In the first segment of this interview, the subject was “Gold, The Great Gamble”. In this segment, we discuss what type of stocks to pick and why. In the next and last segment, we give specific stock picks.
SmallCapPower.com: Gentlemen, your fund specializes in small-cap resource stocks. Why do you focus on that segment of the market?
Cyna: Firstly we are in Toronto — the world’s center for resource stocks. For us to cover the centers of finance in New York or London would be to take us away from our base strength. That’s the first reason. Secondly, we like the companies that we can hear and feel and see.
In this particular area of the world, we see the management of these companies. We hear their presentations. We often go to their sites to see what they’re doing or visit their factories to see their technology. They are small, simple, and easy to understand.
One can make a determination based on what one sees. When one looks at General Electric (NYSE:GE) or Apple (NASDAQ: AAPL), for example, one is dealing with a far larger entity that has a far different structure that is more difficult to analyze and understand. Here we feel that we have an excellent grasp on the type of companies that are traded in the TSX & TSXV, which is our specialty, and we’re very comfortable with those stocks.
SmallCapPower.com: But there’s a lot of risk in that sector. Do you see the potential gains as offsetting that?
Cyna: We don’t agree that the risk is higher than the risk elsewhere. If you go back and examine the stock prices of any of the major corporations over the last five years, what you’ll find is very dramatic swings in value. Large caps tend to be very consistent as long as the economy is consistent. But as the economy collapses, the large caps collapse even more.
And as they collapse, or as they grow, the danger, in our opinion, is as great or greater than the small caps.
Because we’re so close to the juniors and because we understand the companies, we find that the swings in value, although they can be dramatic in individual stocks, the chance for picking stocks that will escalate dramatically is far higher. So by taking a portfolio of small caps, we’re able to pick out enough winners that they will overall establish a far more beneficial track record than taking a portfolio of large caps over which we have no say, no control, and very little ability to analyze beyond what public information is disseminated.
Toles: I agree with Larry. He talked about meeting management and doing your due diligence. We have a better comfort level by using those methods than reading a financial report. There are so many examples in the marketplace where company management has misled analysts.
SmallCapPower.com: Among the small caps, what are three or four commodities you’re most bullish on at this point?
Cyna: Number one would be copper. We think there could be a dramatic copper shortage. The other is rare earth elements, but not all rare earths. Rare earths are a very misunderstood class. There are 16 rare earths and many of them are in fact very common. But there are some that are in very high demand and dysprosium is one of them. The U.S. military puts dysprosium as number one on its list of strategic metals. So we like dysprosium, and we like copper.
Toles: Dysprosium quadrupled in price from January to June and it’s doubled again since then. We see a lot upside.
SmallCapPower.com: There are light rare earth elements (LREEs) and heavy rare earth elements (HREEs). Dysprosium is a HREE. Do you look for companies with projects that have a high concentration of HREEs?
Cyna: There are two deposits in the western world that have very high concentrations of dysprosium. One of the deposits is in Alaska and it’s owned by Ucore Rare Metals Inc. (TSX.V:UCU), which happens to be one of our favorites. The reason we like the one in Alaska is that it’s on U.S. soil and it’s strategic to the U.S.
SmallCapPower.com: But that’s not a dysprosium-only deposit.
Cyna: No, but the majority of the available dysprosium in the free world is there. Not only that but recent exploration in the surrounding area, which also owned by Ucore, has indicated further HREE deposits.
SmallCapPower.com: Is there another commodity you’re bullish on?
Toles: Well, uranium could be included in that list as a long-term play.
Cyna: Yes, uranium, we believe, will come to the fore. There is some debate going on around the world as to whether uranium is safe or not. We believe uranium will be found to be safe and that the price of uranium will eventually escalate. But we don’t believe it’ll be this year.
The next one on the list would be silver. We put at a higher value on companies either exploring for or producing silver than we do gold juniors. And the reason is that the use of silver is expanding dramatically. Silver is the weak sister to gold but industrial demand is growing and growing rapidly as opposed to gold where there’s limited industrial uses. The supply of silver is not keeping up with the demand for silver, which is growing at a much greater rate.
SmallCapPower.com: Let’s look at the methodology you use to select the companies you invest in. Let’s begin with management and the components you’re looking for there.
Toles: In this sector half our valuation is on the asset itself. The other is on the people. Larry and I like sit down and find out who management is. Some people have good track records of developing an asset and making it viable.
SmallCapPower.com: Do you have a specific ranking system?
Cyna: Oh, very much so. At the top of the list is the trend in the market. One always has to look at the market because whatever the market does, everything does to some extent. So one must look at the trend, no matter what. A rising trend or a rising tide carries all boats, so to speak.
Number two is the jurisdiction. Is it in a safe political jurisdiction? Is it some place that we want to be? There are areas that are not as stable as others or that have a history of being unstable or have a political system that has varied in recent times – those places fall on the list because they’re given a low valuation based on that particular criteria.
After that we then go to management. And if management is new, untried, then, of course, we look at it with skepticism because we know that if you have two equal companies with equal resources or equal technologies, the one with experienced management has a far better chance of succeeding. If we don’t meet the management, we’re very reluctant to invest in the stock. We want to meet and hear and see either the plant or the resource. So, experience and track record is next on the list.
The actual metal or the actual product is next. And then you get into all the lesser criteria, but those are the major criteria.
Toles: One more is that they should trade on the TSX. We’ve traded in other jurisdictions before and it’s not fun. Having such an open well-oiled machine as the TSX makes our jobs a lot easier. There are no external influences to deal with.
SmallCapPower.com: What are some of the lesser criteria?
Cyna: Another is the number of shares outstanding. How many shares are there and how do they relate to the value of the underlying company? What’s the market cap of the company? And, lastly, the trend on the chart. If a trend is down on a chart we’re very reluctant to catch a falling knife. You cut yourself catching a falling knife no matter what the underlying value is. And when the general trend is down, often there are factors that you may not see at first glance that let you know something is not quite right.
Next: Part 3 of this interview
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
