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Buying Miners? Well, In a Perfect World...

Tips and ideas for seeking only world-class gold assets today...
 
ANDREW PULLAR is CEO of the Sentient Group, a private equity fund.
 
Previously working in London and Sydney as a mining engineering consultant, and also working variously for miners and mineral firms from De Beers to Gold Fields, he now says his plan for investment success is all about identifying companies with long-life, low-cost, world-class assets and supporting them through to production, as he explains in this interview with The Gold Report...
 
The Gold Report: Please sum up your current view of the gold equities market as gold hovers above $1100 per ounce.
 
Andrew Pullar: To come to terms with what has happened in the gold equities market, you have to understand what has happened to gold itself. The overwhelming contributor to a softer market is really a stronger US Dollar environment because that's not good for gold; the threat of higher rates in the US will probably keep gold subdued for some time. The US Federal Reserve indicates that even an uncertain global outlook won't delay a rate hike for much longer, so we see gold as a real asset that is behaving like a currency that pays zero interest. The big positive for gold is that you can't print it, so the price over the long term should correlate well to the increase in money supply. In other words, it should go higher. 
 
TGR: Could raising interest rates hold any positives for gold?
 
Andrew Pullar: Raising rates may have one benefit for gold in that it could cause unexpected market turmoil, which is risky for investors. And investors don't like risk. But gold equities are hurting in anticipation of a softer gold market. Gold producers have had a couple of years to focus on cost cutting. The prospect of further low gold prices is keeping discretionary investors sidelined.
 
We're also seeing that there is little capital available for resource sector companies, which makes it tough for these businesses to implement operational improvements, and that causes a further drag on their share prices. It's not a great environment, but we think that over the medium to long term, there is light at the end of the tunnel.
 
TGR: Does that provide greater opportunity for your company, given that there is less capital available and you have capital to deploy?
 
Andrew Pullar: It does. There are a lot of opportunities out there. I wouldn't classify all of those as investment-grade opportunities, though. Many of them don't meet our long-life, low-cost, world-class asset style of project that we're looking to invest in. The company is a private equity company that focuses on investing in and building companies in the natural resources sector. It's something that we've done successfully since 2001, and we don't do anything else.
 
TGR: You had success at your previous company as a portfolio manager. How has your approach changed with your new company?
 
Andrew Pullar: We still use some of the underlying fundamentals of company valuation. The company I previously worked for has a dynamic team of market experts who are very good at picking stocks and trading around a core position. They took positions in a lot more companies than my current company does, and it took smaller positions. The company I work for now, being a private equity fund, has the mindset of a business builder, so we take much bigger positions in companies. Sometimes we own the whole company, both public and private, and we don't have the luxury of trading away from a position if things don't go according to plan.
 
TGR: How do you justify such large ownership interests?
 
Andrew Pullar: It's about identifying something up front, making a judgment and then backing that judgment. Because we're a private equity fund, we have the luxury of having a much longer timeline. We make an investment with a view to being there for 5 to 10 years, almost a complete cycle in the mining industry. If that company keeps meeting the goals being set for it over time, then we are going to keep supporting it. Once again, our mindset is as business builders. You don't have much influence when you're a 5% shareholder. With a 20% stake, you can get a board seat and start to influence the direction of a company.
 
TGR: You talked earlier about investments that meet your investment hurdles. Let's talk about some. What are your preferred jurisdictions?
 
Andrew Pullar: Essentially, those would be Australia, Brazil and Argentina because that is where we have deployed the most capital. We have a big office in Sydney and a number of people from Australia, so that has been a logical place for us to go. Brazil is one of those jurisdictions where you can find a new district or a new basin, and those are opportunities you don't often find in countries that are considered more stable jurisdictions. Although Brazil has had highs and lows, it is a country that is supportive of the mining industry. These countries have an incredible mineral endowment. We look at geology first to establish whether there is potential to have a long-life, low-cost, world-class asset. These don't come along very often. When they do, they deserve capital.
 
TGR: What are some other ways that you support your investments?
 
Andrew Pullar: The due diligence we do up front is based on a risk matrix that is really quite complex. At every point, at every stage through the development cycle, we will reassess whether or not an asset is meeting its goals. We provide technical and financial expertise and, most importantly, we provide capital. At each stage, though, we'll be expecting at least a two times return.
 
TGR: At what point in the investment cycle are you typically exiting your position? 
 
Andrew Pullar: In a perfect world, we would exit a position when it first comes into production. We have to be cognizant that the new investor also wants to make a return on capital, so the point at which the development capital has been deployed and the company is now entering into a cash flow position suits a certain kind of investor. That is a good time for us to exit. In a down cycle, it's not as easy because companies generally aren't getting taken out early for a premium. So in the down cycle we just keep ticking off the goals, and we're making sure that the companies are meeting their development expectations. If they are achieving what they are meant to be achieving, then as we move through into a better market, we should be able to start exiting some of these companies close to the point at which they are reaching production.
 
TGR: You have a position in a company that is mining in Greenland. Greenland doesn't have much of a history as a mining jurisdiction. Is that a concern?
 
Andrew Pullar: I was in Greenland about four weeks ago because I wanted to see this project firsthand. I was tremendously impressed with the attitude of the local officials toward mining in the region. They are tremendously supportive. There are a number of mining projects and a couple of mines. The geology is amazing. Most of Greenland is covered by an icecap that is about 3 kilometers thick. The eastern side has a problem with ice flow but on the western side there is clear, year-round access to Maniitsoq. In addition, it's quite easy to identify structures through the use of typical exploration tools like aerial electromagnetic surveys. The company has been quite innovative about using sophisticated aerial surveys to identify additional gossans. I was blown away with the country's potential. A lot of companies in Greenland are struggling to raise capital. We've identified North American Nickel as one that's worthy of investment. We're sticking with it.
 
TGR: What is one thing investors should constantly remind themselves about in this space in this market?
 
Andrew Pullar: The big clock keeps turning, and cycle lows will turn into cycle highs with time. World-class assets don't come around very often, so if you're lucky enough to find one that comes with a strong management team and decent jurisdiction, back your judgment and try to ignore the volatility.
 
TGR: Thank you for talking with us today, Andrew.

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