The third day of this year's Mines and Money conference in London (MML) included a session, 'Ones to watch in 2020', where four well-known financiers summarised what they are looking for when investing in exploration companies.
The investors were asked whether they focused on particular commodities and/or countries, or whether their investment decisions were based almost entirely on a project-by-project basis. Jayant Bhandari (an institutional-investor consultant with Anarcho Capital, having previously worked with US Global Investors in Texas) said, "investors in mining have no business speculating in commodities".
Jayant added that "mining conferences have become commodity-speculation events, but it is virtually impossible to project the future of commodity prices. People should invest for value, not for a fancied commodity." He also commented that "there are certainly some 'no-go' countries, where everything you invest can be stolen. In others, as long as I have value on a post-tax basis, I would go."
Matt Geiger (the managing partner of MJG Capital, and founder of a venture-backed technology company) told delegates "it is OK for investors to have opinions on particular metals and countries/regions", but he agreed with Jayant that investors focus far too much on commodity price movements.
Lawrence Roulston, the managing director of Westbay Capital (and previously president of Quintana Resources Capital and editor of Resource Opportunities), said he based his investment decisions on a project-by-project basis, rather than focus on particular commodities/countries.
The fourth panellist was Claude Bejet, who, unusually for the MML crowd, boasts degrees in philosophy, psychology and sociology. As a private investor from Switzerland (and a regular contributor to stock exchange magazines in France), Claude is focussed on the gold sector, particularly low-cap companies, which he described as having the greatest upside. He described mining markets as "manic-depressive", however, because the same project can be valued completely differently depending on where we are in the cycle.
All four panellists agreed that management was the single most important factor in considering an investment.
Matt stressed that investors should focus first on the management team, and then consider the project economics (assuming reasonable metal prices), financial structure, upcoming catalysts and price to value metrics. Then they could consider the jurisdiction and target metal.
Jayant commented that he believes great teams attract great assets, so people should be looked at first. Make sure, however, that you are getting in at a similar price level to management, and then monitor insider buying/selling closely. Matt warned that management has a value and there is a limit on how much he is willing to pay for even exceptional management.
No-one on the panel had a rigid 'scoring' system to determine the attractiveness of an investment, although Lawrence did concede to having a scoring system of sorts, although it was in his head rather than on a spreadsheet. He described the process as instinct, rather than mathematical.
For development-stage projects, Jayant said he asks whether the expected all-in cost of production will be in the lowest quartile globally, does after-tax NPV (with a reasonable discount rate) exceed initial capex by a healthy margin, and is after-tax IRR north of 25%? Jayant also expects after-tax payback in under three years, and uses a default discount rate of 10% (even in this low interest rate environment), but uses up to 20% in risky environments to see if the project still makes sense.
Matt and Lawrence both favoured a simple discounted cash flow, with Matt telling delegates that "for me, nothing else works", but he tries, of course, to quantify the risks related to geology and politics.
Red flags to investment for the panel included strong local/indigenous opposition to a project, companies that claim ore sorting will dramatically change the project economics, flowsheets with steps that are not commercially accepted in industry, deposits near or under fish-bearing lakes, and mines with a life of under 10 years and with minimal expansion potential.
Company size did not appear to be an important criteria, with both Matt and Jayant actually having a bias towards obscure exploration and development-stage juniors. Matt added that, in terms of the project, he wants it to be a big opportunity. NPVs of less than circa US$200 million are not of interest because "mining is very risky business whether the project is big or small, so you might as well focus on 'home run' opportunities".
Jayant said he didn't have a minimum company-size criteria, but he has tended to find most value in small, junior companies as they are often not paid attention to by the market.
When asked on red/green flags to investing and their exit strategies, Jayant said he always has a buy and a sell price, and every project and management has a value; "there is always a time to sell". Matt's reasons for selling included the company not delivering on his expectations, the share price exceeds what he has calculated to be fair value, there is insider selling (or selling by a fellow shareholder that you trust), there is a change in your original thesis for investing, and there are negative political developments within the country.
Bad management is Jayant's key red-flag. "A bad market, where everything gets randomly sold off is the best green flag. It is here that the best money is made."
When asked if any of their investment criteria have changed over the past few years, Lawrence said he had increased his focus on management, while Claude has increased his focus on gold, which he described as still undervalued.
Matt said, "I used to tolerate questionable management teams if the project economics looked excellent on paper, but this is bad idea as I learned through losing money". Jayant confessed that he used to speculate in commodities, and lost money, so has "wised up".
Lawrence seemed the most active shareholder, being on the board of all his investments. Matt also described himself as a "very active shareholder", and creates a "catalyst timeline for each, and every, of his investments". When a company doesn't deliver to Matt's expectations, he follows up with management and then sells if he is not satisfied with the answer.
Jayant also described himself as "very active", and follows companies closely (including going to conferences to hear any news or rumours about these companies).