Sentry Select Primary Metals PME.TO
December 29, 2008 - 9:19am EST by
john771
2008 2009
Price: 2.28 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 37 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Sentry Select Primary Metals (TSE:PME, OTC:SPMLF) is a reasonably well-managed closed-end sector fund that has recently traded at discounts to NAV between 45-50%. The fund has a large cash position ($1.47 per share at 9/30) and a portfolio of mining stocks emphasizing small and mid-cap gold companies. I believe PME at current prices provides good prospects for appreciation of NAV and reduction of the discount. Note that all values are expressed in Canadian dollars.


BACKGROUND OF THE FUND AND PORTFOLIO


The fund was launched on June 14th 2007 near the all-time peak in the TSV Venture Index. The company explains its investment policy:


The Corporation is invested in an actively managed portfolio

consisting primarily of securities of mining and exploration

issuers. Although the Fund’s initial intended focus for 90% of

the portfolio was to invest in issuers that are engaged in the

production of and/or exploration for uranium, nickel and

molybdenum, the Manager has the discretion to alter the

composition of the actively managed portfolio at any time.

During 2007, as a result of deteriorating credit markets and

economic outlook, the Manager reallocated the Fund’s

portfolio’s weightings to favour precious metals equities

while maintaining defensive levels of cash.”


The funds most recent portfolio summary provides the largest positions as of 9/30. With some small assumptions about the balance of the portfolio, assuming no change in the largest positions, and adjusting for share price changes from 9/30 to 12/24, I estimate the current allocation is:


46%

Precious Metals

11%

Base and Specialty Metals

8%

Uranium

35%

Cash



The NAV has become a bit more sensitive to market movements so I expect that the current cash level is a little lower than in this calculation.


Adjusting the 9/30 positions for subsequent price movements, I estimate the current top 10 holdings are:


14%

Semafo

10%

Goldcorp

6%

Kinross

5%

Yamana

4%

First Uranium

4%

Osisko

3%

Quadra

2%

Globestar

2%

Amerigo

2%

Uranium One


Additional detail about the portfolio at 9/30 is HERE

Complete detail of the portfolio at 6/30 is HERE


PAST PERFORMANCE



Fund or Index

2007 Return

Jun 14 – Dec 31

2008 Return

Jan 1 – Dec 24


Comment

PME – Sentry Select Primary Metals

-10.8%

-49.7%

Fund at a 46% discount to NAV

MMP.UN – Sentry Select Precious Metals

-26.4%

-58.1%

Fund at a 1% premium to NAV

TSX Venture Composite

-10.2%

-75.5%

Small cap Canadian index dominated by resources

TSX Metals & Mining

-9.3%

-72.0%

Mid-Large Base metal miners

TSX Gold

13.6%

-9.4%

Mid-Large Gold Miners

RBC coverage Senior Gold


-19.0%

5 companies

RBC coverage Intermediate Gold


-18.0%

6 companies

RBC coverage Junior Gold


-30.0%

6 companies

RBC coverage Emerging Gold


-69.0%

9 companies


A few points about performance:


  • PME's shift away from its planned focus on base and specialty metals was correct in 2008 (see the extremely poor return of the TSX Metals index)

  • PME's return was depressed by the terrible performance of small cap mining stocks (see the TSX Venture Index and RBC's Emerging Gold coverage)

  • PME has performed at least as well as MMP yet there is an enormous relative valuation gap between their share prices.



DISCOUNT


The NAV is updated every Monday and Thursday on the Sentry Select web site. It was last reported at $4.19 on 12/22. I estimate it was $4.25 on 12/24 putting the fund at a 46.3% discount.


PME shares have traded at a discount to NAV of 13-32% from July 2007 until the middle of September 2008. As the market collapsed PME shares fell much more sharply than the fund's portfolio and the discount has stayed in a range of 45-50% for the past 6 weeks.


PME has been adding value through steady repurchase of its own shares. By my calculation the company bought back 653,500 shares in Jul-Sep and 268,400 shares in Oct-Nov.


PME's sector is out of favor, but PME still trades at a significantly larger NAV discount than other resource sector closed-end funds. (data from Globefund.com)



Symbol


Fund Name

Premium/(Discount)

RTU.UN

Canadian Resources Income Trust

21.6%

MMP.UN

Precious Metals & Mining Trust

0.5%

OGF.UN

Brompton Oil & Gas

-4.4%

EPF.UN

Energy Plus Income Trust

-5.3%

AEU.UN

Middlefield Active Energy Inc Trust

-7.5%

TRF.UN

First Asset Energy & Resource

-8.9%

DTN.UN

DiversiTrust Energy Income Fund

-9.4%

SEF.UN

Strategic Energy

-11.2%

FGX

Faircourt Gold Income

-12.0%

COX.UN

Coxe Commodity Strategy

-12.1%

SPU.UN

Citadel Sustainable Prod Energy Trust

-13.5%

OSM.UN

Oil Sands & Energy Mega Pro

-14.3%

SSJ.UN

Sentry Select Commodities Income Trust

-14.5%

UF.UN

Uranium Focused Energy

-18.7%

LRF.UN

Long Reserve Life Resource Fund

-24.9%

GUR

Global Uranium Fund

-26.1%

AGB.UN

Global Agribusiness Trust

-28.5%

HAY.UN

Stone Agribusiness

-30.4%

OCF

Oilsands Canada

-33.7%

CMP.UN

CMP Gold Trust

-33.8%

FRE

Front Street Resource Performance

-35.4%

EOS.UN

Enervest Energy & Oil Sands Trust

-47.9%


Average

-16.8%




PME

Sentry Select Primary Metals

-46.30%



In particular it seems irrational for PME to trade at a large discount to MMP.UN. At 9/30 the ten largest holdings of the two funds included eight of the same names. PME has the same manager and a better 2008 return. The only reasons that I believe the market values MMP more highly are 1) MMP started earlier and provided one year of strong returns, and 2) MMP has a superior name.


GOLD


PME's largest risk exposure is in the gold sector and I believe the outlook is very favorable. GDX was recently posted and summarizes the bullish theses for the metal. In my mind the key points are:


  • Gold is nobody's liability. Its value is not dependent on government policy.

  • Mine supply has been steadily decreasing.

  • The opportunity cost of owning gold disappears as cash interest rates near zero.


FUND FEES


Management

1.60%

Servicing

0.40%

Performance

20% of NAV in excess of a “Threshold Amount” set at $12 at 12/31/08 and increasing 10% each year. No performance fee has been paid and perhaps none will ever be paid.


RISKS


The clearest risks are continuation of the trends in 2008. The portfolio performed poorly and the discount got wider and wider.
PME's largest stock position is Semafo which has delivered excellent results in 2008, however one of it's three mines is in Guinea and may be affected by the coup over the weekend.  At this time it's not clear whether there will be any adverse impact on Semafo and PME's investment in Semafo shares.


CONCLUSION


The discount and conservative cash position provide PME buyers with a large margin of safety. If the discount simply shrank to 16.8% in line with the the average of other resource funds then PME shares would appreciate 55%. Potential additional gains can come from appreciation of the fund's portfolio.





Catalyst

1) Decline in discount to NAV

2) Appreciation of gold-oriented portfolio
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