Bottoms Up—Less Is More
We are constantly on the hunt for more Dells and MasterCards, though the favourable risk/reward metrics of our small caps clearly excite us too.
While bigger is usually better, less is often more. It has to be. We would only add small and mid-cap stocks today if they were exceptionally cheaper with exceptionally more upside opportunity than their large-cap brethren. Sometimes small caps are so cheap they literally can’t get much cheaper from being so underowned. Our small-cap investments in the past few months have given us exemplary returns with exemplary future potential.
We strive to ensure our bottom-up security selections coincide with our macro top-down views. Thus, we continue to concentrate in oil and gas shares. The demand for oil is at all-time record highs. And, global production levels are having a hard time keeping pace. Charles Maxwell, renowned in the field, believes that oil production will stop growing altogether by 2015, driving energy prices substantially higher over the next few years. We believe a similar outcome is in store for natural gas prices as the higher inventory levels are worked off over the next couple of years and natural gas, which is the favoured clean energy solution, sees demand far outstripping supply.
On a bottom-up basis we constantly compare individual securities in which to invest. The energy sector offers no shortage of attractive opportunities. Sometimes when we may have a specific macro view, as for example, higher gold prices, finding the individual securities—gold stocks—with favourable risk-reward parameters may be more limited, as is the case now.
Corridor Resources is our largest holding. It meets our criterion of lower than average risk and higher potential reward. The company is debt free, is a low-cost producer, in a favourable jurisdiction (New Brunswick—where royalty rates are low and political risk minimal) and receives above average gas prices due to the heat content of its gas and proximity to the best gas markets in North America.
Most of Corridor’s assets today are natural gas based. The fact that gas prices remain below the North American marginal cost of production and are likely to trend much higher also attracts us to Corridor. Natural gas prices have been held back by weaker industrial demand from the recession, excess supply from shale discoveries and continued drilling facilitated by hedges at former high prices. But demand is recovering, hedges at higher prices have dropped off and most E&P companies are focusing on oil. Supplies are beginning to come down both naturally from normal gas well annual decline rates, about 24% annually on average (much higher for shale wells) and from declining capex. We anticipate substantially higher gas prices over the next few years.
Corridor’s stock price fell in late 2010, an overreaction to a press release that the timeline for the drilling results from two shale wells would be delayed as the frac fluids (mainly water) were not coming to surface fast enough. Both Corridor and the operator, its joint venture partner Apache, were perplexed as they had anticipated meaningful immediate gas flow from these very thick shales, strong gas shows in the drilling and high pressures. These wells are now being analyzed and, we believe, pumps are in place to help remove the water. In other shale plays, up to 60% of the water needs to be removed in order to allow gas flow (up to only 10% had flowed out naturally in early December). We anticipate merely a few weeks’ delay in the process as they work with experts to expedite the project even though the market was reading failure.
Though, most importantly, Corridor has already been successful finding shale gas and Apache was brought in to help exploit the immense shale resource with its technical expertise and capital.
Corridor’s shares remain highly compelling. The Frederick Brook shale, where Corridor has already made discoveries in two wells, could add substantially to the company’s $4 per share proven reserves and land value. Corridor’s independent engineers have assigned a massive resource of 59 trillion cubic feet of gas to Corridor’s Frederick Brook shale. Risking the 59 TCF (62% for Corridor) at a 30% recovery factor (Apache’s factor), a 40% risk factor and only $0.33 per mmcf in the ground, adds a potential $15 per share to Corridor.
Old Harry, its prospect in the Gulf of St. Lawrence could add another $17 (a potential 2 billion barrels of oil in place, based upon only $12.50 per bbl in the ground, a 25% risk factor and a 25% interest for Corridor assuming they farm out 75%. We anticipate a joint venture announcement in the next few months.
There may also be significant value from Anticosti Island in Quebec where Corridor controls 900k acres of a potential oil shale and just announced the analysis of highly prospective results from core samples. It should land a joint venture partner expert in shale oil for the play this year too.
Corridor may also have an oil discovery on the JV property with Apache where they are now conducting tests on its G-36 oil well which could be a play with some 12 potential wells.
We’ve ascribed no value to either of these last two mentioned prospects though both could be meaningful to the company. The risk-reward for Corridor remains highly favourable, yet we are only paying about $1.50 per share, or less than $150 million, for all of the upside over the value of its reserves and land. Apache alone will likely end up spending $125 million to earn 50% on a portion of Corridor’s shale properties pursuant to the JV agreement.
