Warren Irwin founder and chief investment officer of Rosseau Asset Management limited. He discusses the founding and rise of Rosseau Asset Management through some very profitable investments, including Bre-x in Indonesia, profiting from its rise and its fall.
Warren is the biggest shareholder in NexGen (OTCQX:NXGEF), a major uranium producer and discusses the likely growth in demand going forward particularly in China where they are constructing many new nuclear power plants. New uranium mines will need to be built to meet this growing demand creating upward price pressure. NexGen has recently made a big new discovery with its Arrow deposit, this is the best undeveloped deposit in the world. The stock should be trading at multiples above where it is now based on the value of this deposit alone.
There is often a big lag between when a company makes a big new discovery and the reaction with the share price and the biggest lags usually come with the biggest discoveries.
The Athabasca basin is the richest area for uranium in the world, Warren discusses the relative merits of Investing in NexGen vs. Fission Uranium (OTCQX:FCUUF) based on the nature of their respective deposits and the best mining techniques. NexGen is likely to be easier to mine and so he believes it has the advantage.
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host Collin Kettell. Really excited about the guest we have on the program today. He is a bit of a legend in the mining space and does not oftentimes give interviews. His name is Warren Irwin. He is a Chief Investment Officer and founder of Rosseau Asset Management. Warren, welcome on the program.
Founder and Chief Investment Officer, Rosseau Asset Management Limited, Warren Irwin: Oh, thanks for having me, Colin.
CK: Yeah. Thank you for taking the time out of your busy schedule to talk to us. Just for listeners who are not aware of yourself and your background, I want to spend a few minutes going through how you got so engrained in the mining space. You are currently managing around a hundred million dollars. If anybody is familiar with NexGen, which has been one of the sweethearts this year and last year in the mining space, you are the largest shareholder of NexGen. You own in the highest single digits there.
But I want to go back to how you got so involved in the mining space and that all started with Bre-X. We do not have time to really tell the full story here and our friend Tommy Humphreys over at ceo.ca did a great piece and interview with Warren last year that you can check out. We will put a link to that at the bottom of the interview. Warren, can you give a brief background on how you made money on the upside and the subsequent downside and fall of Bre-X?
WI: Yeah, well, I guess stepping one step back from that the whole interest I had in mining kind of started when I was a kid. I grew up all around Canada, but I spend about four years when I was really young in Timmins and the whole excitement of mining in Big Gold Discoveries and the Big Texas Gulf discovery of Kidd Creek really, really excited me that big fortunes were made. That really peaked my interest.
When Bre-X came around that was definitely very interesting story for me. I just spend some time in Indonesia and so it just tied in very, very well together. I had some really good friends who were living in Indonesia at that time. I was fortunate to spend the month there in the years prior to the Bre-X discovery so I was able to have both strong working knowledge of Indonesia itself and the riches of mineral wealth that were down there, what I saw when I was there. I was also able to combine that with some mining background I had to do some really good analysis on Bre-X.
I did much of the same stuff with respect to calculating or modeling and things like that. What I was able to do, too, was get in early in the story. It was a big winner and I was able actually get to site. I was really kind of at site and subsequent to that that I started to get quite a number of doubts on Bre-X and eventually sold about half my position for the best reason in the world at around $260, $270, $280 a share when my builder of my house wanted money from me. I decided to sell half, managed to get really close to the top, and then the subsequent remainder of my position I sold falling Mike bailing out of the helicopter.
The key thing there is the value of site tours is really, really important because that is really where you can start asking some of the deep questions. For instance, when Mike did fall out of the helicopter, I actually was in that exact helicopter. I actually knew the pilot. I knew the pilot's background. I knew the safety checks. I knew everything so I knew that the story the company was putting out was a bunch of baloney. That encouraged me to dump my remaining bit of stock when I knew there was something very seriously wrong there.
CK: And then from there, Warren, you went on to, if I am correct actually, go ahead and short Bre-X and profit from the collapse and fall of that company. Is that correct?
