The Case for Resources: Interview with Investing Icon Ned Goodman

Ned Goodman is considered one of the leading architects of Canada’s investment management industry and an outstanding member of the country’s philanthropic community.

Born in Montreal, Mr. Goodman combined an early interest in geology (McGill, B.Sc.) with business (U of T, MBA) in a unique approach to investment management and wealth creation that over the last 40 years has led to the establishment of the Dundee group of companies. Among the several interests that comprise the group, he is Chief Executive Officer of Dundee Corporation and today, Chairman of the Board of its largest subsidiary, Dundee Wealth, home of Dynamic Funds and the Dundee Bank of Canada.

Global Resource Reference: Last year you resigned as CEO of Dundee Wealth and started Ravensden Resource and Dundee Resource Merchant Bank. Why?

Ned Goodman: I’ve had a career of being in merchant banking for mining and oil and gas companies. Some of them I’ve owned more than I should have and some of them I’ve owned less than I should have. I go back in the industry almost to the day I graduated from the University of Toronto with an MBA in 1962. I’m a geologist. Geology is my first love. I’ve been providing money to the resource industry for decades.

As a sideline I’m an investment manager of more than resources. I run four portfolios and I am a securities analyst. I ran Dundee well up until June of 2007 and then I quit because I realized the resource industry is where life will be easier for me, because I know it so well. I know the people.

Now I’m seeing properties that I looked at twenty years ago.

GRR: Let’s talk about this crack team you’ve put together for Dundee Resource Merchant Bank. You’ve hired engineers and geologists, not just finance people.

NG: That’s right. The formula is this: Let’s take advantage of 43-101s. Every one of my guys can write a 43-101 report—they’re engineers and they’re from consulting firms.

As you know, in the mining and oil and gas business, before a company can even tell you what they think they have in the ground, they have to publish a 43-101 technical report. Sometimes they can’t afford it; sometimes they can’t find the guy to write it soon enough.

When we see a press release that shows some good drill results, we ask, “What’s that worth?” So I get my guys, we go to the property, kick the tires, look at the drill results and we come home and write what we think the 43-101 is going to say. The company can’t tell anybody about the data until it’s public, but if you can figure it out without the company telling you because you’re smart, then you’ve got information that the public doesn’t have. It’s all there, you just have to do the work. And that gives us a great advantage.

GRR: What other tools do you have at your disposal?

NG: There’s a new device out there called a handheld XRF reader that can scan a drill core and give you an elemental reading right there on site. You know how difficult it is to get an assay. Sometimes you have to wait a month or more. Now we can go to an exploration project with one of those and pretty well tell what the grade’s going to be.

GRR: A lot of investors are curious to know what happened to Ravensden’s IPO.

NG: We promised people we’d give them a tax write-off with Ravensden, and we had a lot of money sitting on the table expecting to get a tax write-off, but we weren’t going to be able to get our prospectus out in time to do that, so we pulled it. Eventually we’re going to come back with a version of it and make it work.

GRR: What are the minimum criteria you’re looking for in a resource company?

NG: The minimum criterion is that management is capable and honest. There are so many companies that will sell you a flow-through share at a 10% premium, and never do a day of work, never have a property that’s worth working on. These guys have a management company and have ten of these projects. What people don’t realize is that up to 10% of your flow-through money can go to overhead, so they take 10% here, 10% there, on all these dinky little companies. They do a little work on some properties, but who cares, all the money flows back up to the top level, and the management gets big stock options on the stocks they’re playing in, and if they hit, well, they’re totally screwed. They don’t know what to do anymore! We don’t give these guys any money.

GRR: You can spot that?

NG: We know them! We know who they are.

The next thing we want is the ability to buy at a valuation level that is going to make us a lot of money. We don’t expect everything to be a “ten bagger” but I’d like think that we could make, on a large portfolio, at least a 25% to 30% return on our investment on a diversified basis.

Then we want projects that need us—that need our capital and our expertise. For that, we have to have the people in place that can spend the capital properly and know the project such that based on our assessment of commodity prices we will develop economic projects at the right time.

It’s really quite simple. We use the discounted present value of potential future cash flow based on estimates of the prices of the metals and capital cost assumptions that are based on inflationary times. It’s the kind of work that any major resource company would do before they decide to make capital expenditures.

GRR: Are you finding that your bar for minimum requirements has gone up with the decline in the economy and commodities prices?

NG: It’s wide open! There are so many good management teams and so many good projects, it’s like we’re kids in a candy shop. Warren Buffett once said during the 1974 market break that he felt like “an oversexed man in a harem”. That’s what it’s like today.

GRR: How about the mining sector as a whole? There are a lot of factors at play here, BRIC nations, banking failures, growing populations, changes in technology. What is your outlook for resources right now?

NG: I’m very positive. I think that what is going on in the world right now with this concern about Mr. Obama’s crisis becoming a catastrophe is just a lot of words. Sure, there is a reason why that’s a possibility but with the amount of dollars they’re throwing at it, it will get it fixed. The recession that we’re in is a normal recession and it will eventually end but they have to fix the banks first and they have to do something about housing foreclosures second. They have to build confidence back into the system.

In our view, that’s the United States and the US is no longer the central economic entity that we should be looking at. The US will remain important, but the center of our world is Asia and India—and especially China. China is going to drive the world. They are continuing their program of urbanizing 15 to 20 million people every year and they have a plan to move 300 million people into cities over the next 15 to 20 years. They are building infrastructure and the building of infrastructure requires commodities.