We did sell some Corridor in November above $7 to reduce our weightings where we believed they were too high and then bought back on the overreaction in early December in the $4.40 range. As an added endorsement, the Children’s Investment Fund (a value oriented UK based fund) bought a sizable position in Corridor over the last few months.
The value of Corridor today is above $10 per share and our 3-year target is $16, a greater than 40% potential annualized return.
Xcite Energy has now appreciated into one of our largest positions. The company completed a successful commercial flow test in December, flowing a higher than expected 3,000 barrels per day from a low-risk development well which had an over 90% chance of success. Yet, the market had been treating it as if it were a wildcat well and affording little value to the company. The result should now enable Xcite to establish significant reserves. And, the reservoir quality is even better than expected which should lead to enhanced economics when production begins. Oil production is expected to commence within 90 days of spudding the initial production well this October. The result also lifted the expected recoverable resource above 200 million barrels (without enhanced oil recovery). At that level Xcite would be the second largest independent operating in the North Sea.
With over $25 million in cash on hand, plus funds from minor additional dilution, the company should be able to finance its pre-production expenditures prior to becoming self-reliant when production begins early next year. Xcite trades for around $5 per barrel whereas it should trade closer to $10/bbl or an $11 share price, about double its current trading price. A nearby operation, with 200 million of proven and probable barrels of reserves, was acquired a few months ago for $3.1 billion, or $15.40/bbl, and applying that valuation to Xcite could ultimately value the shares at more than $17 or 3x today’s share price, with further upside potential from additional reserves, higher oil prices, other corporate ventures and enhanced oil recovery.
Last March when we first invested in Xcite, its market value was $70 million. Less than one year later, though still undervalued, it’s about $900 million. Remarkably, though there is less risk today, the risk parameters have not altered materially since then. It was simply completely off people’s radar screen a year ago. We often get questioned as to how it’s even possible that something is that undervalued. The partial answer is that one can sometimes find those dislocations in the public equity markets when a company is totally ignored. And that’s what we seek out—the unloved, misunderstood, discarded or completely overlooked—companies trading well below our appraised values.
On the other hand if a company is overly popular and trades substantially in excess of appraised value we’re likely to shun it, or perhaps even short it. Nortel and Potash, both excessively popular and at one point, the largest companies by market value on the TSX, are prime examples.
Orca Exploration is another example of a lower risk investment with high potential reward. Not only does the company trade at less than half our appraised value but the company possesses many low risk attributes. Orca is a utility-like business. It provides natural gas for power, mostly at set predetermined prices, to the government of Tanzania and local industrial users. Tanzania and the adjacent regions are gas starved and require gas to power electricity merely to avoid the regular brown outs. Orca operates at low costs with high netbacks. The company now has working capital in excess of $50 million to grow its business. It had made acquisitions which we expect to add value and the western portion of its Songo Songo field will be drilled this year, potentially adding significant value. The net asset value is above $11 per share, nearly twice the share price and we expect production levels to more than double over the next 4 years. A mid-teen target in 3 years is not unreasonable which provides a potential return in excess of 35% per year.
Manitok Energy is a new holding—an oil and gas company operating in the Foothills of Alberta, it's also a lower risk company with drilling focused on development wells—either re-entering existing well bores or twinning nearby wells. Land prices in the area have come down to '98 levels as the majors already there concentrate elsewhere and the area is technically challenging, discouraging new entrants. The experienced management team formerly worked for Talisman and specialized in the Foothills for several years—one of the team members even won an award for the lowest finding costs at $7 per BOE (barrel of oil equivalent) for 3 years in a row. The company has no debt and raised $18 million to fund its drilling program. Manitok is producing 400 barrels per day (bpd) but should easily exceed 1,000 bpd shortly and with existing funding the company could ramp up production to 5,000 bpd by the end of 2012—and enough prospects in the area to take them many times above that level.
We paid $1 per common share for our position and $1.15 for flow-through common shares for some of our taxable Canadian accounts. A ramp up to 5,000 bpd could increase the company’s value to over $8 per share. Our current appraised value is about $2 per share moving quickly to $3 based on our 1,500 bpd exit 2011 expectation. Low risk development drilling, a well-capitalized balance sheet to fund their well-articulated plans, a competitive advantage in their region, very high expected internal rates of return from conventional drilling and a proven management team that has drilled 50-60 wells per year in the area for several years all combine for a sound opportunity. This company was off the radar screen, only coming public last October. Our purchase price offered a drastic discrepancy between risk and reward.
