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Ian Ball: Above-Average Capital Allocation Yields Above-Average Results In Mining

Strategies for capital allocation. Where are the bottlenecks in mine efficiency? Beware of excessive share dilution in mining stocks. Companies seeking capital meet potential financiers via the internet. Ian Ball brings us Abitibi Royalty Search, an online platform where mining companies in need of financing can easily submit geological data on their projects for consideration. In the mining sector, above-average capital allocation yields above-average results. The bottleneck in efficiency is in equipment provider innovation. Ian sheds light on our current position in the commodity market cycle, he expects the bottom within 12 months and his investment strategies reflect this. He advises to beware of share dilution in mining companies and not just opt for the cheapies. Ian Ball was appointed president of Abitibi Royalties ( OTC:ATBYF ) in 2014. Ian worked 10.5 years for Rob McEwen, initially at Goldcorp (NYSE: GG ) and then McEwen Mining (NYSE: MUX ). He most recently served as McEwen Mining’s president where he was responsible for overseeing production, construction and exploration activities throughout North and South America. He was responsible for discovering McEwen Mining’s El Gallo 2 project, scheduled to become one of the 15 largest silver mines in the world and building the El Gallo 1 gold mine that is forecasted to produce 75,000 ounces gold in 2015. www.youtube.com/watch Palisade Radio Host, Collin Kettell : Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is a new guest to the program. I am very happy to have him. It is Ian Ball, President and CEO of Abitibi Royalties. A lot of people are probably familiar with the name as he has been around in the industry for quite some time and he has worked in the past – and still does to this day – with Rob McEwen. Ian, welcome to the program. President and CEO, Abitibi Royalties, Ian Ball: Thank you for having me today. CK: Yeah, as we were talking before the interview here, you went through your background that got you into mining. I thought I had started young, but you were saying that your background in mining went all the way back to when you were five years old. If you do not mind just giving a brief overview of that story again, it would be great. IB: Yeah, I would be delighted to. I grew up with mining because my parents were investors in mostly junior mining companies, and they had me looking at mining stocks at the age of five. There is always a discussion around the dinner room table on gold mining, exploration success, and the amount of wealth that it could generate on the back of discovery, so it has always been very intriguing for me. As I sort of went through school, I became very intrigued also in terms of how different mining companies were run and it seemed to me it was quite clear that the best mining company in terms of its management, in terms of its assets was Goldcorp. This was back in 2002, 2003. I was very fortunate to have met Rob McEwen at that time and then have him offer me a job to go and work there. CK: And so from therein you became the president of McEwen Mining, if you can give a brief overview of your time there and what you are doing now. IB: Sure. Well, after Goldcorp, because if you think back to 2005, Goldcorp merged with Wheaton River and the head office was then subsequently moved to Vancouver. Rob stepped down as CEO, which was always his intention. We went out and started a small company called US Gold which then became McEwen Mining. I had started at US Gold and slowly started to move into the exploration’s operational side and started in Mexico with a small exploration budget. We were fortunate enough to make a reasonable size silver discovery that now has almost a construction permit and is scheduled to be one of the fifteen largest silver mines in the world. On the back of that headed up a team that built what is now McEwen Mining, the main operating act of the El Gallo 1 Mine in Mexico. With those two successes then being promoted to president of McEwen Mining and that will have to be about ten years. CK: Great! So now you are working with Abitibi Royalty. I think a lot of our listeners have seen many of the press releases you guys have been doing, what you are calling a royalty search over the past few months. But, essentially, if you kind of outline the concept for potential shareholders behind how you guys see making money. It is quite a unique business model that I do not think has been executed on before. IB: Well, we look at Abitibi as having almost like a number of divisions inside of a company. Number 1 is the royalty search. If you think of any job of the CEO, it is allocation of capital. In a mining company, we have done an absolutely horrible job of allocating capital. When I was working at Goldcorp and then McEwen Mining, what become Rob’s primary themes is that if you do the average you should expect to get the average result. Most mining companies view the same as everybody else. That is why it is mostly we are all in the same position. When I look at the world in terms of mining, oftentimes it is not large sums of capital that generate the highest return; usually it is small sums deployed in a different fashion. We looked at it and said, well, it is a tough market right now. There are a lot of prospectors and junior mining companies that are having a difficult time in terms of financial position. They cannot pay the claim fees that are coming due and, therefore, they are going to have to drop the properties. Then I say, well, would we be willing to pay the property taxes on their behalf, in doing so getting back a royalty? We have also asked that should the properties be sold we would also get 15% of the net proceeds. But we are looking for properties that have certain characteristic. They have to be near a mine site. They have to have good geology and