All signs point to explosive rise in the gold price: Part 2

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[Editor’s note: For part I of this article, please click here.]

With more than 20 years of experience in the investment industry, Sheldon Inwentash, chairman and CEO of both Pinetree Capital and Mega Uranium sheds some light on the future of gold and navigating the “murky and tricky” junior space.

TGR: On the equity side, in terms of having a mixture of seniors and emerging juniors, obviously the big concern everyone has with the emerging juniors is we’re not geologists. We can only try to find people who know about geology. How do you really find out if there’s proven gold in the ground?

SI: It’s a bit of an art, not a science. You have to talk to people. You have to find out who the winners are. You’ve got to look at management teams. You’ve got to look at analysts and what their views are. You’ve got to do your own due diligence and I think a lot of people have been hurt because the investment community, the brokerage firms, are in it for commissions and if it’s the flavor of the day, they’ll say how this is great or they’ll maybe pull back and not put as much of their own view on the line.

And then you have a lot of new players come in and it just creates deals and investments, but you really have to do your own homework. Even many of the analysts out there, their work’s tainted because they’re really just trying to help their firms. From our standpoint at Pinetree, we really do our own homework and we’ve had a number of successes where we’ve invested and help found companies like Aurelian Resources (TSX: T.ARU, Stock Forum), Gold Eagle and Guyana Goldfields (TSX: T.GUY, Stock Forum). We have a number of junior gold investments that have been sold to majors. At the end of the day that’s the real test because the majors really understand how these deposits evolve.

TGR: So you have a team of geologists and quasi analysts at Pinetree?

SI: We have a couple of analysts internally, but we really go out and speak to other people that we know. We sometimes contract them to look at things. I invest with other people, too, who are very, very knowledgeable, who are geologists or have run companies, so we have an extensive network that help us with our appraisal of what separates the real stuff from the junk.

TGR: If we look at Pinetree’s investment philosophy and your enthusiasm related to gold, and I look at the last several investments that Pinetree made, I see germanium, moly, nickel. I see really only one that I can identify specifically as gold.

SI: Yes, there are others. We’ve been exceptionally successful in uranium. I’m quite a strong uranium enthusiast. With these corrections out there, we’ve been actually buying gold and uranium, but what you see in press releases is just where we get above a critical percentage ownership. So it’s not the disclosure of all the things we buy. It’s just what meets a certain threshold for regulatory reasons. For example, last week we announced that we went over 10% of a company called Queenston Mines (TSX: T.QMI, Stock Forum) and the value of that investment is substantial and it’s actually one of our favorites right now. So you have to look at it in context. Some of the others have an immaterial value, but we own the larger percentage of the company and have to report it.

TGR: Could you give us some senior mining stocks that you like and junior emerging companies that you would recommend people invest in or, as you say, do their own due diligence on and why you like them?

SI: I’m a fan of two seniors, Goldcorp and Kinross Gold Corporation (TSX: T.K, Stock Forum), because of management and because of their pipeline of projects; the fact that they’re willing to acquire new deposits and they’re aggressive. I believe you have to be aggressive into a rising gold price/gold market and they’re willing to make moves, whereas many other companies just sit on their hands and don’t do anything.

In the juniors, we like Queenston (QMI), which recently came up with some spectacular results. We think it’s absolutely one of the top ones to own. The other one we really like is Colossus Minerals (CSI). It’s in Brazil. It’s the old Serra Pelada Mine. Grade is extremely important in investing today and both of these names have terrific grades.

There are a lot of companies that announce massive holes of two grams over big widths. They say they have all these ounces of gold, but the cost of mining is expensive. It’s a big dirt moving operation or underground operation that makes a lot of these things not as attractive from an investment standpoint, so we like higher grade. We think that’s very crucial. Aurelian and Gold Eagle were both bought by majors and we think it is the grade that resulted in those deals.

TGR: Any other companies come to mind?

