking positions for a longer-term view. Basically we believe we can get doubles and triples in many of our positions in a six- to eight-month timeframe. But, having said that, we have our hedges in place because those positions might be at risk of loss in the short term. We have to be cautious in this type of environment.

TER: Earlier, you mentioned having done very well in oil and gas in the last six months or so. What are some of the plays you like there?

RS: Last year we purchased things like Niko Resources Ltd. (TSX:NKO), which is an Indian natural gas producer. It has lots of optionality with a host of worldwide oil and gas exploration targets that could have some pretty significant impact if they have success. They’ll also generate cash flow in the range of US$400 million in the next year from their newly developed program in India.

TER: Interesting to hear that you’re in natural gas because we’re hearing that’s there’s more natural gas than we know what to do with.

RS: Keep in mind that, unlike oil, which is a global market, the natural gas market is regionalized. So when you talk about natural gas pricing, typically we’re talking about the North America market. In India, Niko is in an interesting situation because all of their gas is contracted out at $4.20 per Mcf U.S. and their operating costs are about 20 cents per Mcf. So they’re making a great profit and gas is in high demand for energy use in India and in particular for their customers, it solves a real problem —access to reasonably priced energy resources.

TER: What other types of plays did you move into on the energy side?

RS: We also like a company called Petrominerales Ltd. (TSX:PMG), which is a Colombian oil producer and explorer. They’re producing over 20,000 barrels per day and have lots of upside exploration potential. They also have exploration potential on a heavy oil block that’s really not factored into the price of the stock, and gives it further option value. It’s got strong netbacks, it’s got a strong balance sheet, and it’s run by an competent management team—the same management team as Petrobank Energy and Resources Ltd. (TSX:PBG).

TER: You also said that you’re reasonably bullish on uranium. Any examples from that sector to share with us?

RS: Mantra Resources Ltd. (ASX:MRU) is one. It’s only listed in Australia currently, but I expect they will have a Canadian listing possibly by the fall. This asset has 40 million pounds of uranium resource in Tanzania, East Africa. They just released a scoping study that shows that they’re going to have a very robust project with a 10-year mine life and reasonably low operating costs of around $26.50.

Mantra also has an interesting geology, an unconsolidated sandstone-hosted deposit from surface, which is a soft ore and allows you to reduce a lot of capital and operating costs because it requires no crushing or blasting. What’s also interesting about this project is the district potential that could possibly expand that resource up to 200 million pounds. So it’s a really robust project and I think we’ll hear more about it as it gets listed in North American marketplaces.

TER: Any others?

RS: Yes. Another one we’ve recently taken on is an American-listed company, Uranium Energy Corp. (NYSE.A:UEC). It looks as if these guys have jumped to the front of the queue as the next in situ leaching (ISL) producer in the U.S. With the recent financing completed several weeks ago, they’re potentially fully financed to get up into production. That could be as early as 12 months from now.

TER: Was that financing the catalyst to really driving up UEC’s value?

RS: I think the big value is that the permitting process in the region they’re in, which is in Texas, requires only state approval. In contrast, many of the other potentially great ISL assets in the states are in Wyoming, which requires both state and federal permitting and there’s been a significant delay in that whole federal process. Other companies were in line ahead of companies like UEC, but I think now UEC has jumped to the front of that line because they expect to get they’re last permit by year end.

TER: What’s the outlook for uranium? We had a huge run-up two summers ago. It fell down and has been kind of flat since.

RS: Uranium is a commodity that effectively there’s only one use for, so you can easily paint its demand-supply pictures. The demand side, of course, is nuclear energy, which seems to be getting more and more popular as a cleaner form of energy that has the base load capacities to take care of demand for energy in various parts of the world. I think we will continue to see reasonable prices.

Do we go over the levels we were two years ago? That’s a tough call. There certainly was speculative activity when uranium hit its high at that time, but I think a number of these projects will provide reasonable operating margins and that at $60-plus uranium, these companies make good cash flows and will command reasonable multiples in the marketplace when they are producing.

TER: What has kept the prices of these companies down?

RS: I think it’s been broad market issues and the U.S. dollar certainly has played a big role in all of the commodities. When the U.S. dollar goes up, these commodities go down. I think the U.S. dollar safe-haven trade that occurred late last year affected all of the commodities and, as a result, all of the underlying equities.

TER: Ryaz, what advice would you have to individual investors who may want to invest in commodities?

RS: You have to realize that it can be a very volatile investment strategy. You need a long-term vision and to basically back companies that have good assets, but particularly good management teams with track records of creating value. If individual investors can’t stomach that volatility, they should be making sure professionals manage those strategies for them.

TER: Any other parting words you’d like to give to our readers?

RS: Happy investing.

DISCLOSURE: Ryaz Shariff
I personally and/or my family own the following companies mentioned in this interview: None.
I personally and/or my family am paid by the following companies mentioned in this interview: None

Ryaz Shariff, based in Vancouver, B.C., is President of Primevest Capital Corp. and Portfolio Manager of its Primevest Fund, which focuses on catalyst-driven investing. An entrepreneur whose background includes experience in M&A, restructuring, financing and business management, he has held senior management positions in early-stage companies. A graduate of Simon Fraser University and a Chartered Financial Analyst, he also spent part of his career as a broker specializing in retail and institutional sales as well as corporate finance.

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