they have to have science and mineralization through previous exploration. I thought if we could build up a portfolio of 25 to 30 of these, we might walk away with two that end up being successful. Today, we have 70+ submissions. We completed eight transactions and we are continuing to review submissions as they come in. We have been pretty happy with what we spent. Today, I think for the first eight we spent $90,000. CK: I want to dig in a little bit deeper on this model behind paying for the claims fees and in turn getting a royalty and some upside on the project. The purest form of speculating in the mining sector is picking up or staking projects and holding them from the cheap point of a bear market into the craze that comes into a bull market, and that is essentially what you guys are doing. I mean I have looked at some of the press releases coming out and the costs to cover these claims fees are quite low and you are ending up with a substantial royalty. But for our listeners that are not as familiar, what is the value of the royalty? I mean some of these assets are not going to become a mine, and even if two of them do it, it is going to be a long time out. If you can explain how these things become valuable just through a bull market emerging that would be great. IB: Well, if you look at some of the royalties that we acquire, couple of them are 200 meters away from an operating mine. They are very, very close. A lot of the geology indicates that the mineralization may trend over where we have the royalty. You are right where even if there is a discovery it could be some time before you see cash flow. But if you look at the industry in the history of mining, the history of royalties, the best royalty ever purchased was by Franco-Nevada (NYSE: FNV ) in the early to mid-’80s on the Goldstrike mine, and that was when Barrick (NYSE: ABX ) then subsequently made the large discovery just like Goldstrike. If you look at Franco, it was not so much the cash flow that was the driver of their share price; it was the exploration success in knowing that cash flows were coming in the future. I think that this way, if the exploration company has a good drill hole, their share price starts to increase because you are building the underlying value. We suspected the same thing would happen initially here as any of these properties was to have a resource, and the value would have continually be increased as they get closer to production. The thing that we like most about these is that they are all right near a mine site and these are not in an area that has no infrastructure. They are 200 meters away, 500 meters away, a kilometer away from where usually substantial mines are operating. CK: For the benefit of our audience, Ian, can you explain how royalty is tied to a project? When a royalty goes away? How it sticks with the projects as long as the project remains in good standing, etc.? IB: Yeah. In that sense, it is a good question because royalties, in terms of their legal standing, they do vary by jurisdiction. You have to know the underlying rules that are applicable. Ontario, for example, in Canada is different than in Quebec. It might seem strange that you are on the same country but one is common law, one is civil law. The rules do change. One thing that we are building into our agreement is saying that once the claims come due again we are putting in a clause that we will be willing to pay the claim fees again for a higher royalty. That is where we can maintain if we like the property that it shows it stays in good standing and does not go to any default status. CK: Okay, thank you for the clarification there. I want to shift gears a little bit and talk to you about the industry that we are in which is, oftentimes, as you pointed out, mismanaged, money is misallocated. Much of your career was started at Goldcorp, and you said that at the time it was extremely innovative, shareholder-friendly. Of course, there was what I believe was referred to as the “Challenge” which was that first online exploration challenge that was a huge success and has now been replicated a few different times. Can you talk about the use of technology and the internet in how you have gone ahead and worked in the mining sector? IB: Well, I think the internet has a lot of uses in terms of its reach to connect people, to bring in new ideas. You did see it with the Goldcorp Challenge. You have to remember that was back in 2000 when the internet really was at the early stage and what you are able to do today versus then has obviously been drastically increased, so there is more we can be doing on the internet. If you think about it other companies have tried it and there is always success. Barrick would be an example where they had a challenge on metallurgy. This was in 2006 where they put up a prize of $10,000,000 I believe it was. But I think the problem there was they did not have an internal champion to keep pushing it ahead. I think without that a lot of these initiatives end up failing where I think Rob was a very good example where he came up with the idea, was the internal champion, and continued to push it so it became a success. I think that is the key. We have tried to use the internet saying that rather than trying to talk to people individually about what claims they want to have in good standing. We have created an online platform where you can submit all your technical data online and you will have an answer within 48 hours. I think that is a much more efficient process. Those are just two examples. In terms of innovation technology as a whole, right now we are seeing a lot of cost cuts in the industry. But it is just cutting cost; it is not innovation. The two should not be confused. To give you an example, two years ago, I went down to the Caterpillar (NYSE: CAT ) factory in Illinois and my question was why are we not developing an electric coal truck? Because according to the work that I had done, mining cost would