WI: That is right. Yeah, I made a bunch of money on the way down too - the key is, as many investors know, it is way easier to make money on the way up. I got the stock at $18 and I sold it probably on average around $220 something in there. Whereas when you short stock the most you can do is make is a buck. I prefer to make money in the long side. It is a way to make bigger, bigger money. But I was able to short Bre-X in the teens and I covered it at nine cents.
CK: Fantastic! So then in 1998 you founded Rosseau Asset Management, which I believe started with about $3 million. Through that epic bull market that we had from 2000 to 2007 and then an extension to that to 2011 you managed to grow Rosseau to over $270, $275 million. I wanna ask you about that time period. It was a great time to be investing in the mining space in the junior sector. Maybe just highlight those years and what you were looking for, some of the successes you had during that epic bull market.
WI: One thing I remember when the market started out it was kind of like the market today where when you look around today, in general, very general terms, the gold companies out there or the resource companies out there are generally good because all the lousy ones have been blown away by the market. Nobody has funded them and with a lot of the sources of funding gone the majority of my competitors are no longer in business and hence companies that do not have very, very strong fundamentals are not just getting financed so they just go away.
Right now it is very similar to what it was like in the early 2000s. In the early 2000s there were just a handful of really good companies left, really, and one of them included Guyanna Goldfields. That is the one I first remember getting involved with. And I remember Pat Sheridan from the mid '90s when he was just starting out with the Peters Mine and trying to make that a go. Then I followed them through the collapse and then I followed them out the other side. I want to back them so I was able to back them in the early 2000s and that was huge win for me. In fact, I think all said and done, we made 37 times our money on that original investment.
CK: That is fantastic! There is a quote that I saw you said. It is, "My view generally the best time to invest in the junior is after the discovery is made but before people have figured out it is a big discovery." I do not know if that is a philosophy you followed ever since the beginning of founding Rosseau Asset Management. But it is certainly one that you have been pretty vocal about in regards to NexGen Energy since last year.
Just for listeners unfamiliar with NexGen they recently came out with a substantial, very substantial resource estimate at their high grade Arrow asset in the Athabasca Basin. A lot of people, several months ago, were thinking there would maybe be 50, 60, 70 million pounds of uranium. Warren, was the one voice coming out saying that he thought there was probably 200 million pounds just incredibly accurate that when the resource estimate came out you were only about 2 million pounds off. It came out at 202 million pounds of uranium in the ground. Talk to me a little bit about this idea of getting into a junior where the discovery is already been made.
WI: Yeah, in my experience, just to give you a quick summary of some of the ones that I have been involved in. We talked about Guyanna Goldfields. We are also in the Aqualine discovery in the Navidad silver deposit in Argentina. We have been involved in Virginia Gold Eagle. We are one of the biggest shareholders and really that was the big discovery of Fruta Del Norte in Ecuador. We have been involved in lots of new discoveries.
One thing I notice especially in times like this where people are not necessarily in favor there is no hype in the gold sector, in the minerals sector at all, really, is when a company makes a big discovery there are a number of people that follow the company closely, but generally not that many and the stock will pop on the original discovery because all those people will commit more capital to it. Then after a while there is a bit of a lull where you are basically on an education process where that company needs go out and start telling the story to get it around some people.
There is often times a really big lag between a discovery and people actually factoring this discovery and the valuation. The biggest lags I have seen are generally in the biggest discoveries and the reason for that is if you made a discovery, let us say, tomorrow of $2 billion worth of ore like not in future value, but let us say the fair market value of the company is it started out as $10 million company, it made a discovery and you could write a report saying it is worth $2 billion tomorrow. Well, it does take a long time for the market to realize that and grind it all the way up to $2 billion dollar market cap because it does take a lot of education, takes a lot of people to realize what is really going on here and everybody to do their work. There is quite a bit of a lag. The biggest lags actually come with the biggest deposits.
