“Buy Canada’s Best Junior Miners for 69 Cents on the Buck”

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[1] 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.

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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[2], 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[3], 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[4]).

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 [5]— we’d like to know what you thought. Thanks!


Endnotes:
  1. see the article in which Roseman teases his idea here: http://sovereign-investor.com/2011/02/03/buy-canadas-best-junior-miners-for-69-cents-on-the-buck/
  2. just announced they’ll be buying back about 10% of the float: http://www.theglobeandmail.com/globe-investor/news-sources/?date=20110215&archive=cnw&slug=C2924
  3. latest reports from CMP Gold Trust on their website here: http://www.cmpfunds.ca/CMPFunds/Offerings/CMP_goldTrust.asp
  4. The Globe and Mail keeps a pretty good list here: http://globefunddb.theglobeandmail.com/gishome/plsql/gis.show_closed_end_rep
  5. Roseman’s Commodity Trend Alert, please click here to review it for your fellow investors : http://www.stockgumshoe.com/reviews/commodity-trend-alert/

Source URL: https://www.stockgumshoe.com/reviews/commodity-trend-alert/buy-canadas-best-junior-miners-for-69-cents-on-the-buck/


  1. Avatar
    Sam
    Feb 23 2011, 08:50:23 am

    What about the the ETF – GLDX? According to its name it is for the Gold Explorers not miners.
    Anyway, what kind of companies are included in this ETF?

  2. Avatar
    Bruce
    Feb 23 2011, 10:31:10 am

    It was on October 31, several years ago, that the government of Canada issued an order for business trusts to restructure into corporations. The change became fully effective at the end of 2010. The crux of the matter was the loss of tax revenue from investment in those trusts by foreigners (mostly Americans). The trusts, many of which derived substantial income from exploitation of Canada's abundant natural resources, paid substantial income to shareholders, which income avoided some forms of taxation. I don't know how (of if) the Halloween order affected CMP Gold Trust. Anyone considering investment in CMP Gold Trust should probably take a look-see at this aspect of the investment.

  3. Avatar
    Mark
    Feb 23 2011, 01:26:22 pm

    O.k. in this article you did not throw it into the thinkolater. I always like it when you say you throw it into the thinkolater and then after a silent drumroll (on my part) you tell it. I know I'm just a freebee reader however the thinkolater is what keeps me coming back for more!!! Even if you already know what it is, throw it in to the damn thinkolater anyway just so you can say you threw it in and came up with (silent drumroll) cmp gold trust. Yea that's what I like.

  4. Avatar
    sheeple123jump
    Feb 23 2011, 01:59:27 pm

    About this closed end gold fund….ahh,I think the management fees are too high.
    and with some effort to study on ones own,you can come up with your own good basket of miners …alongside a good publication like Casey's International Speculator, which I subscribe to ….has many good miners…oddly they dont have All of the best performing ones…but they have a good stable of winners.They have Bear Creek but not Great Panther.
    When the silver and gold price soared last fall…ALL miners soared with them, except for a few loser stocks like JAG….you could have just closed your eyes and picked any junior miner and watched it soar to a triple or better. I chose AG (first majestic) and Bear Creek(BCEKF) but I didnt happen to choose Great Panther (GPL) and now I wish I had. I didnt choose SLW at 18 because I thought it would drop to 17 or 15.50 .Now,my take on it now is they are ALL at high tops, waiting for a correction…..

  5. Avatar
    Mark
    Feb 23 2011, 02:02:26 pm

    I hope the thinkolater is not broken and he bluffed his way through this without it, or is trying to cover for the broken thinkolater, just tell us it is not broken, sears offers plans to fix broken household things for a price. Travis you do such good work!!! and I am just joking around. Thanks for what you do for the little people (people with less than $2,000 in their trading accounts), yet at the same time say it came from the thinkolater!!!

