Terry Salman of Salman Partners on Resource Intelligence TV
Founder of Salman Partners Sees Positive Outlook for Commodities
Few people know what it takes to run a successful multi-billion dollar investment company. Salman Partners’ founder Terry Salman makes the job seem easy. The mild-mannered Chairman, President and CEO last year steered his company to $7.7 billion in fund-raising activity, mostly for resource explorers and miners. The year prior to that, Salman Partners was named the number one investment firm by the National Post and First Coverage for its stellar performance in 2008. The list of boards Terry sits on is impressive and often philanthropic, ranging from the Advisory Committee for the Investment Industry Association of Canada to The Vancouver Playhouse Theatre Company. In June 2009, he was awarded a Doctor of Technology, “honoris causa” from the BC Institute of Technology.
Resource Intelligence: Are we in for a bumpy ride this year and for the following decade?
Terry Salman: I think given the precarious state of what we saw in the world financial markets in 2009, that there are still going to be pockets of uncertainty and some structural problems in the financial system. What happened in the past could happen again. Having said that, if you look at the outlook for resources, it’s going to continue to be positive. We are in a “super cycle” here and it depends on how long that lasts, but I think the outlook for commodities is pretty positive.
RI: At Resource Intelligence, we call this the “Decade of the Commodity.” Do you agree?
TS: I do.
RI: What do you think the major trends are going to be in commodities this year? Last year we had dramatic rises with “Doctor Copper” up 134%.
TS: If you take a look at uranium, it hasn’t done much lately. It is a sleeper but the outlook is very positive given the fact that the supply and demand for uranium is weighted on the demand side and the price has not been doing much lately, so I think uranium is an area if interest.
You’ll notice that commodities have shifted from one commodity to another very rapidly, whether its coal, uranium or copper. Maybe next year it will be zinc and so on. I think these rapid shifts occur partly because we live in a very technologically savvy world, and events can be articulated more quickly than in the past. Also, given the uncertainty we’ve had in the financial markets in terms of structural deficits and questions about how we’re going to finance these deficits, I think that uncertainty will continue. So price movement from one commodity to the next will continue as well.
RI: Are you suggesting then that there are currency risks going on right now? Inflationary or deflationary?
TS: I think if anything it’s probably on the inflationary side. There are currency risks and I think you are going to continue to see some currencies—particularly the US dollar—decline further. I think this is certainly true for the euro as well. While you have this uncertain currency environment and deficits that nobody knows how they’re going to finance, we still have a housing market that is precarious even in places like China. So there is going to be continued unrest from time to time in the capital markets.
RI: Is there a bellwether commodity that investors should look at to gauge the commodities markets?
TS: I think you have to be diversified and that it is good to have a balanced portfolio within the commodity sector. For example, we like coal. We like uranium. They are not on everybody’s radar screen, but certainly there is a huge appetite for those kinds of securities. The coal sector has done very well recently. Precious metals are in a league of their own and are directly related to the decline in the US dollar and the uncertainty surrounding the financial markets.
RI: Do you anticipate that we’re moving into a period of buyouts of projects by foreign nationals?
TS: Yes. I think the acquisition of commodity-related assets is going to continue.
RI: Is there money in the system to help the juniors finance expansion?
TS: The juniors have had more of a difficult time and I think that is because of all the uncertainty we’ve had lately. So, what do the juniors need? They need near-term production—within a two-year period is what I call near. Anything beyond that is more difficult. Having said that, you still need good management and if you have good management, then the timeline can be a little bit longer. Proven management is very important.
RI: What about companies that only have a 43-101 report but who are still trying to define resources—how are they going to get their funds?
TS: I think they are going to get their funds by focusing on and improving the resources that they have in terms of the number of ounces in the ground. I think they are going to have to focus on really moving their projects along, finding a JV partner as necessary, finding a debt facility to finance their major projects and to be able to tap equity markets in a way that investors don’t perceive it as an endless series of equity issues. Investors are suspicious about doing small financings when the capital needs are significant. Unless it’s a terrifically expanding exploration play and there is always money around for those kind of plays.
RI: You certainly proved that last year. What I thought was so extraordinary was that you were doing deals in January, February and March when the market was certainly not looking very bright and cheerful.
TS: What we’ve done is tried to be very focused on the companies that we want to associate ourselves with, which involves corporate finance research, so that all our employees are aligned on the same page. We find that we can’t be everything to all people, so we’re very focused on the people we want to support and back them to the fullest.
RI: That being the case, what percentage of a person’s portfolio would you suggest being in the resource sector in 2010 and possibly looking forward for the next decade?