go from – and this is in Mexico because this is where I was primarily working at the time. Mining cost would go from $2 a ton to $1 a ton if you can move from a diesel to an electric haul truck. I thought, “Okay, well, that would drastically impact the economics of a mining operation.” Caterpillar’s response was, “We do not do electric. We only care about expanding the hours on a diesel engine.” That is the wrong mindset for the mining industry. I think we need to push the suppliers to work harder on the innovation side. CK: Well, that is very interesting. Well, Ian, at 34 years old, you have ridden a couple cycles up and down. I want to talk about where we are at right now in the cycle. I think action speak louder than words. Certainly with you picking up assets under Abitibi and other projects you are working on, it would indicate that you think we are near a bottom. How do you see things developing over the next couple of years? Are we close? Is the bottom behind us? IB: Well, a couple of things. You are right and we launched the royalty search on the back of a very difficult time in the market. Four years ago, when we could not have done the royalty search idea because there was a lot of capital available, the other thing that we have done to sort of show that we think it is the good time to be buying is that we are one of the few companies that have launched share buyback program. Rather than issuing shares, we are buying back our shares currently. The other thing is I agreed to take all my salary in shares versus taking it in cash. That is also my belief that the share prices are going to go up, not down. In terms of where we are in the market, I think kind of pick a spot or a price in terms of where’s a bottom, I think that is a very difficult thing to do. I sort of try to look at it in terms of where are we are in the cycle. This might sound like I am looking at myself a lot as a buffer but I think we are in the bottom twenty to bottom third of this downward trend. If you look at the technicals, which I know, I am not a big believer in technicals, but if you look at the charts you would assume that gold is going to go to a thousand. It is probably going to overshoot a thousand as it typically always overshoots support to some degree. Whether it is $975, $950, $925, I think gold is going to go there somewhere in the next twelve months. Knowing that is very difficult to do deals and markets can turn around quickly. We have looked at it and see we are in the bottom third of the market that is safe enough for us to start deploying our capital, share buyback, asset acquisitions. We think in the next twelve months, we will probably see the bottom, but we do not know where that would be or we do not know how quickly we would recover from there or whether it sort of just tread water for some time. CK: What do your past experiences in bull markets tell you about the type of gains will be made for investors? Obviously, it depends on if you are going to the ground level purchasing assets like yourself or if you are buying mid-tiers or majors. But what will you expect over the next few years? IB: Well, it is an interesting question because I just sort of give you an example. If you go back to 1995, this is when Goldcorp made the high grade zone discovery at Red Lake and the shares did very well off the back of that. Then in ’96 we had Bre-X. We then had gold prices starting to decline making significant declines in ’97, and then they ultimately bought, did a double lot then in 1999 and then in 2001. By the time you got to 2001, Goldcorp, despite having arguably the best gold discovery in fifteen years, was back to the same price they were pre-discovery. If you look at it and say – in hindsight it makes sense and here you have a deposit that ends up being five million ounces of gold at 88 grams per ton gold. Think of it. That is almost unheard of. It is unheard of. Then if you have the nerve to buy at the time the gains were phenomenal going from 2001 to 2005, 2006 where the share price ultimately went from $5 in 2001 to $46. Big games can be had with the announcement of a company of reasonable size. I think that now people should be looking at companies that have good assets, good discoveries, that are trading at fractions of what it even cost to discover those deposits. I think there is a few of them out there right now. CK: Yeah, that is great. Well, Ian, at this point, I want to ask you if you have anything to add. Any suggestions for audience, members, and also if you can give us some more information on the companies you are working with where people can find out some more information that would be great. IB: Well, I would say the thing you will come to appreciate over time is that with a lot of these mining companies, you should be looking at the share dilution. I think that is what has been a killer in this industry and that the cost of capital to finance these companies was quite high, and you are looking at companies that are cheap and that is why we buy shares. But do they have any money? How long will that money take them. If they have to do a financing, how many more shares are to be issued plus the warrant? There’s a bit of a cautionary tale to be had there. In terms of other mining companies, I only invest in one and that is Abitibi. I do not invest in any others. There are specific reasons why and I think Abitibi has a good story in terms of its fundamentals. I do think that there are other companies out there that are doing good work, but it is still a bit of a cautionary tale. Right now, you have an opportunity to probably buy a handful of very good companies at a reasonable price rather than trying to buy companies that are just cheap for the sake of being cheap. CK: Okay, well, Ian, thanks so much for coming on the program. Really appreciate it. We will try and get you back on next year maybe in a better market, maybe not. IB: Okay, that sounds good. Thank you for your time today.

