A look at the gold-silver value proposition...
BRIAN OSTROFF has been with Windermere Capital, Inc. since 2009 and is a managing director. His area of focus is the junior and mid-tier mining sector. An active philosophy and deep technical expertise allow the firm to invest "anywhere along the spectrum" from exploration to production, all the way to operation. In this interview with The Gold Report, Brian examines the gold-silver value proposition.
The Gold Report: Brian, let's start with you telling us about Windermere Capital.
Brian Ostroff: Windermere is an investment manager. We currently oversee two hedge funds with a natural resource focus. The Breakaway Strategic Resource Fund and the Navigator Fund are both offshore hedge funds based in the Cayman Islands. They serve high net-worth individuals, family offices and institutional investors.
TGR: Do they have an open-ended structure or are investors committed to a cut-off investment?
Brian Ostroff: Both are open-ended. Navigator is a monthly. Breakaway is a quarterly.
TGR: So they're corporations. Do they trade on an exchange?
Brian Ostroff: Yes, both funds trade on the Irish Stock Exchange, and they are quoted there. Subscriptions are done directly with the fund.
TGR: What is Windermere Capital's investment philosophy?
Brian Ostroff: In terms of the basic investment theory behind both of our funds, we feel that we are quite different than most of the other funds in our space. For starters, we have strong technical expertise. Most of the people here have technical backgrounds as opposed to a financial or capital markets background.
We have two partners in our fund. One is a group called Ocean Partners, which is made up of the former ores and concentrate trading team at Pechiney. When Alcan bought Pechiney, these guys did a management buyout. They do business in roughly 35 countries and have a physical presence in 15. They are geologists, mining engineers and metallurgists, and their global footprint allows us to send someone to an opportunity quickly.
Our other partner is Peter Hawley and his group. These guys have all been in the business for over 30 years building and operating mines. Once again, this is an area where we think we have an advantage. We can look at various assets, not only as financial guys, but also with a deep understanding of the geology and the likelihood of it going into production.
The other area where we think differently from other funds is that a lot of funds do their due diligence and write their checks, make their investment. We find that our work really begins after we've written the check. We're not activist investors, but we're definitely active. We tend to take fair-sized stakes in companies, and then we try to help it going forward by making additions to its board, perhaps helping it operationally, assessing its assets and either helping the company divest or find other assets.
TGR: Active versus activist implies that you do everything but management — seed, assistance, banking, financing.
Brian Ostroff: We certainly assist in all those roles. We do not take board seats. What we do is find people in the industry with whom we have a relationship, people we think can help advance the company.
With regards to our investment theory, we are extremely value oriented. Primarily, we invest in the micro- through mid-cap stages; but our alpha really comes from the micro-cap stuff. We tend to look at a company, assemble a peer group and try to understand why the company we're looking at is considerably cheaper than its peer group.
Once we understand that, we gather around the table with our partners to have an honest discussion as to what the issue may be and what we can do to fix it. Once we get to the point that we think we can help close that gap with the target's peer group, we have a discussion with management to see that we're all on the same page.
Once again, we are active — not activist. We have a meeting of the minds and when everyone is comfortable with the business plan, we tend to make our investment. Of course, that's only in situations where we have large stakes. We use the mid-cap companies to move our positions around and get exposure to various metal groups. In the micro-cap space, we tend to take a position anywhere between 10% and 19.9%.
TGR: Micro cap is what, US$10 to $75 million?
Brian Ostroff: Yes, actually, US$10–US$100M. If we've done a good job with that micro cap, hopefully, it really starts to grow from there.
TGR: The idea is to get it over US$100 million in market cap, so mutual funds can buy it?
Brian Ostroff: Yes.
TGR: Would you tell us about the differences between your two funds?
Brian Ostroff: The Breakaway Strategic Resource Fund is mining only. Due to the technical expertise to which I had alluded, it can make investments anywhere along the spectrum.
The fund was first conceived in the dark days, just coming out of the global crisis. We felt there were a lot of good assets that were orphaned or had been lost and financial players had taken them over. We were looking to buy distressed assets, even outright buying the properties or mines. We do structured debt through our partners and offtake deals all the way through outright investment in the company's equity.
I like to describe Breakaway as a complete "rocks to stocks" Investment vehicle.
