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Globalization is bringing everything just a little closer to home, especially investment opportunities. That was the premise underpinning Forbes & Manhattan's decision to stage its first Annual Resource Summit in early November at the Breakers Hotel in West Palm Beach, Florida. Forbes, a Toronto-based merchant bank, invited an impressive panel of industry experts and guests to its summit. In this Gold Report exclusive, we give you their perspectives on our changing world and the investment opportunities change has wrought.
At the first annual Forbes & Manhattan Resource Summit, Dundee Wealth Inc. Chief Economist Martin Murenbeeld was quick to answer the title question of his session, How long will the bull market continue?
"I don't have a clue," Murenbeeld said wryly.
Instead, Murenbeeld presented his "Nine Bullish Arguments for Gold," which clearly make a strong case for further commodity cycle momentum.
"The shortest (gold) cycle, it turns out, is 10 years. We have just finished the ninth year," Murenbeeld explained. "With the kind of things that are happening in the global economy, could I stand up here and say to you this will be the shortest commodity cycle in the history of these data? In fact, I'm likely to say this will be one of the longest, if not the longest cycle, in the history of these data."
But before summit delegates could buy gold futures with their iPhones, Murenbeeld added a caveat.
"I don't know if there are 10 years still to go. What I can tell you is that in all the cycles we have seen to date, you get significant reversals. In 1974–1975, on a (London) P.M. fix basis, gold almost had a 50% reversal. But it wasn't the end of the cycle," he said.
"One of these days, China is going to hit a speed bump. But that's what it's going to be—just a speed bump. (The commodity cycle) is on for the long haul. I don't know whether it is 20 years or 25 years, but it will go on for a while," Murenbeeld said.
Murenbeeld was part of a big-name summit speaker docket that included session addresses from several high-profile U.S. generals, including former National Security Advisor and Retired General James L. Jones, former Australian Prime Minister Robert Hawke, Brazilian billionaire Eike Batista, CNN's Larry King and a number of noteworthy commodity gurus like longtime UBS Steel Analyst Dieter Hoeppli and Byron Capital Markets' rare earth elements specialist, Dr. John Hykawy.
If you haven't heard of Forbes & Manhattan, you're probably not alone. The merchant bank operates out of Toronto and has equity positions in 24 different resource-based companies with operations throughout the world. Forbes separates those companies into five categories.
We won't list them all, but some of the more noteworthy companies in the Base and Precious Metals Group are Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF), Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF) and Apogee Minerals Ltd. (TSX:V:APE).
Among the companies in the energy group are Kurdistan oil and gas explorers Vast Exploration Inc. (TSX.V:VST) and Longford Energy Inc. (TSX.V:LFD).
Canadian iron ore junior Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF) and Rodinia Lithium Inc. (TSX.V:RM; OTCQX:RDNAF) are listed under Specialty Metals.
The Agriculture Group hosts all of Forbes' potash companies, including Allana Potash Corp. (TSX.V:AAA), Brazil Potash [privately held] and Atlantic Potash [privately held].
The Financial Group, the smallest of the lot, contains Dacha Capital Inc. (TSX.V:DAC; OTCQX:DCHAF) and Aberdeen International Inc. (TSX:AAB).
With that many companies under the Forbes umbrella, Chairman Stan Bharti has his hands full.
"People ask me, 'How do you run 24 companies?' Guess what, I don't. The trick to being successful is to delegate," Bharti explained.
Bharti added, "A lot of companies try to control things. I think control is an illusion. You operate successfully by creating the environment around which the president or CEO can do a good job, and most people want to do a good job. The other thing is not to judge people on what they say. You measure them with results."
As Bharti explained, the Forbes & Manhattan business model is relatively simple.
First, you need a good asset with strong potential for further resources. Once that's in place, you add to the equation people who can get the most from that asset over a timeframe that could span as long as half a decade.
"You've got to take three, four or even five years to work the asset and unlock its value," Bharti said.
"To unlock that value, you've almost got to treat these junior companies like incubators. I only put money into deals where we have a significant position in the company and the company comes and works in our shop because we surround the company with accountants, lawyers and investor relations people so the CEO can access all the depth of a large corporation without the overhead. That's very important because other junior companies can't afford to have their own full-time lawyers or accountants."
