by Travis Johnson, Stock Gumshoe | February 23, 2011 1:26 am
I guess maybe that headline should be that we can buy Canada’s best junior miners for 69 cents on the Loonie, but that just doesn’t roll off the tongue as easily (though perhaps it should — remember when the Canadian dollar only cost us Americans about 65 cents? It’s now worth more than the depreciating Greenback, albeit just by a penny or two … so far).
You may well have seen this teaser, it has come up to the top of my inbox a few times over the last couple weeks — it’s from Eric Roseman and serves as an ad for his Commodity Trend Alert, and he’s basically telling us that he’s identified a compelling gold opportunity in a Canadian closed-end fund.
You can see the article in which Roseman teases his idea here if you like, but basically what he tells us is that the investment in question is a closed-end fund that owns shares in junior gold mining companies, has good management, and trades at an unusually huge discount to the fund’s net asset value. Here’s an excerpt of the tease:
“Traded in Toronto, this closed-end fund is now selling at a 31% discount to its net asset value or NAV. That means you can buy one dollars’ worth of great junior gold miners for just $0.69 on the buck. And the fund is managed by one of Canada’s top-performing resource managers. Talk about a deal!
“I’ve never seen such a mind-blowing discount. At some point that huge discount will narrow as gold prices rally and its junior gold stock portfolio skyrockets.
“Gold mining shares are now down between 12% and 16% since hitting a high in early December. But the best-managed junior gold mining fund in Canada is down more 20% from its all-time high.”
Well, it looks like Roseman’s readers might have helped to drive the shares back up slightly over the last two weeks — it still trades at a steep discount, but the price jumped close to 10% in the week or so after this “story” was first mailed around. Of course, the prices of the underlying stocks change all the time, too, and gold and silver are both up a bit recently, so one can never tell exactly what influence a newsletter has.
But from those clues, I’m pretty sure that Roseman must be teasing CMP Gold Trust (CMP or CMP-UN in Toronto, CMPZF on the pink sheets). This is indeed a closed-end fund, though it’s apparently structured as a trust (I don’t know what the legal technicalities are for these funds in Canada, where there are many fewer closed end funds than there are in the US).
CMP Gold Trust is a closed end fund that invests in a basket of junior gold stocks — some of which are absolutely teensy, others of which have clearly “emerged” like ATAC Resources, or exploded to become multi-billion dollar businesses like Osisko Mining. CMP is managed by Dundee Resources, which is a respected investment manager in the sector, and they have a large but fairly common hedge fund-style management fee (referred to by the shorthand “2 and 20” — 2% of NAV per year in management fees, plus an incentive of 20% of any performance that grows the NAV by more than 8% year over year).
They do focus on gold, as you might imagine, though not necessarily exclusively, and they do also have some flexibility to use leverage of up to 25% (ie, borrowing money to enhance returns) — though they aren’t using much leverage at the moment.
The shares are trading for about C$13 and change, and have recently been down about 20% from their highs. As of February 11 the NAV was announced at $19.72, or $18.75 for the fully diluted NAV (they have outstanding warrants as well), so that’s right in range with the tease — the shares are almost exactly at a 31% discount to NAV right now, and over the last week or two they have also been at about a 31% discount to fully diluted NAV, so it’s easy to fit that clue in. It has also helped the shares a little bit that they just announced they’ll be buying back about 10% of the float, which seems like it should be a wise decision on their part if they can’t find an investment that they think is discounted by more than 30%.
Do keep in mind that closed end funds on average trade at a significant discount to NAV (though there are prominent exceptions), and the fact that they have a large management fee as well as embedded tax liabilities (capital gains that they’ll pass through to unitholders each year) means that CMP Gold Trust is likely to always have perhaps a larger than average discount — though I will grant you, without having studied their performance or looked for any other management skeletons, that the discount seems unusually high for this fund.
You can see the latest reports from CMP Gold Trust on their website here, including their weekly update on the NAV of their holdings (they share the NAV every Friday). Their latest portfolio disclosure, as of September 30 (next disclosure won’t be until the end of March), tells us that their top holdings included Sabina Gold & Silver Corp, Tahoe Resources, ATAC Resources, Torex Gold Resources, Queenston Mining, and Osisko Mining Corporation — a quick look indicates that most of those holdings, each of which was more than 5% of the fund at the time, have held their own pretty well over the last five months, though we can’t know what trades they might have made, and I didn’t check to see if any of their smaller holdings had huge breakouts or disappointments.
Am I 100% certain that this is Roseman’s pick? Well, no — there are a lot of investment funds of various types that could reasonably be referred to as “closed end funds” in Canada, several of which focus on natural resources if not specifically gold, and some that even have quite similar holdings to CMP Gold Trust (like the Precious Metals and Mining Trust from Sentry, for example, ticker MMP-UN in Toronto, which trades at a stiff premium to NAV in part because they pay a monthly dividend — which seems like a silly reason to pay a premium, since it means they have to realize investment gains pretty regularly).
I’m sure that this is the best match I’ve found among “real” closed end funds, but it’s possible that there’s another one of similar ilk out there somewhere. This is a match on all the clues, it’s just a question of whether there might possibly be a second match (if you’d like to scan the universe of Canadian funds, The Globe and Mail keeps a pretty good list here).
If you’re curious about other kinds of “funds” that invest in little resources stocks and miners, there are a lot of other possibilities, of course — there are other types of investments that aren’t quite closed end funds, too, including Pinetree Capital (PNP in Toronto, PNPFF on the pink sheets), which several of my readers have mentioned to me in the past. They’re more like a venture capital investor in junior miners — not relatively established juniors like Osisko or ATAC Resources, but really tiny stocks that may not even be public, I scanned their list and hadn’t heard of any of the names I saw, and they usually have hundreds of stocks in their portfolio to offset the risk that teensy miners bring. Pinetree trades at a discount to NAV, as you’d expect for a venture fund, but it’s not quite as big a discount as the CMP Gold Trust, and they get quite a bit broader into most natural resources, though roughly half of their portfolio companies are in precious metals.
At the other end of the “juniors” there’s also the much-ballyhooed GDXJ, the “Junior Miners ETF” from Van Eck — that trades, like most ETFs, without any real discount or premium on most days, but it’s also not really “juniors” the way I define that term. This is really an ETF designed to bypass the fact that the GDX, the most popular gold miners ETF, is dominated by a few of the mega miners like Goldcorp and Barrick. The big holdings in GDXJ are junior compared to those large caps, but they’re almost all significant producing miners — folks like Fronteer Gold, Hecla Mining, Coeur d’Alene Mines, Silver Standard Resources, and Silvercorp Metals (notice that several of those are primarily silver producers — that has undoubtedly helped GDXJ to perform substantially better than GDX over the last six months or so).
So what do you think? Interested in buying a professionally managed portfolio of junior gold miners? Find the discount attractive, or the management fee too high? Like CMP Gold Trust, or is there a different gold miner closed-end fund that you prefer? Let us know with a comment below.
And if you’ve ever subscribed to Roseman’s Commodity Trend Alert, please click here to review it for your fellow investors — we’d like to know what you thought. Thanks!
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