In our taxable accounts (not registered accounts because, as a non-listed security, it was not eligible) we own private company, Porto Energy. We added to our Porto position in December. Earlier this month, the company announced its intention to complete an initial public offering, raising $60-70 million, at $1 per share. The company is headquartered in Texas, with its assets mostly onshore Portugal—a safe jurisdiction with an advantageous royalty structure. Porto has a 100% interest in 5 concessions covering 1.4 million net acres, including 7 major identified exploration trends and more than 45 mature drilling targets, mostly oil. The contingent resource on these properties is about 1.9 billion barrels of oil and the company already has a couple of natural gas discoveries which only require reserve certification and a tie-in to a pipeline to move them to proven producing status. Porto has a very competent management team, led by the former head of Devon International which his group grew into a multi-billion dollar enterprise before selling it. Applying the valuation metrics of publicly traded companies similar to Porto gives us a value of about $4 per share. An ultra-conservative valuation (giving value to only 10% of their potential resource at a mere $2.50 per barrel) gives us $2 per share today, about 3x our portfolio pricing of $.60. We had previously passed on investing in Porto until our initial purchase in the spring of 2010, after all of the key elements were in place—it no longer had leverage, it had an experienced management team in place and it had had amassed a 100% working interest in all its properties with an action plan to properly exploit them.
In December we also bought a private placement (requiring a 4-month hold period) in Aurcana, a publicly-traded Canadian company with silver production in Mexico and a low risk Texas mine where the funding from its December raise should allow production to start by mid 2012. Aurcana was trading well above the issue price of $.31 when the financing was proposed. The company has now fully funded its pre-production costs in Texas (a mine that their engineers consider low risk with permitting and feasibility studies fully completed) and its Mexican mine is free-cash flowing $12 million per year. The net asset value of the company at today's silver price is 3 times our cost. The management team is solid (the COO spent 30 years at Cominco). Our opinion of silver is even more positive than for gold given silver’s supply/demand characteristics. Once the Shafter Mine in Texas is opened in 2012, the company will be a large silver producer, throwing off about $90 million of annual free cash flow at current silver prices. The share price has however risen to reflect most of its underlying value unless, of course, silver prices move materially higher.
For accounts where we didn’t already own a position, we purchased shares in a private placement of
Dynacor Gold Mines, a gold milling operation in Peru originally spun off from Malaga. At our recent purchase price of $1.05 the company was trading at around 7x its current run rate of earnings but we expect the company to increase output from about 40k ounces per year to 75k ounces by 2012, at which rate the company would be trading very cheaply for only about 3x expected earnings. The company mainly custom mills gold (for others) giving it a very stable, noncyclical, gross margin of over $200 per ounce. The company also has massive potential for which we are paying nothing at its Tumipampa gold property where there’s potentially a minimum of 1 million ounces of gold and current drilling, with initial results expected in the next few weeks, could provide more upside. The only debt of the company, short-term debt of less than $2 million used for working capital to ramp up production, is held by our income accounts.
St Andrew Goldfields, is our only other precious metals position. Despite its significant run up into last September, it still trades below its net asset value, unusual for a gold producer as they typically trade at premiums. We see further gains in the net asset value as the company executes on its exploration program—St Andrew is in the early days of exploring its 120 kilometre stretch of the Timmins, Ontario mine camp, the largest land package in the third most prolific mine camp in the world. We see little downside for the company, other than from volatility in the price of gold. It has state-of-the-art infrastructure and its mines and experienced management team all provide it with low technical risks. The company is free-cash flowing (with extensive tax pools to shelter profits) and the balance sheet is clean with over $30 million of cash, so there are low financial risks while the attractive valuation provides a margin of safety too. Our 3-year target, even without any material exploration success, and assuming a lower than prevailing gold price, still offers a potential return of 20% per year.
All of the above holdings meet our stringent criteria. Their balance sheets are clean, mostly debt free, often cash laden. They either have some sort of competitive advantage, are low cost operators and/or lower risk operations (i.e. high probability of success in development drilling in the case of our oil and gas investments). Potential tailwinds are also in place from our macro views that could push entire industries higher. And, most important, all are trading well below our conservative appraised values allowing for potential outsized gains.
