Winnipeg Free Press - PRINT EDITION

Natural-resources riches paying off -- thanks to socialism

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Saskatchewan isn't just a place that you wish you didn't have to drive through to get to Alberta and B.C. on vacation anymore.

Nor is it merely the habitat of rabid Riders fans.

These days, our flatland colleague to our left also happens to be the belle of the ball when it comes to natural-resource development potential, says Tom MacNeill, president of 49 North Resources.

It's almost as though overnight, Saskatchewan has gone from a place from which even its own people fled to one of Canada's "have" provinces that contributes equalization transfer payments so we "have-not" provinces can make ends meet.

And today's resource capitalist, thirsty for future profits, largely has socialism to thank for what MacNeill and other resource-industry insiders foresee as a long-term economic boom in the making.

"We've got all the resources the world wants, and the irony is half a century of socialism has kept them all nicely in the ground, so now we can extract them at much higher prices and with much more profitability," says MacNeill, whose firm trades on the S&P/TSX Venture Exchange.

It used to be that investors shunned Saskatchewan because its governments had made it too expensive to carry out risky resource exploration and development.

That is, until about a decade ago, when the provincial government substantially cut its resource royalties from a high of 65 per cent in 1982 to 15 per cent or less.

"My point of view is this: We had a half a century of socialism that actually scared capital away," MacNeill says.

Those dark ages for capitalists started in 1944 with the election of Tommy Douglas and the Co-operative Commonwealth Federation (CCF), the forerunner of today's New Democratic Party, he says.

This continued until successive NDP premiers Roy Romanow and then Lorne Calvert reversed the trend to make the province a more attractive place to raise capital.

Today, under the Saskatchewan Party, a conservative movement that evolved from the crumpled heap of Grant Devine's Progressive Conservatives, the province has become even more business-friendly.

Of course, the world's hunger pangs for what Saskatchewan has in the ground -- potash, uranium, oil, gas, food, etc. -- hasn't hurt either. Nor has the fact the U.S. Federal Reserve recently announced open-ended money-printing to the tune of $40 billion a month until inflation sets in and the economy roars back to life.

Increased demand and inflation often mean good things for resource producers. More people and more money chasing finite hard assets that the world can't live without have a way of increasing the value of natural resources, MacNeill says.

But the fact Saskatchewan has a long history of flirting with socialism has created a unique opportunity not found anywhere else in North America. It's as if Saskatchewan's economy has been cryogenically frozen for 50 years.

Today, it's thawed out and looking like Alberta did 50 years ago -- only more diverse in resources, he says.

Alberta's geology is mostly sedimentary rock and dirt, where oil and gas are often found. Saskatchewan has a lot of that, too, so it's also energy-rich. At the moment, the province produces about 500,000 barrels a day of crude oil, and rising. But it has something else.

A little less than half of Saskatchewan's geology comprises the Precambrian Shield, rich in minerals such as uranium, copper, zinc, gold and rare-earth elements used to produce smart phones and green products such as rechargeable batteries.

Despite the bounty, it's a fairly long road to full development because Saskatchewan didn't build capital markets in decades past as Alberta, B.C. and other provinces did.

So although it has two of the biggest and best resource companies in the world -- Cameco and Potash Corp. -- there isn't much below that.

MacNeill says underneath these whales are a lot of guppies -- junior resource firms -- and few middle-stage firms, which are a crucial part of resource development.

"The juniors find the resources, the intermediate companies tend to expand them, and the big firms mine them," he says. "And it's been going on that way around the world for a couple of hundred years with regard to capital."

Aside from 49 North Resources, which wears the hats of explorer, merchant banker, developer and producer, the only other financier brokering early-stage deals in the province is MGI Securities.

The firm, with offices in Winnipeg and across Canada, has raised more than $500 million for junior resource and other companies in the province in the last few years.

"We're the only investment bankers working in Saskatchewan," says Jeret Bode, with MGI in Saskatoon.

"We work with junior firms that need money and we go out and raise money for them from institutional and retail investors."

Business has been brisk and lucrative over the last half-decade as large multinational mining conglomerates have come knocking to snap up promising resource companies.

BHP Billiton, for instance, might not have got its way with Potash Corp., but it purchased two smaller potash companies in the province in the last few years.

It bought Anglo Potash for about $280 million and Athabasca Potash for about $340 million, Bode says.

Another example is Hathor Exploration, which was taken over by London-based giant Rio Tinto in 2011 for $578 million.

For investment bankers such as MGI, the name of the game is getting in near the ground floor, helping junior firms fund their business to grow and then waiting for the large resource firms to tender takeover bids.

"We raise money at 25 cents, 50 cents or a buck a share, and we hope to get taken out at five to 10 times in two to three years," Bode says.

It's a unique opportunity for investors seeking multiples on their money.

Of course, the catch is that it's risky.

"Some of these companies can have their share price cut in half," Bode says.

MacNeill says investors can even lose all their money in some cases.

"It is the riskiest part of the investment spectrum other than just speculating on commodity prices," he says. "Our world is based on this idea: If you're going to spend an exploration dollar, you probably better write it off and consider that you have a 100 per cent risk of loss."

Diversification is essential to success for that reason, says Kevin Thompson, also an investment-banking associate with MGI in Saskatoon. Many investments -- even those that analysts pore over and deem to be the real deals -- don't pan out.

"It's a two-six-two rule," Thompson says. Two investments will be absolute flops where you're lucky to get any of your money back. Six others may do OK, but they won't really make you much money, if any at all.

"And then you'll have two of them that will be big home runs, and those will offset the costs of the others, plus considerable gains."

And it's those occasional successes that send risk-taking investors' hearts aflutter.

"There will be lots of companies in Saskatchewan where people will be going, years from now, 'Wow, I bought that for a buck and now it's worth $30,' " MacNeill says. "We're just getting started."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition September 29, 2012 B12

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