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Palos Capital Pool's loan returns cushion stock losses

Hubert Marleau has held his losses down in the competitive small and microcap sector.

His Palos Capital Pool LP portfolio lost 25.1-per-cent for the 12-months ended March 31, 2009, significantly less than the 32.4-per-cent loss benchmark by S&P/TSX Total Return Index in the period. Mr. Marleau, president and managing director of Palos Management Inc. in Montreal, has headed the $8.5-million fund since inception in Dec., 2003.

"Our portfolio is a blend of shares of public companies, interests in private companies and loans to public and private companies," Mr. Marleau said.

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"The loans have average interest rates of 20 per cent and often have equity participation in the form of warrants. In future, we will probably increase the relative weight of loans. Our lending is lucrative and a steady business; in fact, we have never lost money on our loans.

"Moreover, the equity kickers can add another 10 per cent to 20 per cent to our returns. The loans are also the reason we have not suffered the terrible losses of the broader market. Our borrowers work with us because we are faster than banks and require less documentation. Put it all together, and we have more security than stocks provide and more upside than a conventional bond portfolio offers."

Maudore Minerals Ltd. is a Montreal-based mining exploration company. Shares purchased at an average cost of 40 cents have recently traded at $1.80. The company has a Quebec-based resource, with estimated 500,000 ounces of gold, Mr. Marleau said. Located near Val d'Or, it is likely to be sold to a larger producer, he added. In a takeover, which is possible within 18 to 24 months, the shares could triple in value, he suggested.

Gobimin Minerals Ltd. is a Toronto-based mining company active in China and other parts of Asia. Shares purchased at an average cost of 40 cents have recently traded at 82 cents with a 10 cent annual dividend. The company has $1.75 cash per share and has substantial exploration rights in China and other Asian countries. The high cash holdings mean that the investor is really buying money at a discount. The mining potential is an extra, Mr. Marleau said. Announcements are expected in June, at which time the company will reveal its revised business plan. With 12 to 18 months, shares should double, he suggested.

Mitec Telecom Inc. is Montreal-based company that builds wireless infrastructure . Shares purchased at an average cost of 10 cents have recently traded at 6.5 cents. Mitec's shares are very undervalued and should rise as cell phones continue to penetrate the market, Mr. Marleau said.. Canadian wireless providers are upgrading their networks, a process that generates sales for Mitec. Therefore, the company, which has had losses for several years, should move into the black by the second half of 2009, Mr. Marleau said. With 12 to 18 months, shares should rise to 25 cents, he added.

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