Lawrence Cyna: Look for value in a depressed market
Lawrence Cyna, CEO and Fund Manager of Cymor Strategic Growth Funds www.cymorfund.com , doesn’t lose any sleep over the current state of the markets. He takes it all in stride because he’s seen it before and knows he will likely see it again. In this exclusive interview with SmallCapPower.com, Mr. Cyna sheds some light on what’s happening in the markets and imparts some wisdom to those willing to follow it.
SmallCapPower.com: Mr. Cyna, the market for junior resource companies has been devastated in recent months. Many junior resource equities have been falling since the end of the PDAC conference in early March and many of the drops have been dramatic. In rare cases some stocks are trading at less than cash. You’re a veteran of the junior resource sector and have seen many market ups and downs. Have you seen anything like this?
Lawrence Cyna: It’s more common than one might think. There were two times in the last few years when it’s happened. One was in October 2008 and the other was March 2009 when we had precipitous drops that were more exaggerated than this recent drop. This drop is very bad but these types of drops occur almost annually. The market is a very unpredictable and drops have to be expected.
SmallCapPower.com: In a recent blog post at cymorfund.com you wrote: “Normally companies expect that their stock price will rise when they make a positive announcement. For the last two months companies making positive announcements have experienced either an immediate rise followed by a dramatic drop in stock price or just an immediate drop in stock price. This is counterintuitive and was hard to explain until companies started realizing what was happening.” In your view, what is happening now that didn’t happen in the past?
Lawrence Cyna: First of all, there’s a common belief that the stock market is fully and fairly valued. That, unfortunately, is not the case. Not even close. The stock market is sentiment driven and there are periods of exuberance, periods of despondency and everything in between. These periods can be caused by a currency crisis, an event, seasonality, etc. When you get in a cab and the cabdriver is telling you about the latest penny stock that he bought, you know that the world believes the stock market is a wonderful place and everyone will become rich. During those periods the value of stocks goes up dramatically; price-to-earnings (p/e) ratios and valuations get out of whack; the average p/e ratio over the last 50 years has been around 16 but in these periods stocks will go to enormous multiples, sometimes 75 or higher.
At other times the exact opposite happens but for different reasons and stocks fall. When stocks fall, they don’t fall in the same fashion as they rise. They fall far more precipitously and quickly, which is what we’re experiencing now. When people look at the market, they want to know one thing: “When should we buy?” There are many people, myself included, that look to buy during drops such as this. If you buy a good security based on whatever criteria you’re using and the criteria is valid and you do so during down periods such as this, you will do very well in the market.
In 2008 and 2009, people who were brave enough to buy stocks that were wildly undervalued, made some significant money. But the majority of people were stricken with fear and lost a great deal of money.
SmallCapPower.com: What are some ways in which fear affects the market?
Lawrence Cyna: When fear penetrates the market, strange things happen. For example, let’s say an investor reads the doom and gloom in the newspaper and says, “I think I’d better get out of the market.” That person calls his broker or investment advisor and says, “I want to withdraw 10% or even 100% of my money.” The only way a fund can accumulate sufficient cash to meet the demands of investors who want to withdraw their money is to sell stock from the portfolio that they hold. In a falling market there are fewer buyers than sellers. You may be trying to sell at $1.00, but the next offer will be $0.92 and the next one will be $0.87. In order to liquidate enough cash to cover the withdrawals, the fund will have to liquidate all the way down from a dollar to perhaps $0.50, thereby drive the stock down dramatically. If you do that and you’re a mutual fund or a large portfolio holder, you’re automatically triggering losses that will devastate your portfolio, and you will permanently have those losses on your record. A fund just can’t afford to do that so you’re caught betwixt and between.