Early in my career I remember seeing Voisey's Bay. Now is the situation where we found this massive silver deposit by Robert Friedland and Robert was going crazy in the early days. He had a $300 million market cap and he knew it was worth many, many multiples of that yet nobody else saw that. At the time Robert was getting a lot of grief for the Galactic issue he had with the spill he had in the Northern US with the Galactic mine. He was also getting a little bit of grief on a few other issues. But the other thing, too, is you are finding nickel in a whole new region. There are a whole bunch of questions there and that really led to a very slow start. There was a huge gap in there for some that had gotten early did the work. They were able to get into Voisey's Bay stock which is Diamond Fields; really, really cheap and those people made out like bandits.
CK: Well, there is that well-known exploration to discovery to production curve that a lot of these junior companies always show in their presentations whereby the best place to invest is before the discovery is made, but it is also the most risky and speculative spot to get in. But, Warren, your investment strategy seems like it may have more merit in that there is already a resource or a discovery in place. It is known by the market but not properly valued. I guess in a down cycle particularly that mitigates your risk in holding these companies that actually have something tangible. Is the hedge, the downturn that might come, something that you consider in taking that strategy?
WI: No. I do I agree with that. That kind of summarized it very nicely. There is real inefficiency there because they do not think there are a lot of people waiting on the sidelines especially these days to jump at an exploration story. When the market is really hot as it was some years ago, some kind of any whiff of a discovery people are all over it so quickly it got valued very, very high, very, very quickly. But fortunately today's market environment for the smart investor, companies that are making discoveries especially in the case of NexGen, you are dealing with a situation where all the numbers are there right in front you. You do a little bit of work and you will figure out that the stock has a lot of room to go and that the deposit is probably going to grow substantially from where it is today.
CK: Yeah. Now I want to start honing in more on uranium. Typically, I would start with the commodity and then focus on a particular company. But I want to do that in reverse today and start kind of talking about NexGen and then moving out from that. Warren, when did you first start taking your position in NexGen? Why? And what allowed you to see what other people were not seeing at the time?
WI: Well, I first visited the site in sort of the fall of 2014 when they just started drilling. I had a bunch of shareholders in it, were hounding me go and to see it, so I jumped on a plane and went out to see it. The key take away from that visit was that Lee Courier and his team including Garret, were really, really strong group of people. They were running a very professional program, had a very professional camp, and everything looked very, very good, and they were lining themselves up for a discovery if there was uranium down below.
The key takeaway I took there is there were a number of people on the trip with me speculating that they had a really big discovery. But I really had not seen any definitive signs at that stage, so I sat back and I started watching it very, very closely. When they started getting some exploration success in 2015 I gradually started looking at the company again and little by little they just kept finding more and more. It peaked my interest because it is important for me to have- the companies I really, really like in getting involved in are world class discoveries. Once that you know we are going to get taken out by majors because we are just so big and so strategic. It is clear to me that NexGen had a shot at this.
My initial reluctance though towards getting involved in the stock sooner, too, was another issue which is I believe there was a hung equity deal. I did not think I placed too well and I think some of the dealers still own some stocks. That had me concerned a little bit. At that time, too, I know some of their big investors are having financial difficulties. One of them was Pinetree Capital. I was concerned about the Pinetree stock coming out. I was concerned about this overhang, and I also knew of some other large shareholders who are having financial difficulties in the meltdown. I thought those shares are going to hit the market. I was reluctant at first to get involved. Then as they started putting out more and more drill holes I stepped into the market and I was able to clean up some of the loose stock that was in the marketplace. Since then other people started to see what I originally saw.
CK: There are two what I would call really exciting stories that have gotten love from the market in the last year in the Athabasca Basin that are uranium focused. You, of course, have Fission's Triple R deposit and then NexGen as we are talking about the Arrow deposit. As a point with Palisade Radio we talk to everybody. We get all the different opinions. We have had Dev on the show with Fission and we probably will get Leon with NexGen at some point. What merits do you see quickly of NexGen versus Fission? You have obviously picked to invest your money in NexGen. Some other people picked to invest in Fission. What are the pros and cons there?