Has Risk Parity Jumped The Shark? Asness Says No

By DailyAlts Staff According to AQR’s Cliff Asness, anyone who thinks risk parity caused the massive selloff in August has gone “all tinfoil-hat”. A better argument against risk parity, Mr. Asness concedes, is the fact that it has underperformed over the past several years. But is this underperformance a result of the strategy having jumped the proverbial shark ? Or is it simply a bad run to be expected with any strategy? Not surprisingly, Mr. Asness thinks it’s probably the latter, and this is the view he articulates in ” Putting Parity Performance into Perspective ,” the alliterative latest in his Cliff’s Perspectives series of white papers. Risk Parity Basics Mr. Asness takes the first few paragraphs of the paper to refresh readers on the basics of risk parity : “an alternative long-term strategic asset allocation” used to “diversify a more traditional equity-dominated allocation.” Rather than weighting holdings by market cap, risk parity weights them based on their anticipated contribution to overall portfolio risk – and in order to achieve the right mix, this means leverage is used to ramp up low-risk fixed-income holdings. From Cliff’s perspective, risk parity offers a “real but modest long-term edge” over traditional approaches because many investors are “too averse” to applying leverage. Risk parity is often described as an “all-weather” solution, succeeding regardless of the broad market’s ups and downs, and Mr. Asness believes this is true – on average . Unfortunately, we’re not living in “average” times, and as a result, risk parity has underperformed since 2009. Longer-Term Returns It’s impossible to do true risk parity back-testing as far back as 1947, so AQR uses “Simple Risk Parity” for historical analysis. The firm’s findings indicate that the “real but modest long-term edge” that risk parity enjoys over indexing really adds up over time. This is evident in the image below, which charts the cumulative excess return of Simple Risk Parity over the past 68 years: The image above shows Simple Risk Parity’s excess returns above cash. The image below shows its excess return above a “60/40” stock/bond portfolio. This helps put the strategy’s underperformance since 2009 into longer-term historical perspective: Forward Outlook Risk parity is designed to diversify away from equity risk. Instead of adding equities to a portfolio in pursuit of desired returns, risk-parity strategies favor using leverage to ramp up fixed-income risk. With equities outperforming for the past six years, it should be no surprise that risk parity has underperformed. Moreover, risk-parity strategies have also been slammed by the bear market in commodities, whereas “60/40” portfolios don’t even have direct exposure to that asset class. But do these facts mean that risk parity’s happy days are over? Not in Cliff Asness’s view. He suggests that the recent underperformance is of the sort that’s to be expected with long-term strategies, and adds that periods of underperformance are often followed by periods of outperformance. The problem, as he sees it, is that short-term periods of poor performance can feel awfully long – and this can lead to investors bailing at the wrong time. If traders have tactical reasons for wanting to allocate away from risk parity, that’s one thing – but selling because of painful results that should be expected from time to time is unwise, in Asness’s view, even if resisting the urge to do so is “one of the hardest but most important parts” of an investment professional’s job.