In a similar manner, many investors operate on margin. Margin is the ability to borrow cash from brokers or brokerage firms, in order to buy more stock. That borrowing is based on the value of the stock in your portfolio; that stock acts as the brokerage’s security. When the value of that stock falls, the brokerage calls the borrower and says, “You have to adjust your margin,” which means that some of that stock has to be sold to satisfy the margin requirement. That results in significant downward pressure on the price of the stock.
Another factor is that a very large percentage of stock market trading is computerized. When a computer program notices one or two ticks in downward direction, the program executes an order to either short a stock or exit a position. The program is following the trend. If it detects a trend in a certain area, the program will follow that trend and try to make money on it. As the amount of computerized trades increases, the exaggeration of the trend becomes much more evident. All these factors and a number of others exaggerate falls in the market.
SmallCapPower.com: Have you noticed a significant increase in outflows from your funds over the last 15 months or so?
Lawrence Cyna: We’re a private fund so we don’t experience that as much as many of the public funds. But there has been a dramatic withdrawal of funds from the market. The amount of dollars sitting on the sidelines in the United States is thought to be in the trillions.
SmallCapPower.com: When someone is trying to liquidate a position, do you put in “stink” bids (an offer significantly below the current trading price) for equities that you like?
Lawrence Cyna: Yes, on a regular basis. As a matter of fact we have stink bids going in almost every market. We look at a stock and we say, “We will we buy it no matter what because of the inherent value in this stock,” and we will put in a stink bid for it.
SmallCapPower.com: Are you seeing an unprecedented amount of value in the market?
Lawrence Cyna: Yes, I would say the amount of value is unprecedented, but the dangers are also unusual. In this environment, fear is pervasive and many companies are running out of cash and they could go broke or be taken over (at a significant discount).
SmallCapPower.com: If there are retail investors still willing to speculate in the current market, how should they play these volatile markets? Would you recommend that they put in stink bids through their brokers?
Lawrence Cyna: Some brokers will accept stink bids and others will not but making stink bids on a stock that is falling is not always a smart thing to do. When we put in stink bids we’re confident that there is value in the company because it has met all of our investment criteria.
If you put in a stink bid for a company that had exaggerated value, perhaps a market darling similar to Research In Motion (TSX:RIM), then these sorts of bids are often very foolish. If you’re buying a company based on the idea that “this stock was worth $5.00 and now it’s worth $0.50, so I’ll buy it now,” you will often lose your money.
I wrote something else in my blog that I think is important: “When you catch a falling knife, you will likely get cut”. A basic truism about investing in the stock market is that you do not buy in a downtrend unless you’re very familiar with everything going on with the stock. In a falling market, you will lose far more often than you will gain. It’s better to wait until a bottom has been established but few people know where the bottom is. You have to watch the charts and see when the market has turned. You pay a little bit more for equities than at the bottom, but very few people are smart enough or lucky enough to catch the bottom.
SmallCapPower.com: So remain on the sidelines for now, keep your powder dry and wait till the trend reverses. Is that what you’re recommending?
Lawrence Cyna: Yes, and don’t panic.
SmallCapPower.com: In a recent blog post you wrote, “Maybe gold will again rise, but the current trend is down.” Why is gold falling when the common mantra among gold bugs is that gold is a currency and a hedge against currency debasement, which has happened at unprecedented rates over the last three years or so?
Lawrence Cyna: First, if you look at the trend, you will see gold reached a high in September 2011 of around US$1,900/oz. And if you look at a gold price chart, you will see is that gold has trended down since then. We are now between US$1,500/oz and US$1,600/oz. What the market and the bankers are telling you is that they are not buying gold at US$1,900/oz but they are buying and selling it at US$1,600/oz or so. If you’re smarter than all these people and believe that gold will go higher, then you would be going against the trend. But if you wait until gold shows signs of trending upward, you would be doing something much smarter.
