Part I of an Interview with Marshall Auerback
By Kevin Michael Grace
Marshall Auerback is Director of and Corporate Spokesperson for Pinetree Capital Ltd, a Toronto-headquartered diversified investment, financial advisory and merchant banking firm focused on investing in early stage micro and small-cap resource companies. Pinetree, which has a market cap of $475 million, is invested primarily in Uranium and Coal, Oil & Gas, Precious Metals, Potash, Lithium and Rare Earths and Base Metals. Mr Auerback was previously an advisor to a number of fund management organizations, such as PIMCO, the world’s largest bond fund management group, RAB Capital and David W. Tice & Associates. He has a BA from Queen’s University and a law degree from Corpus Christi College, Oxford.
Q: What does Pinetree look for in junior mining companies?
A: The first thing we want to look at is to make sure the company has a decent asset. We want to make sure that there’s actually something there, that you’re not dealing with a totally speculative situation. Married to that, there has to be a good management team. We tend to back the jockeys that have had success in the races before. Obviously, we tend to start with companies when they’re fairly small, and we do take a proactive approach in terms of providing inputs on management development strategies. We’re not micromanaging the companies, but clearly we’ve seen what works and what doesn’t work, so we like to think that our inputs are very beneficial. And clearly, you want also to have a smart guy at the top running the thing, because even a good asset can be run into the ground.
Q: Everyone says that finding companies with good management is key to success, but isn’t that not as easy as it sounds?
A: I agree with you, but I’ve been involved in the mining business in one form or another for over 25 years, and one is always struck by how many of the same charlatans, crooks and promoters reappear in every single cycle. It’s a pretty small world. But usually if you’re well-plugged into the network, you get a good sense fairly early on who’s good and who’s not good.
Q: So you look at what the principals have done in the past?
A: Absolutely. We know that in portfolio management they say past performance is no guarantee of future performance, but it’s a helpful signpost.
Q: You interview the management?
A: Oh yeah, and we also look at the asset itself. We have very qualified technical people who will go down there and determine whether yes, this for real, or no, this is, to quote Mark Twain, a hole in the ground with a liar on top. You’ve got to be able to make the technical assessment, but the second stage obviously is to have a team in place that actually knows how to exploit the asset sensibly.
Q: What would you say best characterizes good management?
A: For the most part, mining companies tend to be run by geologists and mining engineers, so they always think of drilling holes, and when you ask them about return on capital, return on equity, these are foreign concepts to them. So we like the idea of a guy who has some idea of internal disciplines, where they actually look at hurdle rates, returns on capital, returns on equity. When they think in those terms they’re more likely to be able to exploit a resource intelligently rather than where they say, it’s great, but we need x prices to make money. We want to know they can make money when copper’s at two bucks, as well as when it’s at four bucks. You’d be amazed at how few people look at this.
Take the large gold companies, for example. Over the last several years, if you look at what the gold price has done, and you look at their profitability, for the most part they haven’t done a particularly good job of generating profits. They always have an excuse: labour costs, transportation costs, or our hedging strategy didn’t work. If you contrast a Newmont or a Goldcorp with a BHP or a Rio Tinto, I think the consolidated base metal groups have actually done a much better job of instituting internal disciplines, and they’re much better run companies as a result. This is what you try to find on a micro level.
They say past performance is no guarantee of future performance, but it’s a helpful signpostMarshall Auerback
Q: Geologists sometimes seem to take the attitude that companies come and companies go, but we’ll always be here, drilling holes.
A: That’s 100% right, and it drives me crazy. That deposit in the ground might always be there, but the company itself might not always be there. The more successful companies tend to be those run by businessmen who are not necessarily married to the mining business. To give you an example, Robert de Crespigny, who established one of Australia’s largest gold companies, was trained as a lawyer, and I think that was a plus.
I’ll give you another illustration. In the early 2000s, I was working with a company, and I said you’ve got a really good deposit, but it’s not making any kind of real money at $300 or $325 an ounce gold. Your deposit is going to have value on a long-dated call-option basis, but what do you need do to retain your essential staff and stop drilling for the next several months to safeguard it enough to keep the deposit on care and maintenance until times get better. And most of the people at that company looked at us like, “But that’s not what we do with our money. If we get money, we drill.” And I’d say, why do you want to drill it now when you’re losing money, and you’re not going to be able to exploit the reserve to its maximum potential anyway? But they never really quite got that.
Q: Wouldn’t you say that given the consolidation with the TSX and the NI 43-101 protocols, the mining business in Canada is no longer the Wild West we once associated with the Vancouver Stock Exchange?
A: I think that’s true. There’s been a serious effort to make the exchanges much more compliant with conventional regulation. We don’t think Vancouver is the cowboy market it used to be, but we think it still has an extremely valuable role in helping to develop a lot of these small caps. We think the consolidation with the TSX has helped. In the aftermath of Bre-X there was a sense you have to tighten this thing up. I can tell you from the people we deal with, there are so many more compliance forms you have to fill in and regulatory hurdles than there used to be, and that’s not a bad thing. It’s definitely changed for the better. There’s still maybe the odd fraud lurking out there—there is in any business—but it’s come miles from where it was 15, 20 or 30 years ago.