Adam Thompson:
Please introduce Primevest Capital and describe why you set it up specifically towards natural resources?
Ryaz Shariff:
Primevest Capital’s flagship fund, the Primevestfund, has been around for about 16 years now. The major focus is certainly in the natural resource sector, but not exclusively. We also invest outside the natural resource sector, typically in growth stories. Being based in Vancouver, we have significant technical and financial expertise within the natural resource sector, particularly in mining. In Calgary, we have a similar expertise within the oil and gas sector.
Adam Thompson:
In terms of your investment scope, do you just look at Canadian companies, TSX, TSXV that kind of thing?
Ryaz Shariff:
Well, we don’t have a limitation on our mandate, either for strictly natural resources or strictly investing in Canada, but because of how we invest, which is about being close to management, most of our investments are Canadian listed companies. Their assets may not necessarily be in Canada, and in most cases they’re not, but all of the management teams are usually close to us either by jurisdiction or through a close relationship. We’ve invested in the U.S., of course. We’ve invested in Australia, which has similar types of profiles as those in the Canadian natural resource market. We’ve also invested in other markets in the world, but our primary focus is in Canadian-listed public companies.
Adam Thompson:
With the funds, what’s the sentiment for Canadian listed natural resource companies now versus how it was a few years ago, in terms of high-net-worth families and the institutional investors that you have with your clients or in your network?
Ryaz Shariff:
First and foremost, our investor base is primarily friends and family. Friends would include family offices as well, but we don’t actively market. It’s a reasonably close-knit group of investors and a number of these investors are also some of the entrepreneurs that run a number of natural resource companies or other non-natural resource companies that we invest alongside.
Adam Thompson:
Do you think that markets could be evolving into another commodities supercycle, or do you think that’s perhaps a little bit premature and we’re more of a cyclical bull run for certain commodities?
Ryaz Shariff:
I never feel comfortable calling anything a supercycle. You really only know at the end of it, whether it was a supercycle or not. The natural resource sector is certainly a cyclical business and, in my view, this cycle occurs typically every five to seven years. If it’s seven years, then the cycle lasts slightly longer and if it’s five years, it will be slightly shorter. I think there’s no doubt we’re on the upswing of a cycle. How long will it last? I think there’s some fundamental arguments that we have at least a couple of years left in this cycle.
Adam Thompson:
You’re primarily small cap focused, and that’s perhaps where you see better returns by the margin. Tell us your investment philosophy and how you look at small caps, and what you look for in terms of the attributes for your fund?
Ryaz Shariff:
Because we have no restrictions in terms of the criteria of what we invest in, or market caps, we invest through the whole spectrum, but we find that we can add the most value in the small and mid-cap range. In our investments process, we basically rely on primarily three criteria. Number one is management. We believe that if you’re investing in the public markets, the stewards of the capital that you’re providing to these public companies, the management, is the most important part. Our belief is that 85% of the risk mitigation in your investments comes from that one very significant factor. As a result, management is very important for us. It’s important for us to have relationships with management and access to management.
It’s also important for us to have management that’s vested in these companies and that they have a significant incentive to make sure that the business enterprises succeed. Number two: when we make investments, we ensure that we identify a fundamental undervaluation in our investment analysis. In addition, we typically want to see some other blue-sky potential within that opportunity which you’re not paying anything for today. You can expect that if you’re seeing those types of opportunities; you have to be conducting a lot of rigorous research, which is what we do, to try to identify these gems.
Thirdly, and as importantly as the second point, but not as important as the first criterion, is that it has to have broad institutional appeal at some point in time in the next 12, 24, or 36 months, depending on the type of investment it is. Because, ultimately, the fund flows determine the multiple expansion likelihood. Within that context is what we typically look for in our investment profile. As a result of not being able to find so many of these companies, we run a reasonably concentrated portfolio.
Adam Thompson:
Regarding copper, do you think that there’s more recognition now with something like the energy transitioning going on from a broader investor base, or are more investors to come to you because they are moving away from hydrocarbons to electrification?
Ryaz Shariff:
What’s happened now is we’re in a very unique position because there is an opportunity occurring here that’s going to see the transition of energy. This is an opportunity that we really haven’t seen in the copper market. So, the EV argument is such that it requires probably about four times more copper in an EV car than a typical internal combustion engine car. But just as important is the infrastructure necessary to deliver that electricity to those EVs, which includes charging stations, but also additional copper wire in your house to charge your car. Then of course, where are you getting that energy and how are you transmitting that energy to the end users?
We have a secular opportunity that’s going to be a significant demand driver within the copper space at a time where you saw, over the last 10 years, a significant reduction in investment in new mines and opportunities. Will it catch up? It always does. The commodity markets always catch up, but my view is that there is going to be a bigger lag today than here has been in the past.
Adam Thompson:
What are the metals that you confident on other than copper?
Ryaz Shariff:
Well, I think if you’re looking at this EV space, the first thing you have to understand is battery chemistry. About three and a half years ago, I went down to Tesla’s facilities in Fremont, California, and I had the opportunity to spend a number of hours with materials engineers there. What I was trying to understand was their technology roadmap for their battery programme and how they saw the upstream part of the business. We also wanted to find out what they believed to be substitutable minerals and ones that are not. Then subsequent to that, we investigated a number of other parties, particularly out of China, that have been focusing on battery production and battery chemistries. So you really need to understand which battery chemistries, particular users and battery manufacturers, are using.
As of today, lithium is an important component to that because that’s the electrolyte of the batteries. That’s not going to change for the foreseeable future. Then you look at the anode and the cathode. It seems to me nickel will be an important component because of its energy density capabilities. However, recently I met with a graphite company and we looked at some cost/benefits analysis of using natural graphite vs. synthetic produced. Then you look and say, what other minerals are in there? Lithium is important, nickel is important. Cobalt should be important and can be important, but because of the geopolitics around cobalt, I think there’s a lot of effort currently undergoing to try to engineer cobalt out of batteries.
One area that we recently made an initial investment that we think that could be an interesting component to this is manganese. There are very few ways to play manganese. As we’re doing more work on it, we think we may actually make a much larger investment in that space.
