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Private equity fund shines in spotting takeover deals

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Sentient Group has an uncanny knack for owning takeover candidates in the highly speculative junior resource sector.

The $1.3-billion private equity fund, based in the Cayman Islands with offices in Montreal and Sydney, Australia, holds a portfolio of natural resource companies that contains just eight publicly held names but has profited from two recent takeovers.

The fund held shares in Norsemont Mining , a promising junior with a Peruvian copper deposit, which was the target of a bid by HudBay Minerals. Sentient's website also lists an investment in Andean Resources, whose Argentine gold and silver property caught the eye of Goldcorp last year.

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Norsemont is being taken over at a 33-per-cent premium to its average price in the weeks before the bid, while Andean received an even more delightful 56-per-cent premium.

Sentient's managers declined comment, but the fund's track record of picking takeover targets is undeniably impressive. For typical investors, penny juniors are fraught with peril.

How can anyone pick the small number of winners from among the legions of companies with dubious promoters and faint-hope deposits? One approach is to study the portfolios of pros, such as Sentient, and ride on the coattails of their stock-picking acumen.

Past performance is no guarantee of future results, but Sentient appears to have an eye for companies that attract takeover bids. The fund invests in development stage projects deemed promising enough to eventually lead to low-cost, profitable producers.

Its current holdings are an eclectic mix of long shots rather than conservative investments for widows and orphans. They include a junior iron ore exploration company, a lead miner and a producer of sodium bicarbonate.

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According to information on Sentient's website, about half the names in its portfolio are private companies, but beyond Norsemont and Andean, it has invested in six firms with publicly traded shares.

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Geodynamics Ltd. bills itself as Australia's largest geothermal energy firm. It aims to produce renewable electricity using the natural heat in rocks kilometres below the surface to create steam that drives turbines. The knock against the technology is that it is expensive.

Ivernia Inc. a penny mining stock listed on the Toronto exchange, owns a working lead mine in Western Australia. The company hopes to supply 2 per cent of world demand from the mine, which reopened Wednesday after a month-and-a-half shutdown because of environmental worries over lead releases.

Iron Road Ltd., an Australian-listed company, says it has a 1.2 billion tonne iron deposit that it hopes to develop into a 10 million tonne per year producer.

Marengo Mining Ltd. is trying to develop a copper-molybdenum project in Papua New Guinea. Bloomberg lists Sentient as the company's largest shareholder, with a 22-per-cent interest, but the firm has two other noteworthy investors: U.S. billionaire George Soros's fund, with 19 per cent, and OMERS, the Ontario pension fund, with 5 per cent. The shares trade in Toronto and Australia.

Natural Resources USA Corp. is an obscure U.S.-based producer of sodium bicarbonate. Sentient holds 95 per cent of this over-the-counter stock. Sodium bicarbonate, best known as baking soda, is hardly a common investment theme. Then again, its prices have been rising.

East Asia Minerals , listed on the TSX venture exchange, is exploring for gold in Indonesia, where it already has a large, low-grade deposit. Toronto gold maven Eric Sprott last year in The Globe called it his highest conviction stock.

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That hasn't helped the shares recently though. They are trading well off their highs and were weak Wednesday following a Canaccord downgrade.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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