  6. Avatar
    Dan
    Feb 23 2011, 07:55:09 pm

    you guys are to too two funny Keep up the good work Travis I don't read all the stuff that comes thru my email but I always read this one.

  7. Avatar
    wanglehead
    Feb 23 2011, 08:39:03 pm

    how about altius atusf.pk -has pulled back to the 50day: info below

    Leveraging exploration dollars and keeping an interest Altius Minerals (ALS, Toronto, 13.74) is another of our favor low-risk ways of gaining exposure to resources. With most of its operations in Newfoundland and Labrador, Altius employs the OPM (other people’s money) method of exploration. The typical modus operandi is to stake ground, undertake initial exploration and then form a joint venture company with a partner who must spend a certain amount of money on exploration with the aim of eventually taking it public. Altius typically gets a significant chunk of publicly traded shares, which it sells down opportunistically, and a royalty on future production.
    It has employed this strategy successfully a few times in the past, on gold and uranium properties, most recently in a sale by Fronteer of a uranium property originally discovered by Altius. Its $650,000 investment returned about $180 million, plus a 2% royalty. And now we have just seen it executed again on a prospective iron ore deposit.
    A new public unit
    Altius spent about $2 million exploring the Kami property which it had staked in 2004. Following a joint-venture deal last year, the j-v company went public in early summer as Alderon. Now that the required expenditures have been made, and following some very successful drilling, Altius owns 29 million shares in Alderon (whose stock has moved from $1.30 to $3) plus a 3% royalty on future production. Thus, Altius’ investment of
    $2 million is now worth almost $90 million, plus the royalty.
    The completion of this transaction—where each dollar increase in the Alderon stock price equates to almost $1 increase in Altius’ NAV—is largely responsible for the recent rally in Altius’ share price, up from under $11 in early December. Altius’ share price has been in a long, steady—some would say laborious—increase from the credit-crisis lows just under $5.
    Lots of cash and numerous j-vs
    Altius is active on other fronts as well, with a new strategic alliance with Cliffs Natural Resources (a $10 billion U.S. company) to explore for nickel and iron properties, funded by Cliffs.
    Altius has a strong pipeline of early stage properties, as strong as ever, according to the company, but it is also expanding its project generation activities to other jurisdictions in Canada, while it will seek royalties anywhere. Altius has a large cash pot, nearly $200 million (presenting over half its newly increased market cap). Last month, it invested approximately $25 million into an investment
    company, to be run by Paul van Eeden, investing in early stage resource companies, including private placements. The deal is intended to increase the returns on its cash, while increasing exposure to the resource sector.
    Still inexpensive, buy on pullbacks
    All in all, we continue to count Altius as one of our top resource investments, with conservative management, a solid balance sheet, current income (from its Voisey’s Bay nickel royalty), multiple royalties on development properties, a large pipeline of exploration properties, and perhaps, most of all, a low-risk business method and disciplined, patient execution that reaps great returns for shareholders. We are definitely holding Altius, but given the recent stock price appreciation, would wait for a pullback before adding to positions.

  8. Avatar
    wanglehead
    Feb 23 2011, 08:56:41 pm

    or aberdeen international a closed end fund holding allot of good juniors

    aabvf.pk Still trading above the 50d but pulled back to .87c today quickly bounced back to close at .94 Value from companies web site 1.43/share which excludes royalties and has also declared a dividend of 4 cents a share I am only posting this because maybe something someone else might be interested in it and somewhat obscure
    Volume has been good for pink sheet stock 200,000 + per day recently
    I bought at .34 and then added at 1.01 recently (kinda a dumb move shoulda checked a chart) Seems like a reasonable way to own some juniors

  9. Avatar
    ndmack
    Feb 24 2011, 11:43:59 am

    Aberdeen is AAB.to in Canada. Too overbought though, wait for pb to 50 day (about .78c).
    Also check Skyline Gold SK.V and Silver Bear SBR.TO if you are into Silver.

    Cheers

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