The Gold Report: The Global and Mail reported that more than 50 private-equity mining deals were struck in Canada in 2011-more than in any other sector. Why is private equity pouring venture capital into junior mining plays faster than any other Canadian business sector?
Stephen Taylor: The important thing is that private equity funds have the patience and the experience to take the long-term view that’s required with development-stage mining companies. There’s been a growing dysfunction in the U.S. initial public offering market for small-cap companies and development-stage enterprises of any type. It has led to depressed valuations. It’s not surprising that managers of private equity funds have the patience and see some bargains and are jumping into the sector.
TGR: Most of the deals involved minority positions, not takeovers. Why?
ST: That is really the best way to do deals as a private equity investor. These firms are looking to partner with or back experienced management teams. Experienced management teams are increasingly reluctant to cede control to an outside firm that doesn’t have real expertise in the mining sector. Trying to seek majority control would be a mistake.
TGR: What was the performance of The Taylor Fund in 2011?
ST: The fund, which has about $45 million under management, had a rough year. It was down about 20% in 2011 after a gain of 21% in 2010 and 96% in 2009. Since inception, it’s averaged just more than 26% a year versus about 9% a year for the S&P 500.
TGR: What’s the current industry weighting of the fund?
ST: It’s about 40% invested in energy, which is mainly oil and gas. Mining comprises about 30%. About one-third of the companies are in China, another third are in the U.S. and the final third are in Canada. The Canadian component includes many companies that have substantial operations in other parts of the world.
TGR: You previously told The Gold Report that you saw some “overdone selloffs in the resource space.” Was the selloff that occurred in the latter half of 2011 overdone?
ST: It clearly was. It seemed that 2011 was particularly fierce in the junior resource space. Sharp selloffs have been followed by quick bounce-backs.
TGR: Did the Taylor Fund add to existing positions or new positions as other investors were exiting junior mining plays?
ST: We were selective buyers on our core positions. We want to be selective in our new additions, but we’re always going to be looking to quality management teams as one of our first conditions.
TGR: How long on average do you hold a position in junior mining?
ST: Typically, two to three years. Last year, we did lighten up in some names where the results weren’t what we had hoped.
TGR: You remain bullish on precious metals in general?
ST: As long as central governments around the world continue to print money and to telegraph a low to negative real interest-rate policy, precious metals are the place to be quite frankly. The next two quarters may be flat to sideways, but over the next two to three years precious metals are going much higher.
TGR: News about the Greek debt deal pushed the gold price up recently. Was this just a short-term uptick?
ST: The Greek debt deal is the first of many as other countries around the world will ultimately be forced to restructure their obligations as well. All of these will contribute to rising demand for precious metals and will support higher prices. It could occur in the next quarter or the next year, but I won’t be so bold as to make that distinction. I do know I want to be long on precious metals and that they’re going to be much higher over the course of several years.
TGR: Do you see value in base metals?
ST: I do. There’s a long-term secular rise in living standards that will continue for a huge portion of the world’s population in China, India and Brazil. As this process grinds forward over the next 10-30 years, regardless of short-term disruptions, there will be an inevitable increase in demand for base metals.
TGR: Do you have any final thoughts on the space for investors?
ST: My biggest worry for a lot of these development-stage companies is governmental risk. Governments and jurisdictions around the world may get greedy when faced with the pressure to restructure their financial obligations and debt. They may attempt to take a bigger piece of the pie. That’s a risk that’s always been part of the mining business, but investors should be particularly attuned to that over the next two to three years.
Stephen Taylor is chairman and CEO of Taylor Asset Management, a Chicago-based investment management firm focusing on small-cap domestic equities and emerging markets. He also serves as a portfolio manager for the Taylor International Fund Ltd., a small-cap equity fund. In addition to emerging markets, Taylor’s area of expertise includes private equity, restructuring and turnaround situations and both small- and mid-cap companies. He has considerable experience in the natural resources and finance industries in Canada and China.
Article published courtesy of The Gold Report – www.theaureport.com