Commodities Investment

Transcription

1 The Benefits of Diversification The Role of Commodities in a Portfolio Fundamental Research Corporation Vincent Weber, Research Associate-Mining Commodities Investment Why invest in commodities? How do we analyze junior resource companies? How do we value junior resource companies? Top Picks 1

2 What are Commodities? Anything tangible, assets of actual substance Today we are focusing our attention on investment in commodities through junior mining companies Volatility Investor Concerns Double digit risk levels 2

3 Why Include Commodities? Similar Returns Long term similar to equities Volatility only modestly higher Hedge against unexpected inflation and event risk Participate in unanticipated global growth Positive Risk Premium Energy Production Decision Convenience Yield Why Include Commodities? Diversification Low correlation with equities Not correlated with business cycle Reach return levels with lower risk Commodity allocation in a portfolio should be modest no more than 5-10% 3

4 Junior Mining Life Cycle Entry points are Exploration Post feasibility Fundamental Research Corp Independent Research No banking, no securities Provides small cap coverage Registered with the BCSC Target prices 4

5 How do we analyze mining companies? Projects Where Historic Exploration, Historic Production Geology and Mineralization Accessibility and Infrastructure Political situation, sovereign risk Management Site Visits Commodity Forecasts Projects Where? Historic Exploration/Production On the property and in the region 5

6 Projects Geology and Mineralization Includes Metallurgy Projects Accessibility and Infrastructure 6

7 Political, Sovereign, Environmental Lots of Risks! Permitting NGOs Environmental Sovereign Management Analysis Management Inputs include Corporate/financial experience Ability to raise money Geological experience Focus on the company Unusual insider trading Experience in putting mines to production/generating prospects Track record in raising capital/w orking for public companies Technical Experience Experience in projects similar to the current project Team's focus on the company Any unusual insider trading in the past 12 months Management Rating Net Rating % 20% 40% 60% 80% 100% 7

8 Site Seeing Site Visits What you can t see on paper Exploration model Sense of scale Accessibility and infrastructure Commodities Outlook Forecast commodities Base Metals Precious Metals Other Metals Molybdenum, tantalum, niobium, uranium Industry outlook Which should you buy? What growing economies need, not what they have What senior producers need 8

9 How do we analyze mining companies? What has the company done? What stage is each property? Drilling/sampling results What is the company going to do? Resource calculation Corporate goals and objectives Where do we see potential for growth? How do we value mining companies? Producing Non- Producing Very Early Stage Discounted Cash Flow Real Options Comparables 9

10 Discounted Cash Flow Method (DCF) Primary Inputs - Resource, Grade, Recovery, Mine Life and Capital & Operating Costs Inferred and/or historic resources are normally discounted by 50% Real Options Valuation Model Very useful for valuing early stage projects with resource estimates Unlike the DCF model, this model accounts for management's flexibility to make or change decisions This model also accounts for the volatility in commodity prices 10

11 Comparables Valuation Model Comparables are selected based on the location, commodity and stage of the projects 'Enterprise Value (EV) / Resource Estimate' is the most commonly used multiple Top Picks Company Symbol Initiated Coverage At Current Price Fair Value Industry Monument Mining Ltd. TSV: MMY $0.22 $0.16 $0.50 Junior Mining (Gold) International Water-Guard Industries Inc. TSV: IWG $0.09 $0.08 $0.35 Aerospace MicroPlanet Technology Corp. TSV: MP $0.69 $0.30 $1.45 Energy Technology *FRC does not own any shares, and have any investment banking business with the companies. Fees of less than $30,000 have been paid by the companies to FRC. 11

12 Questions? Conclusions Due Diligence Diversification By stage By commodity By region Get in at the right time 12