We are constantly on the hunt for more Dells and MasterCards, though the favourable risk/reward metrics of our small caps clearly excite us too.
While bigger is usually better, less is often more. It has to be. We would only add small and mid-cap stocks today if they were exceptionally cheaper with exceptionally more upside opportunity than their large-cap brethren. Sometimes small caps are so cheap they literally can’t get much cheaper from being so underowned. Our small-cap investments in the past few months have given us exemplary returns with exemplary future potential.
We strive to ensure our bottom-up security selections coincide with our macro top-down views. Thus, we continue to concentrate in oil and gas shares. The demand for oil is at all-time record highs. And, global production levels are having a hard time keeping pace. Charles Maxwell, renowned in the field, believes that oil production will stop growing altogether by 2015, driving energy prices substantially higher over the next few years. We believe a similar outcome is in store for natural gas prices as the higher inventory levels are worked off over the next couple of years and natural gas, which is the favoured clean energy solution, sees demand far outstripping supply.
On a bottom-up basis we constantly compare individual securities in which to invest. The energy sector offers no shortage of attractive opportunities. Sometimes when we may have a specific macro view, as for example, higher gold prices, finding the individual securities—gold stocks—with favourable risk-reward parameters may be more limited, as is the case now.
Corridor Resources is our largest holding. It meets our criterion of lower than average risk and higher potential reward. The company is debt free, is a low-cost producer, in a favourable jurisdiction (New Brunswick—where royalty rates are low and political risk minimal) and receives above average gas prices due to the heat content of its gas and proximity to the best gas markets in North America.
Most of Corridor’s assets today are natural gas based. The fact that gas prices remain below the North American marginal cost of production and are likely to trend much higher also attracts us to Corridor. Natural gas prices have been held back by weaker industrial demand from the recession, excess supply from shale discoveries and continued drilling facilitated by hedges at former high prices. But demand is recovering, hedges at higher prices have dropped off and most E&P companies are focusing on oil. Supplies are beginning to come down both naturally from normal gas well annual decline rates, about 24% annually on average (much higher for shale wells) and from declining capex. We anticipate substantially higher gas prices over the next few years.
Corridor’s stock price fell in late 2010, an overreaction to a press release that the timeline for the drilling results from two shale wells would be delayed as the frac fluids (mainly water) were not coming to surface fast enough. Both Corridor and the operator, its joint venture partner Apache, were perplexed as they had anticipated meaningful immediate gas flow from these very thick shales, strong gas shows in the drilling and high pressures. These wells are now being analyzed and, we believe, pumps are in place to help remove the water. In other shale plays, up to 60% of the water needs to be removed in order to allow gas flow (up to only 10% had flowed out naturally in early December). We anticipate merely a few weeks’ delay in the process as they work with experts to expedite the project even though the market was reading failure.
Though, most importantly, Corridor has already been successful finding shale gas and Apache was brought in to help exploit the immense shale resource with its technical expertise and capital.
Corridor’s shares remain highly compelling. The Frederick Brook shale, where Corridor has already made discoveries in two wells, could add substantially to the company’s $4 per share proven reserves and land value. Corridor’s independent engineers have assigned a massive resource of 59 trillion cubic feet of gas to Corridor’s Frederick Brook shale. Risking the 59 TCF (62% for Corridor) at a 30% recovery factor (Apache’s factor), a 40% risk factor and only $0.33 per mmcf in the ground, adds a potential $15 per share to Corridor.
Old Harry, its prospect in the Gulf of St. Lawrence could add another $17 (a potential 2 billion barrels of oil in place, based upon only $12.50 per bbl in the ground, a 25% risk factor and a 25% interest for Corridor assuming they farm out 75%. We anticipate a joint venture announcement in the next few months.
There may also be significant value from Anticosti Island in Quebec where Corridor controls 900k acres of a potential oil shale and just announced the analysis of highly prospective results from core samples. It should land a joint venture partner expert in shale oil for the play this year too.
Corridor may also have an oil discovery on the JV property with Apache where they are now conducting tests on its G-36 oil well which could be a play with some 12 potential wells.
We’ve ascribed no value to either of these last two mentioned prospects though both could be meaningful to the company. The risk-reward for Corridor remains highly favourable, yet we are only paying about $1.50 per share, or less than $150 million, for all of the upside over the value of its reserves and land. Apache alone will likely end up spending $125 million to earn 50% on a portion of Corridor’s shale properties pursuant to the JV agreement.
