Tops in Rocks

Globe Investor Magazine, September 18, 2008

Terry Bell

Photograph by May Truong

Terry Bell doesn't come off like your typical flashy hedge fund guy. His East Coast roots still show in his soft-spoken, measured tone and the casual garb of khakis and a golf shirt. Like many of his colleagues at Salida Capital-whose well-appointed midtown Toronto office greets visitors with a model of the Bluenose II-Bell is a product of the Atlantic provinces. "This firm has a Maritime bent," he says.

As the founder and chief strategist of Salida's Global Prospector Fund, Bell, 46, has been a major presence in the mining sector since the fund's inception in May, 2003. The fund takes sizable positions in small- and mid-sized mining exploration and development companies that have quality projects, often based on the belief that those stakes will attract premium bids from major producers. If things aren't moving in what Bell and his firm feel is the right direction, they're not shy about giving management a nudge, in hopes of spurring a deal.

As Bell points out during a chat over lunch, salida means "exit" in Spanish. "We think one of our best exits is to sell to the professionals. Rather than just trading stocks into the market, the ultimate end game-or salida-should be to sell to the ultimate buyer that is going to develop the project." A few years ago, Bell suggested to Yamana Gold and its deal-crazy head honcho, Peter Marrone, that they should have a look at Viceroy Exploration and its Gualcamayo project in Argentina. Salida owned both stocks.

"I was haranguing them," Bell says with a sheepish grin. "I would sit them down for lunch and say, 'This is a good deal for you guys.' And the next thing you know, they did it." (Marrone won't say if the pitch was the catalyst for the deal, but notes that Bell "seems to understand the dynamics of mining companies better than a number of hedge funds out there.")

Though rocks have been his career-long passion, Bell took a circuitous road to the hedge fund world. He left Woodstock, New Brunswick, more than 20 years ago to earn a geology degree from McGill University, later supplementing it with a graduate degree in mineral economics. After a short stint in exploration in the mid-1980s, he switched to analyzing the industry. He spent three formative years covering small-cap base metals and gold stocks for Eric Sprott in the early 1990s. "Those three years really honed that idea of thinking like an investor," he says. He later spent half a decade at TD Securities before the industry downturn of the late '90s. But by 2002, the mining sector was turning around, and Bell was offered the chance to join some former colleagues at Salida. With his deep understanding of mining, he helped round out the skill sets at the upstart hedge fund, whose founders were primarily experts in oil and gas. Since then, Salida has grown into one of the biggest and most successful hedge funds in the country.

While it was fashionable during that latest cycle of the commodity boom to focus on mining management teams with deal-making prowess, Bell, the geologist, still believes it's all about the rocks. "A lot of people say they invest in people. Well, people are awesome. They are definitely important criteria. But geology is what counts."

The Salida Global Prospector Fund is looking for companies with deposits that have the scale to attract the big producers. Yet Bell also has a mantra when searching for resource plays: He wants projects that are "already found but not recognized." As a model, he points to Canico Resource, a Vancouver junior that acquired the Onca Puma nickel deposit in Brazil from Inco in 2003.

Bell and Salida initially bought the stock at $1.40, and continued to add to the position as it grew increasingly clear that Onca Puma would become one of the 10 largest nickel mines in the world. In November, 2005, Brazilian giant Companhia Vale do Rio Doce struck a friendly deal to acquire Canico for $865 million, or $20.80 a share. "We made good money across the funds," says Bell, who, in addition to overseeing the Prospector fund, steers the bulk of mining investments peppered throughout Salida's other fund offerings.

With his strong technical background, Bell has seen the value of several other mining properties before their owners got takeover offers from the majors. Some of his big scores include Cumberland Resources (taken over by Agnico Eagle), Dynatec Corp. (by Sherritt International) and Arizona Star (Barrick Gold). "He must have done a thousand property visits" to deposits big and small, says Franco Nevada's Pierre Lassonde. "He's a guy who can differentiate the gold from the floss."

Of course, not every mining stock is going to attract a rich takeover bid or triple its production in a few years. To round out the portfolio, Bell stays busy by trading, shorting and hedging.

It has been a tough summer for Salida and Bell. With a high exposure to juniors, the Salida Global Prospector Fund has felt the summer sell-off even more than most. Bell's fund has roughly $100 million in it now (you need $1 million to invest in it) and was down 38% over the last year to the end of July. Fortunately, the fund was up 22.3% in 2007, 70% in 2006 and 25.7% in 2005, net of fees. It is still up 20% annually over the last five years. Bell says, however, that amid the drubbing, there are still encouraging signs.

"Even in the carnage of July, in some ways our target market was validated when we saw the pretty good premium takeover bids for Aurelian Resources [by Kinross] and Gold Eagle [by Goldcorp]," he says. "Our strategy hasn't changed. We still think the commodity markets are going to be robust and provide opportunities in base metals and precious metals. If anything, we're going to focus on our core holding names where the prices have brought them into deep value."