WI: Well, first of all, I really do not think there is much comparison between the two deposits other than they are sort of in the same area, in fact they are neighbors. The key takeaway for me when I am looking at NexGen is that it is very simple to mine. They are in the basement rocks unlike in the Parker River in Cigar Lake of Cameco (NYSE:CCJ) where they are in sort of in the quasi-basement sandstone where there is tremendous water inflow issues. They have to freeze all the rock to get at the uranium.
NexGen, with the Arrow deposit, is a very simple mining. It is in the basin rocks, which is like a traditional mine. You need to have additional ventilation and a number of other safety measures, too, given that you are dealing with uranium. But it is very, very simple, to mine. I really like the management team; good, strong, credible guys. The similarity to Fission is, of course, they are in the Athabasca Basin which is a Saudi Arabia of uranium in the world. It is one of, if not, the absolute best jurisdiction in the world to find uranium. With respect to what I like about NexGen over Fission is one thing I really try to do in my career is I stayed away from a number of issues and one of them is difficult mining situations. I try and stay away from those, and difficult metallurgy and new processes and stuff like that. I do not like to re-invent the wheel.
When I look at what NexGen has over Fission, the biggest thing I see is it is just easier to mine. When I look at Fission and look at having to build dikes, I really do not like having to build dikes. They are quite a bit of work and actually the dike they need to build is quite big. Then from the bottom of the pit they need to go underground and then there is another issue surrounding what happens to radioactive dust, what happens to all the rainfall. It falls into the pit. There is a lot of water you have to purify and get the uranium out of that water before you could discharge it. You are dealing with you got a dike and you got Fission on the site of that dike. I just do not want to deal with all those hassles.
I think what will happen with Fission is over time as they drill out their discovery the bells will ring and they will know exactly the best way to mine that. I do not think it will resemble the current mine plan they have. I think the deposit will tell the owners of Fission how to mine that. It may not involve dikes at all. It may involve simpler dikes or something. But I think there needs to be a better system to mine that and I think that will become clear to all investors over time.
The thing I really liked about NexGen is I think it is a lot bigger. It is easier to mine. I like the team there. I think it will be more of a strategic asset than Fission's, but mostly it will be a lot easier to mine in my opinion. I have a preference to NexGen over Fission, but in the end having another uranium company in the neighborhood is not a bad thing. I think both Fission and NexGen have shown the marketplace that there will be a new frontier in the Athabasca Basin and it is around that epicenter of those two discoveries.
CK: Thanks for that, Warren. In terms of investment strategy, investing in a best of best asset, and we could throw NexGen in there, meaning large scale, high-grade proper jurisdiction. You do not necessarily need to be in a strong commodity market. Uranium right now has been and is in the dumps. Some of the stocks are starting to get a lift, but the price of uranium is actually down over the last couple of weeks. However, I do believe that you are bullish on the outlook for uranium. Of course, if you can couple an investment in a great company with an upturn or an upswing in a particular commodity that is how one can make a fortune. Talk to our listeners a bit about what you see the outlook for uranium like.
WI: Yeah, it is a very good point you make that you can make a ton of money finding and making discovery in a lousy metals market. The analogy I draw to that is the Voisey's Bay discovery was made when the nickel market was pretty crappy, and there were billions of dollars made there. NexGen, as luck would have it, made a very, very large discovery in a lousy uranium market. I think there will be lots of money made with NexGen if the price of uranium hovers where it is today, just due to the fact that it is extremely large. The project is very, very robust and has a strategic nature to it.
Now with respect to the real super-duper homerun here would be- we also get a little bit of strengthening in the price of uranium. Uranium has been in the dumpers for quite some time. I have watched Tim Gitzel from Cameco speak about uranium. He has obviously more data to work with than I do. He is a little confounded, too, I think, with respect to how long that uranium downturn has lasted. The trick with uranium in predicting anything is it is not a typical supply-demand equation where right now about- the key tricky part of forecasting it is you have got on the demand side you got tremendous increase in demand with- basically you got 66 reactors under construction right now in the world off a base of about 437 reactors. That is a pretty significant increase.
