Jason Mann's mission is simple. He comes to work every day looking for great values. Recently, he's been finding them in precious metals. Mann, a senior analyst with Freestone Capital Management based in Seattle, explains in this exclusive interview with The Gold Report why about one third of Freestone's $2.1 billion assets under management are invested in non-traditional assets, including commodities.
The Gold Report: In broad strokes, how would you define your investment strategy at Freestone?
Jason Mann: Freestone manages an array of proprietary and open architecture investment solutions for our high net worth clients. We have long used non-traditional asset classes to help manage portfolio risk, but even within our proprietary equity strategies, we are generally risk averse. In equities, I'd characterize us as "value with a catalyst" investors. We're definitely looking for investments that are cheap, but if there's not some sort of corporate action, some sort of catalyst to really drive a stock above its fair value, then we're not really interested.
TGR: What have been some of your best ideas that fit those criteria?
JM: Two of our better ideas that I sourced were Aberdeen International Inc. (TSX:AAB) and Sprott Resource Corp. (TSX:SCP). These have been prototypical investments for us: they appeared cheap, they had clear catalysts that should drive the stock value higher, and they came with some sort of "free option" that could drive outsize returns. These two companies are good examples because they seemed cheap when we bought them; then some of the catalysts that we foresaw kicked in, and the stock price closed that gap. Of course, not every idea works out as planned, but these were two of my better ideas.
TGR: Aberdeen put out a statement in the first quarter that said that it had a net asset value (NAV) of $1.37 per share, but it's trading at about $0.82 right now. What do you think is the reason behind the disconnect?
JM: Aberdeen is small and underfollowed, which usually creates a discount. Its liquidity is a bit lower than some larger funds can handle, so it's stayed under the radar. I'm actually shocked it trades at a discount because the company is very transparent and you can see most of its individual positions. We can estimate the NAV daily.
TGR: David Stein, Aberdeen's president and chief operating officer, does a good job with disclosures. There's no doubt about that. Could the dispute with South African miner Simmer and Jack Mines Ltd. (JSE:SIM) have been holding the stock back? The good news is that Aberdeen entered a binding arbitration agreement over a $10 million loan that it provided to Simmer and Jack in 2006.
JM: There's definitely a discount because of that issue. The company holds the $10 million on the books, but it's not really there until the lawsuit is settled. That's actually one of the catalysts that we anticipate will drive value.
We expect the lawsuit to get cleaned up in the near to medium term. Assuming Aberdeen settles the lawsuit, it will have that cash flow in, and the market can more easily value the company. The company also has a gold royalty that it can monetize once the lawsuit is cleaned up, which should serve as another catalyst to drive value.
TGR: Another tack that Aberdeen has taken is to buy back its shares. The company has bought back over 700,000 shares for about $0.90 each. Do you think that's an effective use of capital?
JM: I believe that the shares are pretty attractive, so it makes sense for the company to also buy them in the open market. However, if it comes at the cost of not being able to invest in other great companies, then it's not necessarily a good decision. But Aberdeen has done a great job of allocating its capital over time, and that is clear in its NAV performance. I'll give management the benefit of the doubt because they've shown that they're great capital allocators.
TGR: What's your upside on that stock?
JM: It can easily trade to NAV and its NAV could continue to grow once some of its performance shares kick in and its warrant portfolio gets revalued upward. Some other holding companies, such as Sprott Resource, have traded above NAV at certain points. When gold really gets hot, junior miners take off and their warrant portfolio might go crazy. In this scenario, the stock could trade at 1.2 times NAV... that's definitely possible.
TGR: Sprott holds a number of oil and gas companies. It also holds about 74,000 oz. of gold bullion. Was that what attracted you to it?
JM: When we first found Sprott, we couldn't believe that we were able to buy the stock at a discount to its physical gold, physical silver and Canadian Treasuries, plus get all of its other unique business for free. We were very pleased to pick that up. We got interested because we liked the long-term prospects for gold and silver and we were able to buy that at a discount through Sprott Resource.
TGR: Where do you see that stock trading through the end of the year?
JM: If the company keeps doing what it's doing, I wouldn't be surprised to see it trade up to between $5 and $6. We are not concerned with where the stock price will be in one year because its underlying businesses are really going to mature over the next three to five years. The stock may be at $6 at the end of this year, but I wouldn't be surprised to see it as high as $12 in three to four years.
TGR: It's a long-term play.
JM: Definitely. Sprott is one of the top players in the commodity space and Sprott Resource’s collection of assets is truly unique. No company can replicate its farmland business. Its uranium business is a really unique asset. And we're happy to have the Sprott team manage those for us.
TGR: Have you met Eric Sprott and his management team?
JM: I've met with the management team. I recently met with Steven Yuzpe, its chief financial officer, and received an update on the portfolio. He's a pretty dynamic guy.
TGR: About one-quarter of the long-short strategy you manage are investments related to commodities, and you seem eager to add positions. There are not many asset management companies with that much exposure to commodities. Can you explain why Freestone’s proprietary managed strategies have so much exposure?
JM: Part of that is our macro view. We expect at least moderate inflation as the eventual result of the massive government stimulus and this will drive commodity prices higher. But our exposure is really driven from our bottom-up process of finding cheap stocks with catalysts—we just happen to find a lot in the commodity space. It helps that we have a constructive view on commodities in the long term.
