Fund Manager Matt Zabloski On Asset-Based Investing In The Mining Sector

Includes: IDMMF
by: Palisade Radio


The recovery is only in its first inning.

Shareholder activism remains an option to add value to a stock.

IDM Mining is a substantially undervalued stock.

Share dilution is still a factor for many stocks.

Delbrook Capital's approach is bottom-up, asset-based investing - that is investing in top-quality assets that the market has misplaced. Delbrook has a strong technical team with a great level of experience, and they focus on companies with large gaps between intrinsic value and market value.

Delbrook Capital fund manager Matt Zabloski believes the $8 trillion of sovereign debt and negative yields will provide a good push into the precious metals sector. Delbrook looks for quality over quantity and solid facts over a good story.

Because the market in precious metals has been so beaten down, even a small amount of institutional investment will cause large increases in share prices.

Shareholder activism, while not yet needed, remains an option for when company direction is not aligned with what's favourable to shareholders.

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. His name is Matt Zabloski. He is the portfolio manager of Delbrook Capital which is a Vancouver-based mining-focus group with about $100M under management. Matt, welcome to the program.

Delbrook Capital Investors President and Chief Investment Officer Matthew Zabloski: Thanks very much for having me.

CK: Yeah, every group at this point in the market it is all contrarian money that is really deploying and has been deploying the last year. But each and every group has a different way of deploying their capital and different things that they are looking for. Before we got on the call today we were going over what Delbrook's mandate is and you had a strong focus towards looking at asset level transactions and what the asset is that a company is holding, the discrepancy between what your analyst believe that it's worth and what the market is valuing it at. Can you talk a little bit about what you are looking for as a portfolio manager of Delbrook?

MZ: Sure, absolutely! I will start by saying that our fundamental approach is bottoms up asset based investing. We have a strong technical team in-house that has a great level of experience in project evaluation, asset evaluation. For us the key is very much to understand the asset, to understand and identify assets where we can identify a gap between market value and intrinsic value. The larger the gap the more excited we get. But more than that once we identify the gap it is sitting down with the team, engaging management, and creating or identifying the catalyst in our mind that will drive that gap to narrow between the purchase price that we evolved ourselves in on the security, and the intrinsic value.

CK: Great! Matt, are there any commodities that you have particular focus on right now and are there any that you would exclude from potential interest for Delbrook?

MZ: Yes, we are right now like a lot of people are curious to explore more within the precious metals complex. Just going through the market right now is approximately $8 trillion of sovereign debt that has a negative yield associated with it. We see a good push in the precious metals space. But within that space I think you will need to focus on quality over quantity and that is our mantra internally here is the quality transaction first over the quantity of transactions. Where we tend to shy away from are overly promotional stories. We are not right now completely committed to the base metals space. So, we have very limited involvement in the base metals space. Some of the energy metals, the lithiums, the uraniums in the world we just don't think there is a lot of substance there to drive the equities up any further. In some cases we are positioning ourselves to take advantage of the reality of when the market realizes that a lot of these investments have overshot what they truly are worth.

CK: I am sure for somebody close to the market like yourself you have noticed a pickup. The share prices of a lot of the gold-related equities have moved up, and even financing is going into these equities are closing quite a bit more quickly. We just put an interview out with John Hathaway from Tocqueville Funds. He had mentioned that while it might seem to somebody like us that interest has come back into the space, a lot of barometers are showing that, really, no interest has come back into the space and the general public are not taking notice of this yet and they will not for quite some time. Would you agree with that and could you expand on it?

MZ: Sure, I would 100% agree with that. I mean Tocqueville, ourselves, other resource-focused investment funds are obviously very knowledgeable and touched base with the market for mills and mining on a daily basis. I would say at this moment if I had to guess we are probably maybe midway through the first inning in terms of the potential interest. The barometers we look at are sector exposure for some of the large asset management firms, East Coast mutual funds, West Coast mutual funds in the US. We would hazard a guess and estimate that the sector for metals and mining in general is not represented at all in these larger portfolios.