The important thing, too, is these reactors are generally larger than the older reactors so they are going to use more uranium. Also when you start up a new reactor it uses about double the annual fuel usage just to fill up sort of the gas tank in the reactor. There is a big build going on and especially China. China right now have 30 nuclear plants in operation. They have 24 under construction and then they have lots and lots more planned. The outlook for the demand is tremendous especially from China. That is why the Chinese had made that investment in Fission because they are very keen to get hold of uranium production.
On the supply side, Tim Gitzel from Cameco talks about how there really have not been a ton of new mines being built in this environment. Generally, in a lousy price environment, there are not a lot of mines being commissioned. His view is for any substantial number of mines to come on board to meet this increased demand we are going to need US$60, $70 prices for uranium. The real kicker here though and the big unknown that neither the head of Cameco, myself, or anybody else really knows is a secondary supply into the market and that is from people that currently have stockpiles that are just selling those stockpiles on the spot market.
For instance, there is a speculation that some of the Japanese power companies have excess uranium that they have not been using in their reactors since they were shutdown after Fukushima and they would be lighting up some of that in the market. There is also speculation that the Americans are selling some uranium into the market to help fund some environmental cleanups. There is also speculation, to what extent I do not know, that some of the weapons grade uranium is being downgraded into reactor fuel too. About 20% right now of the market is being supplied by the secondary sources and these secondary sources do not always have a price point. They sometimes have other reasons to be selling into the market. That is really the big unknown. But the key here is as time goes on the gap between current production and consumption increases and gets increasingly wider. People are speculating that the secondary supply will not be growing sufficient to fill that gap so we basically need more production.
The wrinkle there is if we do need more production, let us say in about four or five years time, we have already missed the boat because it takes about eight years to build a new uranium mine. Sure, existing mines could crank up production perhaps to meet some of that gap, but there needs to be new uranium mines to fulfill this future demands for uranium. They are not currently under construction, really, to any great extent.
People will see there will be a pinch point here at some point where there will be a gap up in the price of uranium as the need is just not being met from the mine production. There is a whole bunch of other wrinkles. It gets very, very complicated very, very quickly because- but I will not go into it further with you guys right now on that.
CK: Well, correct me if I am wrong, Warren, but any time you are looking at the potential upside or downside for a commodity or weighing pros against cons, so as an example we had the terrorist attack in Brussels. That probably had no effect whatsoever on the uranium market, but there was a slight scare in that the uranium power plant near the attacks where actually they pulled the workers out just out of fear that there could be a problem there. Japan restarted four of their reactors so far and two of them were just pulled offline by the court system so that might slow the restart down.
But then on the positive side you just outlined a lot of great factors and before the call you even mentioned an article you saw in the China Daily regarding Rio Tinto (NYSE:RIO) may be getting involved. I guess my question here is you know there is always negatives and positives, but you think the positives far outweigh the negatives at this point in where we are with the price.
WI: Yeah, absolutely. I think probably the best summation of my view on the price of uranium is it is difficult to see the price of uranium for any length of time being much lower than it is today. But there is definitely a very, very good chance I think of a spike upwards at some point. But the timing of that is very difficult to predict. I know that other people before me have tried to do that and have been unsuccessful. But I think at some point down the line I think most observers believe supply will be getting a little bit tighter as demand starts to grow.
The important thing here is when you build a reactor the cost of the fuel is really not the cost of the operations; it represents a very small cost per kilowatt hour. The key there is the capital. You have got a large capital investment in nuclear power plant. You want to make sure you have a secure supply. As these new reactors under construction start spooling up to the extent of not already locked up supply, the operatives will have to lock up supply on a term basis and eventually that crunch time will come. We do need higher prices to get more mines in operation and there will be a crunch point.
