By Andy Hoffman
Globe Investor Magazine, September 18, 2008
This summer, before the minerals sector experienced a series of sudden, steep landslides, we conducted a straw poll of mining-sector professionals, including corporate executives, investment bankers and industry analysts, and asked them about their favourite fund managers who focus solely on mining. A few names kept coming up. We winnowed down the list to three stars: a big-bank fund manager with a sixth sense about winning management teams, a hedge fund manager who isn’t afraid to suggest mergers and acquisitions to CEOs and a dynamic duo who’ve successfully moved against the crowd. Ian Telfer, chairman of Goldcorp, agrees that each of the fund managers we selected has been around long enough to intimately know the players, the ore bodies, the regional politics and the technical elements of the business, plus they have great influence when it comes to raising money. “If they decide to go into a financing, it certainly helps with other fund managers,” he says.
Kinross Gold CEO Tye Burt offered perhaps the most ringing endorsement of our finalists: “I would have any one of these people manage my money.”
Margot Naudie
Photograph by Adam Rankin
Investment management is in Margot Naudie’s blood. Her father was a fund manager, and Naudie soaked up plenty of stock market wisdom around the dinner table while she was growing up in Montreal. “I pretty much always knew I wanted to do it,” she says of being a stock picker. Armed with a degree in political science and economics from McGill University, she followed her father into the business. But when she joined TD as a buy-side analyst in 1994 and was asked to cover the mining sector, she was far from being a rocks maven. “I knew absolutely nothing about mining,” she says with a laugh.
After taking night school classes, Naudie engrossed herself in the world of prospectors, ore bodies and larger-than-life promoters, and developed an uncanny ability to distinguish who would deliver on their promises and who was spouting hot air. Canadian mining legend and Franco Nevada chairman Pierre Lassonde observes, “A big part of her success is the fact that she sized people up more than she sized up the technical aspect. That’s how she’s done so well.”
As the lead manager of the TD Precious Metals Fund, her investing picks have demonstrated that she has an astute insight into what makes a mining firm work in high times and low. Naudie has experienced both ends of the spectrum over the course of her career. When she started at TD, there was plenty of deal-making, discoveries and client interest. “I think it was my fourth day on the job when Royal Oak bid for Lac Minerals,” she recalls. By the time she began managing mining funds in 1998, however, the Bre-X scandal and the Asian financial crisis had taken the bloom off resource firms, and investors had switched to the high-flying technology sector. Nevertheless, since she took over the Precious Metals Fund 10 years ago, it has returned 13% annually. As of the end of July, the fund was down 4.5% over the previous year, but has averaged 23% over the past three years.
In an industry defined by risk, Naudie (who also co-manages the TD Energy and the TD Resource funds) has found plenty of ways to lessen the potential downside without sacrificing returns. Her fund tends to favour well-established names in the gold sector that own what she calls “trophy assets” and are likely to perform well regardless of the stage in the commodity cycle. For example, she fancies Goldcorp, with its flagship Red Lake mine in Ontario and its promising prospects at a new operation in Mexico. (It’s the fund’s biggest holding.) Barrick Gold, the world’s largest bullion producer, with its prosperous Goldstrike mine in Nevada and a penchant for aggressive deal-making, is another top pick. “I tend to be a little more conservative in my investments because preservation of capital is extremely important,” says Naudie. “Risk-adjusted returns are extremely important. Let’s face it, these are high-risk businesses.”
It’s not that Naudie shuns junior miners, which can juice a fund’s returns with their massive upside potential. But since they have a habit of running into financial, political or technical mining problems, she offsets investments in small firms with the more predictable performance of senior producers. “What distinguishes this fund from some other precious-metals funds is that we pay more attention to the benchmark,” she says. She calls it a “barbell approach”: A healthy weighting in the large caps gives the portfolio ballast.
If anything, the summer’s vicious correction in mining equities has reinforced Naudie’s propensity for the name brand mining firms. “It’s been extremely acute in terms of the downdraft. I think it does highlight the benefits of the barbell approach,” she says. Naudie has also been adding to her position in beaten-up names like Freeport and Yamana. “We have not been in a position where we have had to sell securities. My sense is that there has been a fair amount of forced liquidation. Quite frankly, there has been some distressed selling and we’ve been in a position where we could take advantage of that.”
Before buying a stock, Naudie always considers what she calls the “four Ps”: property, people, politics and price. She’s looking for quality deposits that don’t need commodity prices to be at record levels to be profitable. And she wants a location conducive to development—Quebec, for example, with its mining-friendly regulations, is an ideal jurisdiction, she says. Naudie’s small stake in Ecuador-focused Aurelian Resources, on the other hand, reflects the risk of that country’s volatile political system.
Among her favourite juniors in the fund is Capstone Mining, which operates a copper mine in Mexico. She bought the stock for 80 cents, and it now trades at around $3 a share. She particularly likes the management team, which spun off the mine’s silver production into Silverstone Resources.
So focused on people is Naudie that when she saw the press release announcing that industry veterans Ian Telfer
and Frank Giustra had taken control of Wheaton River Minerals in 2002 and had appointed Pierre Lassonde as an adviser, she loaded up on the stock. It was, as she puts it, a “bet the jockeys” investment. Wheaton River became the success story of the cycle, eventually merging with Goldcorp to create a miner that’s now the world’s second-largest gold producer by market value.
With over a decade in the rocks and stocks business, Naudie is no rookie. But Kinross CEO Tye Burt says she continues to bring a fresh eye to the job. “She is perpetually young,” he says. Yet she is shrewd enough to have seen the good and the bad ideas, and to know how to sort through them.”
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