The interesting scenario that you can look at now is because this bear market has gone on for so long the market cap can crash in on the space in general has been so severe. Just a small amount of capital coming in on the institutional side from the generalist mutual fund's level on the pension fund, a small amount of capital would drive significant returns to the market caps in a lot of these companies. I would completely agree with that. Like I said internally here we sort of say that we are just midway through the first and there is a long way to go still.

CK: Many people believe that gold prices are just starting to move up and will probably go to $2000 an ounce or maybe far exceed that, which brings up the question of optionality in your investing. Some assets are economical at prices of $1200 or $1300 gold. Others take $1500 or $1800 gold and the leverage that is afforded by investing in those out of the money assets, of course, can be huge if you time it right. Is Delbrook Capital interested in optionality plays or are you more focused on the type of quality assets that can produce in this environment?

MZ: Yeah, I would say it is a bit of both. For us, it is understanding some of those marginal assets as you defined them. Actually if we run them internally here through our technical team some of them are not as marginal as the market believes. Assets that previously years ago had economic problems with them at a certain commodity price, share price at the current foreign exchange level. Understanding how to rejig those projects which should be economics, being able to identify projects that the market thinks are marginal or even uneconomic at this point. I think our real strength is to find those projects, run them through the internal review process that we have here with our engineering and geological teams and uncover some gems that in fact if we apply the current world economics these are very robust projects especially one to get me excited.

We do look at some of these other projects that are well out of the money as all options. I suppose that we do not typically park our capital there simply because our belief is that gold prices will probably move higher, but the pace under which they do move higher is unknown to the entire market, so it very much threatens an opportunity cost of capital. I would much rather understand the fundamentals, rework the fundamentals and find these hidden gems, then park my money in a truly marginal asset and just hope that factors beyond my control take effect and arise, and push the value of that asset up.

CK: The mining industry is - and always has been - fraught with shady characters. The cycles allow for huge amounts of money to be made very quickly, and that seems to invite a lot of people rushing into the space, a lot of excitement where people throw money into hands that maybe it should not go into. Before the call you were talking about the idea of shareholder activism - the idea of shareholders taking a little bit more control or say in what is being done with their money and the guidance of a particular company, something that does not seem to happen very much in mining. What can you tell us about Delbrook and your interest in getting involved in a more active role?

MZ: Yeah, I would say our policy internally here is very much focused on the value of the proxy that we have, it's our belief that activism or engagement for shareholders is something that has not occurred to the degree necessary within the mining space, especially in the intermediate to junior mining space. It is typically a situation where it is very retail focused. That is not us. We are in to most of our investments we probably have at least a dozen, if not eighteen where we are reporting shareholders. But as internal policy we engage management very actively, engage the board of directors very actively.

It is not outside the realm of possibility for us to be involved in something where we look at making changes if after the discussion with the board and management things are not going in the direction that we believe that they should. As in my previous comment we have said that the sector in general on a recovery is in its first inning. The activism side has not even really popped up yet and for us it is something that we are very cognizant of and we are not at all in the least bit afraid of engaging management or board of directors.

We are looking at a couple right now. I think there are few opportunities out there that are primed for exactly that. Quite frankly, if we deem that to be the best way to create value then I will be happy to make the investment and to make the move to surface that much value.

CK: We put out a piece earlier this week on Palisade Research called Why 11 of the largest gold funds and majors are all invested in this junior gold company? We are, of course, talking about Rob McLeod and IDM Mining (RVRCF). The stock today is up almost 20% with major inflows of capital coming in and one of those funds that were referring to, of course, is Delbrook. Delbrook has been a supporter of the story for quite some time. It is a company that we are invested in as well. I thought I would bring it up so that you could maybe walk our listeners through, why this is an ideal candidate for Delbrook to get involved and why you see upside in the story from here?