Even After Recent Drop, PGP Is A Sell

PGP trades at a large premium, putting it at risk for a steep decline. When rates rise, high premium and highly leveraged funds will suffer. Friday’s drop is a sign of how risky the fund truly is. The purpose of this article is to evaluate PIMCO Global StocksPLUS & Income Fund (NYSE: PGP ) as an investment option. To do so, I will evaluate the fund’s characteristics, recent performance, and trends within the industry as a whole to attempt to determine if PGP will be a profitable investment going in to 2016. First, a little about PGP. PGP’s stated objective is to seek a total return comprised of current income, current gains, and long-term capital appreciation. The fund attempts to achieve this objective by building a global equity and debt portfolio and investing at least 80% of the fund’s net assets in a combination of securities and instruments that provide exposure to stocks and/or produce income and by utilizing call and put options to generate gains from options premiums and protect against swift market declines. Currently, the fund is trading at $16.91/share, after Friday’s decline of 8.62%. The fund pays a monthly dividend of $.18/share, which translates to an annual yield of 12.77%. While the fund has come under pressure over the past few trading sessions, performance in the past few months has been strong, with the fund up almost 15% in the past three months, excluding dividend payments. Given that performance, and its high yield in this low rate environment, PGP may seem like a sound investment. However, there are a few reasons, which I will outline below, why I would avoid PGP going forward. First, and probably most important, PGP trades at an enormous premium to Net Asset Value (NYSE: NAV ), currently at 56.24%. This in and of itself is a red flag for any fund, as it indicates investors are paying well above the fair market rate for future performance. PGP has been able to maintain this high premium because it has a history of reliability for its dividend payout, which is high, and investors have flocked to PGP and other similar funds to earn this yield while interest rates have remained at record lows. While this strategy may have paid off during that environment, once rates start to rise, investors will shift out of riskier funds and in to safer asset classes that will begin to pay more. Funds that demand a high premium, such as PGP, will be most at risk. This was evident during Friday’s drop, as credit markets were rattled over Third Avenue’s decision to suspend redemptions on one of its credit mutual funds. This decision hit many Pimco funds hard on Friday, but funds that trade at large premiums were hit the hardest. For example, PHK, which also trades at a premium (albeit at only 10%) dropped over 7%, which was similar to PGP’s drop. Meanwhile , PCN, which trades at a 7.62% discount to NAV, dropped only 2.44% and PCI, which trades at an almost 16% discount to NAV , dropped only 1.18%. While this is just a snapshot of one trading day, it demonstrates how funds with high premiums are more sensitive to market swings and are riskier for the initial principle investment. Second, interest rates are likely to increase this week, as 92% of economists surveyed by the Wall Street Journal are predicting a December rate hike to be announced during the Fed’s meeting this week. If Yellen announces a hike, and lays out the groundwork for future hikes in 2016, investors may begin to exit riskier funds like PGP, as yield on safer investments, such as Treasury bills, will begin to be higher. Again, due to its large premium, PGP will probably suffer more than most and the drop could be steep. In the past month, as expectations for the first rate increase became more pronounced, PGP has suffered, down about 5% (excluding dividends). With the rate hike becoming more evident, I expect this decline to continue. Third, while PGP has traded at an ultra-high premium for quite some time, historically the fund has traded at NAV, or at a discount. It wasn’t until the depths of the of the financial crisis and the near zero interest rates in 2009 that PGP began to sell at a premium. Investors have irrationally bid up this fund to the point where owning it now sets up the investor for a very quick, steep drop in principle. When rates rise, I expect PGP to return to pre-recession valuations, which would mean a dramatic decrease in share price from where it stands today. Of course, avoiding PGP has risks of its own. The fund has traded at a premium successfully for years, and its high yield, along with capital appreciation, has rewarded investors handsomely. If Yellen announces that the Fed will yet again delay raising rates, or lays out a dovish stance for future increases in 2016, funds like PGP could rally, as that could indicate the low rate environment will be around for longer than anticipated. Additionally, PGP’s yield of almost 13% could be enough to entice investors to stay the course throughout 2016, even with rising rates. While rates rising seems to be an almost certainty, those rates will most likely still be at historically low levels. Investors may decide that the high yield and below investment grade credit sectors that compose PGP could be worth the risk. However, I expect the Fed to follow through with the December rate hike, and lay a groundwork for a few rate hikes in 2016. This albeit slow rate of increases will gradually steer investors out of high-yielding closed-end funds, and PGP should fall quicker than others. Bottom-line: PGP has paid a reliable, high-yield during a period of ultra-low interest rates, rewarding investors with high income during a time when such income was hard to come by. The fund has also performed strongly from its 2009 lows, more than doubling in share price. However, this performance has priced PGP well above NAV, and has shown itself prone to dramatic losses when the market gets rattled, such as on Friday. With volatility expected in the credit markets in the coming months as interest rates are set to rise, the risk-reward of PGP is just not there. While the yield is high, and PGP has proven to pay it reliably, there are other Pimco funds available with similar yields, that won’t expose investors to such a large potential loss in principle. Heading in to the new year, I would caution investors away from PGP at this time.