We did sell some Corridor in November above $7 to reduce our weightings where we believed they were too high and then bought back on the overreaction in early December in the $4.40 range. As an added endorsement, the Children’s Investment Fund (a value oriented UK based fund) bought a sizable position in Corridor over the last few months.
The value of Corridor today is above $10 per share and our 3-year target is $16, a greater than 40% potential annualized return.
Xcite Energy has now appreciated into one of our largest positions. The company completed a successful commercial flow test in December, flowing a higher than expected 3,000 barrels per day from a low-risk development well which had an over 90% chance of success. Yet, the market had been treating it as if it were a wildcat well and affording little value to the company. The result should now enable Xcite to establish significant reserves. And, the reservoir quality is even better than expected which should lead to enhanced economics when production begins. Oil production is expected to commence within 90 days of spudding the initial production well this October. The result also lifted the expected recoverable resource above 200 million barrels (without enhanced oil recovery). At that level Xcite would be the second largest independent operating in the North Sea.
With over $25 million in cash on hand, plus funds from minor additional dilution, the company should be able to finance its pre-production expenditures prior to becoming self-reliant when production begins early next year. Xcite trades for around $5 per barrel whereas it should trade closer to $10/bbl or an $11 share price, about double its current trading price. A nearby operation, with 200 million of proven and probable barrels of reserves, was acquired a few months ago for $3.1 billion, or $15.40/bbl, and applying that valuation to Xcite could ultimately value the shares at more than $17 or 3x today’s share price, with further upside potential from additional reserves, higher oil prices, other corporate ventures and enhanced oil recovery.
Last March when we first invested in Xcite, its market value was $70 million. Less than one year later, though still undervalued, it’s about $900 million. Remarkably, though there is less risk today, the risk parameters have not altered materially since then. It was simply completely off people’s radar screen a year ago. We often get questioned as to how it’s even possible that something is that undervalued. The partial answer is that one can sometimes find those dislocations in the public equity markets when a company is totally ignored. And that’s what we seek out—the unloved, misunderstood, discarded or completely overlooked—companies trading well below our appraised values.
On the other hand if a company is overly popular and trades substantially in excess of appraised value we’re likely to shun it, or perhaps even short it. Nortel and Potash, both excessively popular and at one point, the largest companies by market value on the TSX, are prime examples.
Orca Exploration is another example of a lower risk investment with high potential reward. Not only does the company trade at less than half our appraised value but the company possesses many low risk attributes. Orca is a utility-like business. It provides natural gas for power, mostly at set predetermined prices, to the government of Tanzania and local industrial users. Tanzania and the adjacent regions are gas starved and require gas to power electricity merely to avoid the regular brown outs. Orca operates at low costs with high netbacks. The company now has working capital in excess of $50 million to grow its business. It had made acquisitions which we expect to add value and the western portion of its Songo Songo field will be drilled this year, potentially adding significant value. The net asset value is above $11 per share, nearly twice the share price and we expect production levels to more than double over the next 4 years. A mid-teen target in 3 years is not unreasonable which provides a potential return in excess of 35% per year.
Manitok Energy is a new holding—an oil and gas company operating in the Foothills of Alberta, it's also a lower risk company with drilling focused on development wells—either re-entering existing well bores or twinning nearby wells. Land prices in the area have come down to '98 levels as the majors already there concentrate elsewhere and the area is technically challenging, discouraging new entrants. The experienced management team formerly worked for Talisman and specialized in the Foothills for several years—one of the team members even won an award for the lowest finding costs at $7 per BOE (barrel of oil equivalent) for 3 years in a row. The company has no debt and raised $18 million to fund its drilling program. Manitok is producing 400 barrels per day (bpd) but should easily exceed 1,000 bpd shortly and with existing funding the company could ramp up production to 5,000 bpd by the end of 2012—and enough prospects in the area to take them many times above that level.
We paid $1 per common share for our position and $1.15 for flow-through common shares for some of our taxable Canadian accounts. A ramp up to 5,000 bpd could increase the company’s value to over $8 per share. Our current appraised value is about $2 per share moving quickly to $3 based on our 1,500 bpd exit 2011 expectation. Low risk development drilling, a well-capitalized balance sheet to fund their well-articulated plans, a competitive advantage in their region, very high expected internal rates of return from conventional drilling and a proven management team that has drilled 50-60 wells per year in the area for several years all combine for a sound opportunity. This company was off the radar screen, only coming public last October. Our purchase price offered a drastic discrepancy between risk and reward.