Gold bugs say that gold is a great hedge against currency fluctuation, against fear. And in some respects it is but gold’s reputation is somewhat distorted. Gold was a very different commodity when immigrants were traveling from Russia to New York City with Russian or Polish currency. Bringing that paper to New York City or Toronto meant very little but a piece of gold held its value from one jurisdiction to another. We don’t have that circumstance anymore. What we have now is a fear against currency devaluation and debt. That is a whole different issue. People say that gold will support the currency against debt but in good times and bad times countries have always had debt. Gold does not rise and fall with debt. There is not enough gold in the world to replace the currencies and as the population grows the amount of gold in the world becomes less and less in comparison with currencies, population and other assets. So, gold as a backstop is not necessarily any more valuable than any other commodity.
Now, I like gold. I am a gold bug to some extent. But I know that if inflation goes to 10 or 20%, as it did in my lifetime, and I want to buy a piece of gold, I’m effectively paying interest on that piece of gold. If I spend $1,000 on that piece of gold and interest is 15%, I have to put out of my pocket $150 every year in order to hold that piece of gold. So gold may go up in value but it’s still costing me a lot of money to hold a metal that doesn’t return anything. So, gold is not necessarily the hedge against inflation that people think it is. It will hold some value over the long term but as an immediate value, gold does not have the value that people think it has.
SmallCapPower.com: But interest rates won’t be going up in the short term or even for the foreseeable future.
Lawrence Cyna: I happen to agree with that. But there’s one certainty about economics and that is it’s not certain. As much as the nations in the world would like to keep interest rates at 1% or 2%, sooner or later there comes a day of reckoning. There has throughout history.
SmallCapPower.com: When there’s as much apparent value in the junior resource sector as there is now, how do you separate good value from exceptional value?
Lawrence Cyna: I’ve given a list of criteria before but two items that perhaps I didn’t emphasize as much as I should are: instinct and experience. Unfortunately, one has to be in the markets and understand the markets in order to understand what you’re being offered. So for the average person to establish really good value, I must admit, is difficult.
Still, information is readily available. Every company has a website; every company publishes its own National Instrument 43-101-compliant resource estimate; every company publishes all the information that it can. Investors should be looking for a company that has value. But what is value? First of all, look for a deposit that has the potential to grow; that would be easy to mine; and lack political exposure.
SmallCapPower.com: Political exposure?
Lawrence Cyna: Locations such as Argentina where difficulties occur; such as China where government edicts can change the entire viability of a deposit.
The next thing that one should look for is the ability of a company to do what it says it will do. That consists of two items: experienced management and a cash hoard. Experienced management means people that understand the resource and the markets. Secondly, a cash hoard that’s sufficient to sustain the company throughout this downturn. In other words, an amount large enough to continue exploration at a rate similar to what has occurred over the last few years. Those are the main criteria right now.
SmallCapPower.com: In terms of jurisdiction risk amongst junior resource equities, is now the time to stick to safer jurisdictions? Or is the value in somewhat riskier jurisdictions like West Africa or some places in South America just too compelling to ignore?
Lawrence Cyna: The market is a funny place. The market looks at the discovery or the possibility of discovery anywhere in the world with almost an equal valuation. But what isn’t taken into account is political uncertainty. And when you have gold that is in, for example, in Quebec, which is possibly the best mining jurisdiction in the world, you have the opportunity to safely invest in potential there versus investing in a project in Chile or Argentina or Zimbabwe, for instance. I discount my valuation for companies operating in political jurisdictions like those versus safe jurisdictions like Nevada, Ontario or Quebec, places like that. In my mind, if all the other factors are roughly comparable, one would be foolish to chase less safe jurisdictions as a place in which to invest. The market often disregards political risk. You shouldn’t.
SmallCapPower.com: Are there certain mined commodities that you believe are better bets right now than others?
Lawrence Cyna: Absolutely. First of all, we have a bit of a mania, which has abated somewhat, for rare earth elements. I’m a fan of a particular rare earth called dysprosium, which is high on the military’s wish list (dysprosium is used in high-end military applications) and is found in relatively small quantities in deposits with many other rare earths. Dysprosium is high on my list.