TGR: And what about Navigator?
Brian Ostroff: Navigator is all natural resources. Aside from mining, it also does energy and agriculture, paper and forest, etc. Its investments are primarily in publicly traded equities; however, we do have some room for near-public investments (i.e., those that we think can go public within about six months).
TGR: Does Breakaway Strategic also buy equity in private companies?
Brian Ostroff: Yes, Breakaway looks anywhere along the spectrum, and it'll outright buy a mine if the opportunity presents itself.
TGR: So, does Breakaway Strategic own precious metals?
Brian Ostroff: Yes. Both funds have a fair-sized stake in some precious metals companies.
TGR: Where do you stand on precious metals? Are you bullish on gold, silver, platinum, palladium, whatever?
Brian Ostroff: Yes. I believe that we continue to be in a secular uptrend that will lead us significantly higher, but there will always be bumps along the way.
TGR: Why are you bullish on precious metals?
Brian Ostroff: I've always believed that gold is a currency. Ultimately, investors have a choice — put their money in Dollars, Yen, Euros or Pounds, as they choose or in gold. The one difference is that gold, unlike paper currencies, has to be found and mined. Last year, gold production was up about 3%. That compares with all the central banks around the world that are just printing money.
Now, I don't put myself in the camp of being an absolute doomsayer, in terms of the fiat currencies or the US Dollar. What it really comes down to is — if the Americans print 20% more Dollars, the Europeans print 20% more Euros and the British print 20% more Pounds, you can't all of a sudden come up with 20% more gold. The relative valuation continues to favor gold.
TGR: What about silver?
Brian Ostroff: We love silver. It has definitely come into the forefront and has been a much better performer. Like many people who like silver, the physical market characteristics are very positive.
Ultimately, we view silver as gold on steroids. When you're in these uptrends and everyone's looking at precious metals, silver tends to perform much better. We think that, as the whole precious metals bull market proliferates and more average investors start to look at it, silver at US$35–$40/oz. might be more appealing than gold at US$1,400–$1,500/oz.
As bullish as we are on precious metals, we're even more bullish on precious metal stocks. We believe they are very cheap. If one was to go back 20 or 30 years on the XAU (the Philadelphia Gold and Silver Index) and do a relative valuation to the price of gold, one would see that it is still trading under the band at which it typically trades; so, we think there's value there.
Additionally, if one was to take a look at the TSX Venture Index as a benchmark (obviously, not all the stocks on the TSX Venture are just mining but it has a high percentage of them), that index is still considerably lower than where it was in May 2007.
TGR: Let's stay with the XAU. You say it is trading at a discount to its traditional band. Could you tell me, to what is it trading at a discount?
Brian Ostroff: To physical gold. In other words, if you were to look at the valuations of gold stocks to physical gold, you would see that, historically, gold stocks are still trading well under their norm given where Gold Prices are.
Of course, that can correct in one of two ways: Either the gold stocks relative to gold can appreciate or gold relative to the gold stocks can depreciate. Because we are still in a secular uptrend in precious metals, our feeling is that the stocks, ultimately, will catch up to the metal, as opposed to the metal catching up to the stocks.
TGR: So, you believe that the risk is greater to the upside than it is to the downside?
Brian Ostroff: Correct.
TGR: You mentioned that there was more value in silver due to the psychological perception of silver's price per ounce versus that of gold. Does that imply greater volatility?
Brian Ostroff: It does; and in terms of value, I'm quick to say that value is a relative thing. So, is there value in silver? I'm not sure. Our feeling is that silver offers a better opportunity relative to gold — but make no mistake about it, silver is a lot more volatile. If we get a downturn in precious metals, silver will fall harder than gold.
TGR: To recap, you see gold and silver as a store of value. If you can't print more gold, you have to find it. And if you do, it just adds value to the entire gold supply. If I'm not putting words in your mouth, isn't this a currency devaluation play?
Brian Ostroff: Yes, that is the basis of our theme for investing in precious metals.
TGR: So, where do you find value?
Brian Ostroff: We think there are opportunities in niche stories—companies out there that the market haven't paid much attention to or, perhaps, a commodity that hasn't received much attention. Those opportunities still exist and will always exist; they just get that much more difficult to find as a market matures.
TGR: Brian, thank you for your time.