In our taxable accounts (not registered accounts because, as a non-listed security, it was not eligible) we own private company, Porto Energy. We added to our Porto position in December. Earlier this month, the company announced its intention to complete an initial public offering, raising $60-70 million, at $1 per share. The company is headquartered in Texas, with its assets mostly onshore Portugal—a safe jurisdiction with an advantageous royalty structure. Porto has a 100% interest in 5 concessions covering 1.4 million net acres, including 7 major identified exploration trends and more than 45 mature drilling targets, mostly oil. The contingent resource on these properties is about 1.9 billion barrels of oil and the company already has a couple of natural gas discoveries which only require reserve certification and a tie-in to a pipeline to move them to proven producing status. Porto has a very competent management team, led by the former head of Devon International which his group grew into a multi-billion dollar enterprise before selling it. Applying the valuation metrics of publicly traded companies similar to Porto gives us a value of about $4 per share. An ultra-conservative valuation (giving value to only 10% of their potential resource at a mere $2.50 per barrel) gives us $2 per share today, about 3x our portfolio pricing of $.60. We had previously passed on investing in Porto until our initial purchase in the spring of 2010, after all of the key elements were in place—it no longer had leverage, it had an experienced management team in place and it had had amassed a 100% working interest in all its properties with an action plan to properly exploit them.
In December we also bought a private placement (requiring a 4-month hold period) in Aurcana, a publicly-traded Canadian company with silver production in Mexico and a low risk Texas mine where the funding from its December raise should allow production to start by mid 2012. Aurcana was trading well above the issue price of $.31 when the financing was proposed. The company has now fully funded its pre-production costs in Texas (a mine that their engineers consider low risk with permitting and feasibility studies fully completed) and its Mexican mine is free-cash flowing $12 million per year. The net asset value of the company at today's silver price is 3 times our cost. The management team is solid (the COO spent 30 years at Cominco). Our opinion of silver is even more positive than for gold given silver’s supply/demand characteristics. Once the Shafter Mine in Texas is opened in 2012, the company will be a large silver producer, throwing off about $90 million of annual free cash flow at current silver prices. The share price has however risen to reflect most of its underlying value unless, of course, silver prices move materially higher.
For accounts where we didn’t already own a position, we purchased shares in a private placement of
Dynacor Gold Mines, a gold milling operation in Peru originally spun off from Malaga. At our recent purchase price of $1.05 the company was trading at around 7x its current run rate of earnings but we expect the company to increase output from about 40k ounces per year to 75k ounces by 2012, at which rate the company would be trading very cheaply for only about 3x expected earnings. The company mainly custom mills gold (for others) giving it a very stable, noncyclical, gross margin of over $200 per ounce. The company also has massive potential for which we are paying nothing at its Tumipampa gold property where there’s potentially a minimum of 1 million ounces of gold and current drilling, with initial results expected in the next few weeks, could provide more upside. The only debt of the company, short-term debt of less than $2 million used for working capital to ramp up production, is held by our income accounts.
St Andrew Goldfields, is our only other precious metals position. Despite its significant run up into last September, it still trades below its net asset value, unusual for a gold producer as they typically trade at premiums. We see further gains in the net asset value as the company executes on its exploration program—St Andrew is in the early days of exploring its 120 kilometre stretch of the Timmins, Ontario mine camp, the largest land package in the third most prolific mine camp in the world. We see little downside for the company, other than from volatility in the price of gold. It has state-of-the-art infrastructure and its mines and experienced management team all provide it with low technical risks. The company is free-cash flowing (with extensive tax pools to shelter profits) and the balance sheet is clean with over $30 million of cash, so there are low financial risks while the attractive valuation provides a margin of safety too. Our 3-year target, even without any material exploration success, and assuming a lower than prevailing gold price, still offers a potential return of 20% per year.
All of the above holdings meet our stringent criteria. Their balance sheets are clean, mostly debt free, often cash laden. They either have some sort of competitive advantage, are low cost operators and/or lower risk operations (i.e. high probability of success in development drilling in the case of our oil and gas investments). Potential tailwinds are also in place from our macro views that could push entire industries higher. And, most important, all are trading well below our conservative appraised values allowing for potential outsized gains.