SI: There are lots of them, but these are nicely advanced. We think Guyana Goldfields is very cheap now. It’s got almost 5 million ounces of gold, so that is also an encouraging one and we’ve added to that recently.

TGR: What about Evolving Gold (TSX: V.EVG, Stock Forum)? What’s the story there?

SI: Yes, we own Evolving Gold. They just came out with some more results on their Rattlesnake deposit, some higher grade, some lower grade. They’ve got a lot of projects. I have a lot of respect for management there. They’re all geologists; some worked at big companies and have some interesting theories. They have raised money, and at this price, we think there may be some value. These “junior” juniors are not getting as much attention yet in the gold space and we’re going to have to wait for the trickle down theory to occur, but I believe that if you bet on the right people and if you’re patient they’ll come through for you.

TGR: You briefly mentioned Colossus. I’m looking at its chart. It seems to have found its bottom at 50 cents and has moved up. The same thing here? Things look good for ’09 as their project in Brazil moves forward?

SI: It’s one of these projects that in some ways is almost too good to be true, but it needs more drilling. It’s got a partnership with the local people, and that’s very strategically important. Vic Wall and Augusto Kishida are tremendous geologists. I know them both. So I know that geologically you’re dealing with great people and they are also are shareholders in the company. They’re not just advisors or consultants.

The other thing great about this project is that there is a historical database that was done by Vale (formerly CVRD) where they drilled this up and this is quite a unique project where you have very high grade gold, platinum, palladium all together in a geological setting unlike anything else in the world. And the deposit metallurgy seems to be really good.

TGR: How would you describe Pinetree for the typical investor? Why should an investor look at Pinetree?

SI: Why investors have looked at it and bought it is because they find it very difficult, as you said before, to pick which junior to buy just looking at the geology. We own a lot of companies, so this is a way of participating in sectors, by having other people (us) do the due diligence.

We have a great track record. We’re going to be volatile with the space because that’s our business. We’re in the junior market, so we’ll get hurt when the junior market gets hurt. But we have a pipeline and a record of finding new deals that become winners. For the average investor, it’s a good way to participate in a space without having to spend the time and take the risk. Also, they can buy the shares. If they don’t like it, they can sell the shares. We’re very transparent. We list many of our holdings on our website.

TGR: If somebody buys into the precious metals market, it’s a leverage bet.

SI: Exactly. If you look at Queenston, our position is trading at 20% to 30% of the whole value of Pinetree and we have investments in a lot more companies than just Queenston.

My feeling is right now this is one of the best buying opportunities that we will see, for those that care about this particular space, junior resource, gold first, uranium second. There are so many companies trading at a discount to cash that have qualified assets and are trading at 10 cents on the dollar and that’s what I do daily. We are buying millions of shares of these little ones and people are just—pardon my expression—just puking them up.

TGR: Again, going to a prediction, where do you see gold going in 2009?

SI: Higher.

TGR: Higher. Substantially higher?

SI: Substantially higher. I’m not a numbers guy. I think it will get a life of its own. Everybody gets fixated on these numbers and they don’t realize today, with inflation and costs, these numbers aren’t the same as they used to be. These companies aren’t making a lot of money at $800 gold. 

Sheldon Inwentash is Chairman and CEO of both Pinetree Capital (TSX: T.PNP), a Canadian investment company with a portfolio of investments primarily in the resource and energy sectors, and Mega Uranium (TSX: T.MGA), one of the fastest growing junior mining companies. Mr. Inwentash has more than 20 years of experience in the investment industry. A Chartered Accountant, he was an Ontario finalist for the 2007 Ernst & Young Entrepreneur of the Year Award. He founded Pinetree in 1992. T he fair value of Pinetree’s investments surpassed $100 million for the first time in 2005, and in 2006, Pinetree ranked 5th out of 300 small-cap companies by Canadian Business Magazine for total 1-year return.

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