What is interesting about Arrow is based on our numbers here Arrow will make a ton of money even at today's lower prices, too. I do believe in about eight to ten years' time Arrow will be producing a ton of uranium, and hopefully by then I think we would have a very, very robust uranium market.
CK: Well, as we move towards the conclusion on the interview I want to bring things back to NexGen. You are still a holder of the stock. You initially modeled that 200 million pound deposit quite accurately before the actual numbers came out just last month. Where is the company at now? Have you made any future further projections based on recent drilling of how large this deposit can get? Could it become a largest deposit in the world?
WI: Well, I think right now is I think everybody would agree that NexGen right now is the best undeveloped deposit in the world. Based on the drilling that has been released with assays since the last resource estimate - I have updated my resource estimates and it sits right now at about 270 million pounds. There are two types of results that had been released without assays but just sent along with the results. I have not factored these into my numbers, but I think once I do and once those assays come out it is pretty easy to get through 300 million pounds. When you are looking at NexGen I would use 300 million pounds. When you are looking at post-Fukushima type acquisitions of pounds in the ground you are looking at roughly US$4 a pound, so US$4 a pound, 300million pounds. Those 300 million pounds are pretty easy without making any grandiose assumptions. If they are doing some serious step out drilling that could really, really add to that 300 million pounds.
You are looking at a billion two US market cap and the stock right now is of about $385 million Canadian market cap. When you net that to cash it is only $350 million Canadian. The stock has a lot of room to run. It is worth multiples of where it is trading today, just based on what they have already found and that anybody doing the math could figure it out pretty much on their own.
That is one of the reasons NexGen is such a tremendous stock right now, in my opinion, is that it should be trading at multiples on where it is today based on what they have already found. Yet they have quite a momentum behind them as far as their discovery momentum and they have some really good targets they are going to be drilling here going forward. You got tons of downside protection and some really good upside based on what they have already found and drilled out. Then you got some blue sky both in terms of like you have mentioned possible improvement in the uranium price, but also possible discoveries both to the northeast and to the southwest of the Arrow discovery. There are some really exciting targets there.
CK: Alright. Well, Warren, I have really enjoyed this conversation. We are kind of out of time here, but hopefully we can get you back in the next couple months because while uranium and NexGen are one of the focuses of your group with Rosseau, you also have detailed offline with me some other opportunities in the oil, zinc, and gold space, and hopefully we can find out some more about that when we have more time. Warren, thank you so much for coming on the program. Any last details you would like to share or ways that listeners can get in touch with you and find out more about your group, please add now.
WI: Okay, well, yeah, we are available on our website www.rosseau.com. I try and give my views as often as I can on NexGen. One of the reasons I am doing that, obviously, is these opportunities do not come around all that often in one's career. I think we have a lot of really fun stuff to look forward to with respect to the markets in general especially in the resource side everything is beaten up pretty badly. But specifically within that I think any of your investors should definitely pay a very close look at NexGen, get comfortable, and have a view on it one way or the other and I think I know which way their views would be. But anyways thank you very much, Colin, for your time and I would be looking forward to chatting again soon.
CK: Alright. Thank you so much for coming on the program, Warren.
WI: Alright, bye now.
Warren Irwin is president and chief investment officer of Rosseau Asset Management Ltd. He founded the firm in 1998 after several successful years as vice president and director of special investments at Deutsche Bank Canada. The firm's flagship event driven hedge fund, Rosseau LP, was established on December 31, 1998, and has since earned a reputation for solid long-term performance earning over 50% the return of its benchmark index. Irwin started his career as a bond analyst for Scotia Capital Markets where he developed the Universe Bond Index, the Canadian bond market benchmark, and shortly thereafter developed and managed Canada's first bond index fund. He is a Chartered Financial Analyst and holds a Bachelor of Mathematics from University of Waterloo and a Master of Business Administration from the University of Western Ontario.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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