Bharti used Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF) to illustrate his point:
"We acquired the assets about three years ago for $20 million. It had a fully permitted plant, all the infrastructure at the site and three to four million ounces in gold resources. Then we hired President and CEO John Begeman, who was with Goldcorp Inc. (NYSE:GG; TSX:G), and with him and with a top-notch management team, we worked the asset," Bharti explained. "Today, the mine is producing almost 100,000 ounces per year, it has a market cap of close to $400 million and we think that in the next two or three years that this stock has the potential to double."
One wrinkle in the Forbes business model is that the "cheap" assets Bharti referred to in his summit address are often in developing countries that present weighty geopolitical risk.
Bharti employs a few strategies to mitigate potential problems and smooth over any rough patches.
"To minimize risk, we do two things. We always have a very strong local presence. Local people, local officers, local connections," Bharti said. "We also make sure that at a political level we have some good connections."
Some of those connections serve on Forbes' Advisory Board.
First, there are the "retired" generals: General Lewis Mackenzie, a career military man with 36 years in the Canadian Forces; General Sir Michael Rose, a former SAS commander in the British Army; General Jay Garner, who commanded the Air Missile Defense Units in the Gulf War; Ron Hite, a 33-year U.S. military veteran whose career culminated with his appointment as senior military advisor to the Army Chief of Staff; and Retired General John Abizaid, former commander of U.S. Central Command from 2004-2007.
Augmenting the generals are Pierre Pettigrew, Canada's former minister of foreign affairs, and Peter Boot, who carries some weight in South American financial circles.
"They have been instrumental in opening doors for us and helping us bridge some of these political gaps that we deal with," Bharti said. "A good example is Kurdistan, where General Jay Garner helped us to get a couple of oil blocks. For a junior company to get a couple of oil blocks—that's a big thing."
Bharti also revealed another Forbes secret: "high-level" meetings between advisory board members and politicos in countries hungry for foreign investment.
"We just did one in the Middle East and it was very successful," Bharti said. "We came back with three or four significant deals because (Forbes advisory board members) are well connected at the top. When you walk into a meeting with people of that stature, it gives you instant credibility."
Challenges in the Middle East
Advisory Board Member General John Abizaid, who spent much of his career directing combat operations in the Middle East, was part of the Forbes delegation with Bharti.
"If you take this notion of the Middle East as being unsafe, you automatically take yourself away from an investment opportunity that is absolutely astounding," Abizaid said. "There are places in Iraq where you can invest. . .moving into areas that are underdeveloped now will pay off hugely in 15 years. You may have to move into 10 or 20 of those areas in order for five or six of them to pay off, but I'm absolutely convinced that's the way to move forward in this globalizing planet."
He outlined four issues that need to be "contained," solved or understood in order to achieve greater regional stability in the Middle East: the rise of both Sunni and Shia Islamic extremism; the ongoing Arab/Israeli conflict; and the world's "over reliance" on Middle Eastern oil.
Abizaid said Sunni and Shia Islamic extremism must be confronted with military power but economic development would ultimately prove more successful. He also called for greater understanding of local culture, especially religion.
"It is remarkable to me that after nine years of war, we haven't figured out how to even name the enemies that we're fighting over there, let alone come to grips with the problems that are endemic within their society," Abizaid said.
Meanwhile, General James L. Jones, just a few weeks removed from his position as President Barack Obama's national security advisor, told the audience that America's unwillingness to adapt to globalization is threatening its influence.
"Perhaps our biggest failure was that we didn't react rapidly enough to the rising challenges to our position as 'the most powerful nation on earth.' And we still have not done so," Jones said. "Even if we were reform-minded, we face many huge challenges with regard to the state of our economy. Our current economic and trade policies are governed by regulations that were enacted for another century when we really were the only game in town."
He called for further economic reform and pointed directly at what he sees as America's most significant economic threat.
"China is running all over Africa doing everything that it wishes. And we are always, it seems, too slow, too little and too late. Speed has its own quality in this new globalized world. It doesn't help you to be late and it doesn't help you to be overly complicated. So clearly we still need some basic (economic) reform," Jones said.
"Either we make the necessary changes we need to make in order to restore our competitive edge or we will most assuredly enter a period of decline as a nation of great influence."
Rare Earths Chatter
Byron Capital Markets was formed with the idea that most of the world's financial analysts had underestimated the adoption rates and future sales of hybrid and electric cars and trucks.
Key to these vehicles are rare earth elements used to build their light, high-efficiency batteries and motors.
Leading Byron's rare earths research team is analyst Dr. John Hykawy, who was part of a panel at the Forbes & Manhattan Summit that included rare earths specialist Dr. Tony Mariano and Ford Motor Co.'s Ted Miller.