Gold is high on my list, too, despite my negativity on the price of gold. I firmly believe that gold is a wonderful metal to be exploring for, because it has a universal market. Gold is gold. So, as long as production costs remain below $600, $700 or even $800, and the price remains above US$1,500/oz you’re making an enormous profit on gold.
I like silver, too. Silver has a greater industrial use than it’s ever had in its history. It’s used in everything from medical applications to electronics.
I like copper. I think copper is a metal that is going to remain in high demand for a very long time. As the global population grows and as more people enter the middle class in developing countries, there will be greater needs for housing and infrastructure. Copper’s a major part of that.
SmallCapPower.com: What are some names in the small-cap space that are developing projects in those underlying commodities?
Lawrence Cyna: In the rare earths sector I like a company called Ucore Rare Metals Inc. (TSX.V:UCU), which owns the Bokan Heavy Rare Earth project in Alaska. Generally, Bokan, unlike some other rare earths deposits, has a high percentage of dysprosium. We’re waiting for the preliminary economic assessment (PEA) to come out and it should be out in a couple of months. But all indications are that production will be relatively cheap and easy. It is in a fjord that is so close to the sea that loading the minerals for ocean transport would be pretty simple. And Ucore management is very much in tune with the state government. This one deposit could supply the needs of North America for generations. It’s trading at around $0.35 but this stock was a good value at $0.80. I really think it’s a good bet.
SmallCapPower.com: And in gold?
Lawrence Cyna: Perhaps my favourite gold junior would be Romarco Minerals Inc. (TSX:R). It has an enormous gold deposit in South Carolina, the past-producing Haile Gold Mine. The deposit keeps expanding, and Romarco has very good management. They’ve run into some environmental permitting problems and the stock price has fallen. The insiders were buying it at $2.20, which I think was fair value a year ago. It’s now around $0.70 and the deposit has potential for expansion. I think it’s a really good company.
In terms of silver, I like Revett Minerals Inc. (TSX:RVM). Revett was trading at the $4.00 and $5.00 level with a small silver-copper mine in Montana, a very safe jurisdiction. But Revett has one of the largest undeveloped silver and copper deposits in North America, the Rock Creek deposit. Revett is now an experienced miner and the geology is almost identical to its existing Troy mine. And from what I understand, Rock Creek should become one of the major mines in the world.
SmallCapPower.com: What about a junior name in copper?
Lawrence Cyna: EMED Mining Public Ltd. (TSX:EMD) Mining. It has an enormous copper project in Spain. It’s a past-producing mine that went out of production and EMED is bringing it back into production. It should be producing in roughly 2.5 years. The stock price is very depressed but I think it has excellent management with good political connections in a solid jurisdiction.
SmallCapPower.com: Other than reading your insightful blog, what are two or three thoughts you would like to leave with our readers?
Lawrence Cyna: Understand the motivation of people in the industry. This is a commission-based business. People who are advising you get paid in relation to what they sell. There are some exceptions but normally people that advise you to buy a stock or sell a stock are making a commission. Never buy based strictly on advice. After you’re given the information, do your own investigation before buying.
I would say that although the market is currently in a dramatic downtrend, it is not unusual. This is not going to go on forever. People should look out their windows and see the new buildings going up and the changing needs of the population as it increases and ages. The world is not going to collapse. The world is going to go through ups and downs as it always has. And people should look at the market from that perspective. People should not buy in the hysteria of an overheated market. People should look for value in a depressed market.
SmallCapPower.com: Thank you for taking some time to talk with us, Mr. Cyna.
Lawrence Cyna is the CEO of Cymor Strategic Growth Funds and the Fund Manager. He is a Chartered Accountant and a CPA, with long experience in the securities market. He has been a director and officer of numerous public companies, and been involved in wide areas of the business world. He writes a semi-weekly blog on the markets and economic matters www.cymorfund.com.
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