What Resource Companies Are On This Fund Manager's Buy List?

Another company that I think actually offers a lot of opportunity right now is Roxgold Inc. (ROXG:TSX) (ROGFF:OTC). When we look at companies and model them, we look at the resource base and we look at the quality of that resource base, whether it's grade, the covariance of the resource and the science and the statistics behind it. We try to assess what an equivalent asset trades for in the market. For Roxgold, we see the company as being 60% undervalued relative to other operating assets that have equivalent type ounces and grades. The returns on invested capital have fallen with the average grades coming down, but Roxgold did an acquisition from Newcrest Mining Ltd. (NCM:ASX) (NCMGY:OTC), Séguéla, in the Ivory Coast, and that looks to be a very prospective land package. Roxgold has conserved its capital, and it has made a very good capital allocation decision on this property. I think it is going to be a game-changer for it.

Another one that is in both of our funds and is a top position is K92 Mining Inc. (KNT:TSX.V) (KNTNF: OTC). We see that one right now 31% underpriced relative to other operating assets, and it has a lot of exploration potential yet to be fully recognized. So there may be still a lot in there.

So those are my Top 3 buys right now.

SWR: You alluded to M&A activity, and there has been a fair amount recently. We have Argonaut Gold Inc. (AR:TSX) and Alio Gold Inc. (ALO:TSX; ALO:NYSE.American); Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE)/Gran Colombia/Zijin Mining bidding for Guyana Goldfields Inc. (GUY:TSX) (GUYFF:OTC); Wallbridge Mining Co. Ltd. (WM:TSX; WLBMF:OTCMKTS) and Balmoral Resources Ltd. (BAR:TSX; BALMF:OTCQX) and, most recently, Evrim Resources Corp. (EVM:TSX.V) (EMRRF:OTC) and Renaissance Minerals Ltd. (RNS:ASX). What trends are you seeing with these mergers? Do you expect to see more deals?

RA: Yes. The seniors, for two or three years there, it is like they were petrified to do an acquisition because they figured they'd get taken out to the woodshed and shot because some of the capital allocation decisions historically have been guided by net asset value models, investment bankers and so on, and not based on where real assets are actually trading and what they should be valued at. But I think the companies' capital allocations are much better now, and they are willing to do transactions.

Argonaut brings a wealth of knowledge to Alio on improving the productivity of that asset. I think Silvercorp's bid for Guyana Goldfields was opportunistic, meaning, if it got it, great, but obviously it was willing to walk away at a price. Then Wallbridge and Balmoral, they basically brought a lot of synergies together with a good mineral property and the mill that they can actually work with, too. So I think the M&A is on. Right now, we're just at the beginning of the game.

SWR: If we're at the beginning of the game, what companies would you put on your list that you expect to see as merger candidates?

RA: Well, I worked on this last night and the serendipity of the way it happened is that this company had a takeover offer today, a second one. I think the key thing right now is that single asset companies that have shovel ready projects could be at the top of the list. And the example I was using is Cardinal Resources Ltd. (CDV:ASX) (CRDNF:OTC). It certainly fits that description. And the government of Ghana is totally backing the project with its purchase of the debt that Sprott Resource Lending had with the Ghana Infrastructure Investment Fund, a Ghana-owned investment vehicle, buying the debt. It looks like in taking that out, that may have been one of the catalysts.

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Disclosure:

1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household ...

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