TS: If you have a moderate risk profile I would say 20%, and maybe 30%. I would have a good portion in cash and I would take profits when I can.
RI: That’s higher than it was when we first interviewed you. So that in itself is very encouraging. Last year we had these black swan events, events that people never thought could occur. Do you see any black swans occurring in 2010, or for the balance of the decade?
TS: I see the commercial real estate market as still very precarious. There are still some risks in the housing sector globally that haven’t been flushed out. Investors should monitor this bellweather indicator carefully and frequently.
RI: Last year Salman Partners raised $7.7 billion including a $4.9 billion bought deal for Barrick. How did you get that deal done?
TS: We were part of a very large underwriting group. We cover Barrick Gold. People were looking for a high quality issue because portfolios globally were diversifying more and more into precious metals. So that’s how that deal got done. You have to realize that the mining industry is a very small part of the world equity market so to have an opportunity to participate in a blue chip company like Barrick is a once in a lifetime opportunity.
RI: Given the state of the markets, the attitude among many investors seems to be, “What recession?” Do you think there are risks associated with where the global economy is right now?
TS: First of all, lets not confuse the buoyancy in the commodity markets with the global economy and the recession that we’ve gone through. The real economy is still suffering. We have very high unemployment rates, there is not much job creation going on and there are still structural deficits and deficit spending being pushed into the economy to try to get employment up. If you look at the average man on the street in certain communities everywhere, the real economy is not doing that well. So what we’re seeing is a stock market that is way ahead of the real economy, suggesting that there is real recovery going on. And it is, but it is taking longer than people think and we are still going to have relatively high unemployment on an historic basis. Job creation is not what it used to be, certainly not in the manufacturing sector. When we talk about the commodity sector it is a very small sector of employment.
RI: Are you suggesting that we may be moving into a period of stagflation?
TS: I wouldn’t say that. I think we are gradually going to get out of this recession. I think that there is some real economic growth. I think there are some signs that consumer spending is improving. There are signs that savings rates are going to increase a little bit and I think consumer confidence is coming back into the system. When you look at housing starts in Canada and housing prices in British Columbia alone, I think they are up 30%. There is renewed optimism. Don’t forget the recession never hit Canada as hard as some other countries, so I think there is a cautious optimism. As far as the spending of the ‘80s, I don’t think that’s going to happen.
RI: Will there be increasing realignment of the Canadian economy and the Chinese economy?
TS: There is no question that one of the few countries in the world that has double-digit economic growth is China. Trudeau used to say that being close to the United States is like being in bed with an elephant and when an elephant sneezes you sneeze. I think the same is true for China. When there is any talk about China’s economic growth being lower it affects our stock market and our economy.
RI: What is your call on global growth in the Western World’s economy as far as GDP is concerned in 2010?
TS: I’m not an economist, but lets put it this way: If we had something like a 2% to 3% growth, that would be positive and I think that is a realistic target for us to have. If we had that kind of growth, then we’re not in negative territory so we don’t have the negative growth that some economies have had and still continue to have.
RI: The US economy has been a basket case, but it’s rolling now. Do you expect major gains there in their GDP?
TS: The US is one of the world’s largest economies and they put an awful lot of stimulus into their economy, so you are going to get some growth from that. It will come at a cost but it will be positive growth in the sense that the engine of growth that the US has been for so many years does have a chance of dramatically improving. Also, don’t forget that with decline of the US dollar, American goods are all of a sudden more attractive to importers. That is a very positive sign.
RI: Is there a massive re-education going on in the US as to what makes the economy tick?
TS: I think there is. I think we’re seeing a huge push, for example, for alternative energy. More and more of the alternative energy sector will get the financial stimulus that will drive people into it, because the government of the day considers it imperative. People are realizing how important it is to have an alternative source of hydrocarbons.
RI: From my perspective, we’ve seen tens of thousands of manufacturing jobs lost in the automotive sector and it would appear that there could be an economic underclass that may be with us for a very long time, because they can’t be re-educated. Do you think that is the case?
TS: I think that is true. Re-education is one of the most difficult things for the government or businessman to deal with. It is really hard to retrain somebody at a cost. Who is going to pay for it? The way it is now, it is usually left to the individual. But on a more positive note, in the manufacturing sector you will see pockets of industries where Canada and the United States can compete. Where it is quality over quantity. I think those kind of things will see a resurgence. I think the very positive thing about stimulus packages is that they are putting money into targeted sectors. You can argue that they may be misguided or that there are not enough of them, but they are a positive thing nevertheless.