MZ: Sure. I mean we typically hold our cards pretty close to our chest in terms of discussing investment pieces, but this is one that is near and dear to our heart I suppose. IDM is a story that we have been involved in for a couple of years now. It is potentially in our view- the next producing gold mine in British Columbia, it has significant exploration upside to it, but also that the bigger catalyst is that within literally 12 months this site should receive a permit for development.

So we sit back and we always view our portfolio investments in the context of the broad market. This one checks a lot of the boxes in a politically safe jurisdiction; not an unimaginable amount of cutbacks to get off the ground; a very good management team both on the development side, but also on the exploration side. We are currently shareholders of approximately I believe, 14 or 15% of the outstanding equity and we will continue to support this. We truly see this stock as it stands now as undervalued even the recent move in the shares. Our target price on this is materially higher than where the stock is right now.

CK: One thing that could be of concern to some investors, some companies are going out and doing major dilution events right now. IDM of course, just undertook a pretty substantial dilution. But also if people have been paying attention to these things they have noticed that as soon as that money comes in the door a lot of these stocks are really moving up. I can think of Pilot Gold, Sandspring Resources, Midas Gold, all companies that nearly doubled and we can add IDM to that as soon as they took in the dilution. What is your view on diluting existing shareholders? You were, of course, a large shareholder of IDM before this most recent transaction.

MZ: Yeah, we are approximately 19%. We maintain our 15% ownership so for us, the company required capital to get it to a production decision. Unfortunately, you are doing so now the share prices are much lower than where they should be, that is the deal, of course, is these things double or triple. In our mind I am not looking at the ups in share price; I am looking at our percentage to the equity value. Our internal amounts obviously came down with such a diluted financing, but in our mind it was a necessary evil on the stock. Like I said if you-the economics are starting to hit the target, even prior to the company receiving its permitting- its permits for construction, or making an investment decision. The targets are multiples of where the stock is now.

What I would say it is unfortunately the nature of the beast with the market where it was is a lot of the companies overshot where in reality they should have been given a price of gold in the foreign exchange situation, but that is the nature of the beast. Luckily enough for us we simply maintain our pro rata ownership for this and that is the way that we are playing this. Some of the other stocks we are just maintaining the equity ownership percentage and we are happy to support the projects that we see as moving forward and we can see as undervalued regardless of the recent performance.

CK: Fantastic! Well, Matt, thank you so much for coming on the program with us today and sharing your thoughts and ideas on the market as it develops into a nice, strong bull market, something we have been waiting for for quite some time. If you have anything else to add for audience members or ways to find out more information or get involved with yourself or Delbrook, please go ahead and let us know.

MZ: Perfect! I very much appreciate the time. The contact information for us is on our website at Thank you.

Delbrook was founded in November 2009 by Matthew Zabloski, who acts as director and president of the firm. In this role, he has overall responsibility for the investment and trading decisions of the fund and managed account portfolios. His experience includes various roles within the investment banking department of a major Canadian financial institution where he covered multiple industry sectors and worked on transactions of all sizes. After completing an MBA, he joined Boston-based Fidelity Management and Research Co. as a sector analyst and portfolio co-manager for a growth-oriented investment fund. In early 2008, Zabloski left Fidelity and joined CI Investments to launch a new series of investment funds. While at CI, he managed a value-focused/catalyst-driven investment fund and led the overall research effort for the fund series. Zabloski has B.A. (Honors) and an MBA, both from the Richard Ivey School of Business at the University of Western Ontario. He is a Certified Investment Manager and is also registered as an Advising Representative, Dealing Representative, Ultimate Designated Person and Chief Compliance Officer with the Securities Commissions in British Columbia, Alberta, Saskatchewan, and Ontario.

Disclosure: I am/we are long RVRCF.

Business relationship disclosure: Palisade Global Investments Limited holds shares of IDM Mining. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.