"We believe that rare earth-equipped motors are the lightest, most efficient possible motors for powering these hybrid and electric cars in the future and that doesn't seem to be something that's going to change," Hykawy said.
He pointed out that very light, efficient motors are critical to getting the maximum travel distance out of a single charge.
A significant psychological barrier to prospective hybrid and electric car buyer in North America, Hykawy argued, is the idea that electric cars won't allow folks to pack up the car and drive from West Palm Beach to San Francisco, even if few consumers would ever do that.
But as important as the North American market is, Hykawy believes the real growth will come from Asia, and China in particular.
"In China, you're competing against someone who's taking their bicycle or walking to work. For them, a huge selling point is having a small box around them in a light vehicle that can carry them to work on a single charge. That way they're not putting three-quarters of their monthly income into diesel fuel," Hykawy explained.
Depending on who you talk to, there are between 14 and 16 rare earth elements, but only Hykawy believes only a handful of those are necessary for building high-efficiency magnets and motors. He said the elements with the greatest economic potential are neodymium, samarium, dysprosium, terbium and praseodymium.
"We've looked at projects that we believe supply these materials economically and have good supplies," Hykawy said. "If you go look at the research on our website, we have 'sells' on a number of rare earths companies."
Perhaps one of the best illustrations of the overall global economic shift toward the East is global steel production.
Dieter Hoeppli, managing director of UBS' steel group in New York City, said that annual global steel production has grown from 770 million metric tons (Mt.) in 1990 to roughly 1,367 Mt. in 2010. And steel production is expected to grow another 5.6% to 1,524 Mt. by 2012.
But the biggest change from 1990 to 2010 is where the steel comes from. In 1990, Russia made about 20% of the world's steel, but by 2010 the Russians accounted for only 8%. European and North American steel production witnessed similar if not more drastic declines.
Most of that production has shifted to Asia, which now produces about two-thirds of the world's steel. Asia manufactured only 31% of the world's steel in 1990.
Hoeppli said that shift has brought with it consolidation and the disappearance of well-known steel companies like Bethlehem Steel, British Steel and Dofasco. Those names have been replaced by new ones like ArcelorMittal, Nucor and Nippon Steel Corp.
Hoeppli expects future steel production growth to come from India, a country with a population size that rivals China but that only produces about 60 million metric tons of steel annually, versus China's roughly 600 Mt. He also sees steel production growth coming from Brazil.
If there was one summit speaker everyone wanted to see and hear, it was Brazilian billionaire and mining mogul Eike Batista, who flew in from Rio de Janeiro for the occasion.
Batista is ranked eighth on Forbes' list of the world's richest people and is Bharti's personal friend. In fact, the Forbes & Manhattan chairman said he once borrowed some cash from Batista to get started in the mining business.
Batista estimates that the total wealth creation from the mines that he helped develop from 1980 until 2000 was $20 billion.
In 2000, his net worth was around $1 billion.
That same year he launched his namesake company, EBX, and its subsidiaries. There is MMX Mineracao e Metalicos SA (MMXMY), his mining company, MPX Energia SA (BOVESPA:MPXE3), OGX (oil and gas, privately held), LLX Logistica SA (LLXLY) (logistics) and OSX Brasil SA (OSXB3:BV) (shipbuilding and other supplies for the oil and gas sector). He raised more than $10 billion combined from his companies' IPOs and still owns about 65% of the outstanding shares of all the companies.
But why the X?
"It multiplies," Batista quipped.
Indeed. Batista's net worth is now thought to be $27 billion and he has vowed to one day become the world's richest man. He gives much of credit to the opportunities in Brazil.
"You can have real returns of 15% a year with zero leverage," Eike said. "The Ontario Teachers' Pension fund is our partner. They invested in the early stages of our oil company and they had to send their executives down to Brazil to conduct 'sanity tests' because they could not believe the wealth creation."
He believes oil and gas and iron ore are Brazil's bread and butter, but especially iron.
"Everyone is becoming addicted to Brazil's iron ore. Steel making is like a good whiskey, you need a good blend," Batista said.
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1.) Brian Sylvester of The Gold Report: I personally and/or my family own the following companies mentioned in this interview: None.
2.) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Aberdeen, Alderon, Allana, Apogee, Avion, Crocodile, Dacha, Forbes & Manhattan, Goldcorp, Rodinia, Sulliden and Vast.