It’s not for nothing that the Chinese government is encouraging their state owned companies and their privately-owned listed public companies to go out and acquire resource assets on a worldwide basis. The Chinese government is assisting in the financing to make it happen because they know they’re going to need the product. So I’m quite bullish that current prices can’t last.

So we’re bullish. We’re not short term players, we’re long term players. We get involved in projects at an early stage of the project’s life, we nurse them, we raise money for them and provide capital market expertise.

GRR: What other signs are you looking for that we’ve reached a bottom in this market?

NG: To me, the best sign is that very, very good projects are begging for money, and that’s what we want. I will outwait the cycle. I think we’re in a long term secular bull cycle that’s in a short term bear market on the commodity side.

The crisis that has overtaken the world, this so-called “liquidity crisis” is a credit crisis and a confidence crisis. It has caused people to spend less in the United States, but the Chinese stock market is up. Everybody talks about how poorly the Chinese GDP is doing, that they’re not going to grow at 10% or 12%, that they’re only growing at 8%. Meanwhile, the rest of the world is growing at -3%. So there are lots of signs here and there that we’ve bottomed.

GRR: Some would argue that you have offered solutions to the capital crunch in the form of Ravensden and Dundee Resources Merchant Bank. What kinds of financing solutions are available?

NG: As a corporation, we’re very big on flow-through financing. We provide a lot of flow-through money for Canadian corporations. We’ve put together a team of professionals that can be of help to almost anybody in the business in the sense that our guys are all former engineering and geologic consultants who know how to do 43-101 reports. They do similar reports for Dundee Resources, which gives us an opportunity to see what a 43-101 looks like before the market sees it.

Also, because of our relationship with Dundee Wealth, we can provide these companies with exploration money, development money and equity issues. We’re a full service merchant banking operation.

GRR: How much capital does Dundee Resources have at its disposal?

NG: We want to raise $1 billion. I can’t tell you that we’ve raised any money yet, apart from the $200 million we’ve committed ourselves. I’m confident that we’ll be able to raise the rest of those funds in a very short period of time.

GRR: How can people find out more about this?

NG: They can call me.

GRR: What is it that people should learn from this economic crisis?

NG: There is very little that we can learn from this one because it was a completely unexpected event. The unexpected event was that the banking community got themselves in such a deep hole that they had to be bailed out.

They invented a security called credit default swaps (CDS). Hardly anybody even knows what they are: They are like a form of insurance where you get somebody to make a bookie bet that you’re not going to default. Then someone buys that piece of paper and starts trading it.

The problem is CDS were never regulated. There was no equivalent insurance regulator or SEC to ensure that sellers had the capital to back the credit default swaps.

Wall Street, lead by Goldman Sachs, Morgan Stanley and Bear Stearns had a field day in creating this paper and selling it to banks around the world. Because these banks got a credit default swap from a Triple-A dealer they assumed that they had Triple-A paper. The Triple-A paper was never Triple-A paper—it was just guaranteed by someone who was Triple-A.

When Lehman went under you saw how good that guarantee was. Then, when AIG had to cough up a bunch of money, the government had to take them over so they could guarantee the credit default swaps, otherwise banks around the world would have gone broke because they would have had to raise money to cover worthless pieces of paper.

So there is nothing much to learn: That’s not going to happen again. It will take years to be resolved and whatever happens next time will be totally different. The memory of 2008 will last in the minds of people for a long time. Equity markets are going to be much more cautious, the risk profile of most people is going to be much lower.

A lot of people have been hurt in the market and in most instances will not make a comeback. We’re back to basics in investment management. No longer can you just watch a stock go up and say, “Well it’s going up, I think I’ll buy some.” You’ve got to do your homework and that’s the business I’ve been in for 45 years.

GRR: How is the government faring on getting banks to free up some capital?

NG: In Canada, I think reasonably well. The US is still having a lot of trouble. But they’ll get there. They’ve been through these kinds of things before; this one is going to take longer that’s all.

For now, just look at the current statistics that are coming out showing that Chinese trade was down 18% in last six weeks of 2008. Nobody says why it’s down; they’re all assuming it’s down because things were “bad”. The only thing that was bad is that you couldn’t get a credit note to fill up a boat and nobody would fill up a boat full of copper and send it to China unless they had a credit note that would pay for it and no banks were issuing those things. As a result, Canada now has a trade deficit for the first time in 30 or 40 years. That’s because there is no credit. We couldn’t deliver.

GRR: I’m curious about your background. You were a geologist first. Why geology? Certainly that wasn’t for the money, was it?

NG: Basically because I was scientifically oriented when I was in high school and it seemed like something nobody else was doing. Every time I said I was going to be a geologist people would say, “What’s a geologist?” It’s still my love. It’s really detective work: How the world is made, how erosion affects things, how the movement of the sun affects things. It’s very fascinating. How continents are split apart, how mountains are formed. It was very compelling for me in my youth and still is.

GRR: At what point did you realize that geology could actually be incredibly lucrative?

NG: The first thing I realized is that it wasn’t lucrative! That’s why I went and got an MBA and became an investment counsellor with a resource background. That’s when it became lucrative. Just being a geologist, unless you apply some financials to it, is not very lucrative at all. Geology pays well, but it’s not lucrative unless you own a piece of it.

GRR: You’re an innovator and you’re successful, what does it take to be a successful innovator today?

NG: Some people think I’m successful. I’m still striving to be successful.

To be innovative, you have to not worry about what people think of your ideas. If you’re really doing your homework and comfortable with what you are doing and you come up with an idea, you may have to bowl down bunch of people who think you’re crazy. It’s the crazy guys that have always build things in this world. So you need to be prepared to live a little outside of the box.

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