Gold Mining Investing: Merchant Bank Style - 15 January 2013
Sorting the wheat from the chaff...
IT'S HARD for retail investors to sift the wheat from the chaff in the junior Gold Mining sector. In this interview with The Gold Report, Rick Winters reveals how RMB Resources, a resource merchant bank, figures out what projects to invest in and those to pass over.
The Gold Report: Rick, RMB Resources invests in resource companies throughout the world. Why is RMB flocking to resource companies when most investors seem to be running in the opposite direction?
Rick Winters: RMB Resources is the resource merchant banking division of the FirstRand Group, one of South Africa's major financial institutions. We've been in the business of providing finance to the junior resource sector for 18 years. We look at junior resource opportunities everywhere in the world outside South Africa.
As resource investors, we're always in the game, even when the market doesn't seem to care. Our product mix may change with market conditions, but we stay in the market and are always active.
TGR: With the risk-off sentiment that's prevalent in the market right now, are you making changes to your overall strategy?
Rick Winters: As a merchant banking operation, we look at junior resource finance and focus on relatively higher-risk, higher-return opportunities. In times like this, when junior resource equities and mining equities aren't in favor, we look more toward quasi-equity and quasi-debt investments as a way of providing finance to companies. We do this when we have confidence in their projects, using their projects as security for a debt structure. This saves companies from dilution in a time of very low share prices.
TGR: Can you talk more about quasi-debt and quasi-equity investments?
Rick Winters: We invest all along the spectrum, from pre-initial public offering seed capital through to corporate debt and project finance. When we talk about quasi-equity and quasi-debt, it's a reflection of the stage that a project or a company is at. Quasi-equity tends to be higher risk.
TGR: What is the total amount of your investments in resource companies, both in 2011 and in 2012?
Rick Winters: We have a lot of movement in and out of our portfolio but, generally speaking, we have a portfolio of about $100 million (M)in equity and around $200M in debt.
TGR: Do you expect those levels to increase in 2013?
Rick Winters: Not necessarily. But we'll probably see our debt portfolio grow in 2013 because of the nature of the market.
TGR: With all the companies knocking on your door, how do you decide which ones you're going to invest in and which ones you're not?
Rick Winters: We really stay with the fundamentals. In a buoyant equity time, the spectrum of the projects that we look at is much broader and we do look at exploration and very early-stage projects and seed capital. But we're doing much less of that these days.
We're focused now on projects where we can assess the project and the opportunity technically. We assess the tradeoff between what we believe will be the fundamental value and the opportunity for the project to actually become a cash-flow generator. In other words, we're looking at the feasibility stage and above.
TGR: What are some investment themes that you expect will govern most of your investment decisions in 2013?
Rick Winters: The last year and a half has been an unprecedented period for the industry. We expect 2013 to be the same. We seek to patiently invest. We continue to have a minimum three-to-five year investment horizon.
We focus first on people and identifying good management that we've done business with in the past and that currently has good opportunities. We focus on projects and make sure there's sufficient asset value to justify the risk-return profile. We also focus on our companies' abilities to promote and raise capital because the mining business is very capital intensive.
TGR: Are your investments geared toward rising commodity prices or are you looking for specific situations that merit your expertise and your cash?
Rick Winters: We're happy to participate in the equity upside that comes along with rising metal prices, but we have more of a banking mindset than an equity investor mindset. We're always looking for the recognition of fundamental value at rational metal prices, which are often lower than the current price. In other words, we focus on project fundamentals.
TGR: Where do you see metals prices, particularly precious metals prices, in 2013?
Rick Winters: Prices will be relatively stable. There will be volatility within the metal prices, precious metals in particular. We're in an environment where fiat currencies and the major economies in the world are in trouble. The debt situation has to be dealt with, and is not going to go away for at least a few years. That's why I don't see a precious metal environment that's much different than what we've seen over the last couple of years.
TGR: Is it common for RMB to have a position on the board of a company that you're investing in?
Rick Winters: No, it's not typical for us. One of our most treasured mantras is not to become involved at the board or management level. We believe that if we can't have confidence in the boards and managements of the companies we invest in, we probably shouldn't invest in the first place.
TGR: The junior mining space used to be predominantly the domain of retail investors. Is there still room for retail investors in the sector? Would they be well served to follow the investments made by large companies, such as those made by RMB?
Rick Winters: There is always room for retail investors. One of my attractions of getting into the junior sector when I became an analyst many years ago at Robertson Stephens & Co. was the realization of the mining industry in general, but the junior sector in particular, that it's really a very small sector. There are lots and lots of companies; in Canada, there are around 1,500 listed junior companies.
But if you take the total value of those companies, or even the entire mining sector, it's not very significant. Apple is probably bigger than the entire global mining sector. So when investor interest flows into the sector, it doesn't take much for all the boats to rise, and do so rapidly. But when the interest leaves the sector, the inverse is true. The tide goes out, and all the boats fall quickly.
For people who think about fundamental investing, and not trading, there is a lot of opportunity in the junior sector because of this complete disconnect between the current valuations for companies and value of the metal in the ground and even cash flow given the current and expected prices for the commodities that these companies are producing.
I think for a lot of retail investors, it's very difficult to know who's who in the zoo. Just because a company is a very good promoter doesn't mean that it has very good assets. People with a view like ours, which is a bit longer-term, fundamental resource-oriented view, would be well served by looking at what some of the other successful major resource investors do in trying to cull the number of opportunities and focus on those things that provide the best risk-reward. Institutional investors, as a group, typically do not seek market returns. We are looking at higher-risk, higher-reward opportunities. Retail investors need to look behind the retail promotion and see where serious money is getting invested.
When this market turns, it will come back with a vengeance. Everybody will be very happy. The people who will be most happy will be the people who were already invested.
TGR: That sounds like sage advice.
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