Q:  What are your core beliefs in managing this fund?

A: The reason for creating the fund is our belief in the ‘stronger for longer’ commodities investment theme. We are big believers in the secular bull market occurring in developing economies and the associated secular bull market for commodities and natural resources.

The commodity story is one of supply and demand, and the demand is not going away for many, many years with the emergence of China, India, Asia and other developing economies like Brazil and Russia. On the other hand, the supply side has got many well documented problems that also contribute to creating tight markets in many commodities. In a nutshell, we are positive on resources because we believe that the world is in the infancy of a major structural change in their pricing.

Oceanic Asset Management and its first product, the Australian Natural Resources Fund, were created with the idea of providing UK investors with a regulated product that gives exposure to these growth markets. We are located in Perth, which is the resources heart of Australia. In only a couple of years, we have grown the Fund from $1m at launch to around $120 million.

Q:  How has that philosophy translates into an investment strategy and process?

A: We focus on growth-orientated small to mid-cap resource companies and aim to capture the value of junior companies as they emerge from exploration into production. The typical resource story has two separate growth phases that we look to capture. It can be best described as an “N” curve, where the first uplift is driven by exploration and the excitement of discovery. Then, as the companies come out of that stage and try to develop the project, the lethargy of the market tends to hurt them and they typically pull back to lower levels. As they move into production and become cash flow/profit stories, there is another growth leg and a re-rating to the share price.

Q:  Do you focus on Australian companies only or you invest internationally?

A: Although we call ourselves the Australian Natural Resources Fund, we also take positions in other markets, mainly on the TSX in Toronto. We like Toronto because it has a well-developed mining and oil and gas capital market. We are also developing relationships with some brokers in London and are looking at a number of companies there as well.

Q:  What’s your definition of resource- related companies?

A: It is a conventional definition, which includes oil, gas, gold, copper, zinc, and all the other base metals. But we also look at resources like mineral sands and rare earths Rare earths are used in catalytic converters and environmentally friendly light bulbs amongst other uses so is a good play on the global warming reduction investment theme. We also look at platinum, coal, gas and geothermal thermal energy, and other types of renewable sources, such as bio fuels. We also play some port and logistics companies that are benefiting from the commodities boom at the moment but these are typically a small part of our portfolio. Of course, we also invest in uranium, which currently is a compelling investment theme for us.

Q:  What do you focus on as an investor? Does the resource and mining sector require a specific strategy because of its high capital requirements, long investment phase, and cyclicality?

A: For us, an important element is evaluating the quality and the value of the assets that the company owns whether they be in exploration and/or production. The world continues to develop and we look up to our neighbors in India, China and Southeast Asia, which are consuming vast quantities of commodities as they continue to build cities and “Westernize”.

We also pay special attention to the management because in the small to mid-cap area, the management expertise is very important. We need to make sure that the management driving these companies are well experienced and skilled to deal with developing these projects.

Q:  How large is your investment universe? Would a company like Lihir Gold fit in it, for example?

A: We would look at it but it is probably a little bit too big for us. We had invested in this company a couple of years ago and it fulfilled our expectations. We exited that position and moved into other emerging companies. But the size of the companies in our portfolio varies from $20 million to $3.5 billion Australian dollars.

We look at a very large universe. In Australia alone it consists of about 1,800 companies. There are a lot of small to mid-cap mining and oil and gas companies in Australia.

Q:  The exploring companies that are just starting out do not have historic earnings to evaluate. How do you resolve that issue?

A: Yes, the explorers don’t have earnings so the value is estimated based on what’s in the ground. For mining companies this is ascertained through a complex combination of drilling, trenching, geophysical, geochemical and other modern day exploration techiques. For oil and gas companies, obviously drilling results are important but seismic reprocessing techniques also play an important role in generating targets within oil and gas fields. When it comes to the producers, we mainly use cash flow models to ascertain the value.

Q:  How do you generate investment ideas? Would you describe your research process?

A: Perth, where the fund is located, is very mining and oil and gas oriented. We are ex-stockbrokers, so we know all the stories very well from our days as stockbrokers. We have a number of strategic relationships with many local broker groups and research houses. So we have a supply of quality research, but we also source our own ideas. After all, we live and breathe what we’re doing here.