Assay TV interview with Matt Geiger, Fund Manager of MJG Capital. Matt provides an insight to his natural resource focused fund, explaining why the portfolio is heavily geared towards mining at present, the opportunity in earlier stage exploration and development projects, and the interest mining is now generating from a West-Coast American investor base who have traditionally been aligned with the silicone valley tech sector.
Can you tell us a little bit about your fund and how you got started investing in mining?
We run a long-term natural resource investment fund that is heavily weighted to mining at the moment – say 85- 88% of the portfolio right now is mining-focused. But we also have agriculture, water, forestry, aquaculture, and other types of protein that fit within our mandate. As the commodity cycle continues to mature, we might see some different tactical allocation decisions, but for now I’m very pleased with how we’re positioned, considering where we are in the mining cycle right now.
The structure is pretty vanilla. We have about 30 limited partners. It’s a smaller fund. I’ve asked for a 10-year lockup on all investments, which is s a very draconian ask. I like that because it’s self-selecting for patient capital. I want investors that are willing to stick with it through the ups and downs of the cycle. Although that does constrain the amount of capital we can raise, we’re not a location for hot money, which is fine with me. I own roughly 20% of the fund, potentially doing a capital injection here that could take that up to 35 or 40%. I want investors involved that are on the same wavelength, willing to be patient through the cycle, and back high quality projects and high quality people.
You asked how I got involved in the space. I don’t actually have any mining background in the family, which is a bit unique for this space. I grew up in Silicon Valley, in the heart of tech country, which couldn’t be any further from the mining world. Mining is sometimes viewed as an old fashioned industry by the VCs and the tech participants. I personally think that’s BS. None of the stuff being invented in Silicon Valley right now would be possible without the metals that we’re pulling out of the ground.
What attracted me to this space was the contrarian nature of it. I think it’s a very wide playing field for those willing to take the long-term approach. Additionally, the cyclicality and the volatility of the industry appealed to me. People can be scared by volatility and cyclicality, and we have both of those in spades in the space. I think if you have the right temperament, the right stomach for it, you can turn those to your advantage.
What are some of the differences in mentality between a typical mining investor and the type of investor that you deal with in the West Coast. Essentially, what are some of the elements about mining that are attractive to investors not typically in this space?
I’m not going to lie, it’s been difficult. There are actually a lot of similarities between the VC tech game and the junior mining space. If you’re starting a new technology business, and you can build it to 60, 70 million and sell it, then that’s great for you. That’s great for the entrepreneur, but if you’re one of these big VCs, that’s not good enough. You want something that has the potential, if it works, to be a billion dollar or a multibillion dollar idea.
I think the same principle applies in the mining space. Ross Beaty will tell you that there are just as many risks with small projects as there are big projects. The space is risky enough. Why not you focus on large opportunities so that if you’re lucky enough to get it right, then you get a big payout. Because a lot of your bets, as smart and as well-informed as they may be, simply aren’t going to pan out for reasons beyond your control. So you really need to focus on those large scale world-class opportunities.
There’s also the VC mentality. Especially if you’re focusing on the exploration side of the game, you should expect that 80% of your holdings, no matter how well-informed the bets are, are probably not going to pan out. You have to be comfortable with losing, but you need your wins to amortize those losses and to provide an acceptable rate of return for yourself and your investors.
Mining is far more capital-intensive. In tech, especially with the creation of a bunch of SaaS software and the creation of cloud computing, you can get a tech company off the ground for cheaper than you ever could. Mining is as capital-intensive as it’s ever been, and you have to spend millions if not tens of millions to make a discovery, and then tens of millions if not hundreds of millions more if you’re lucky enough to have a high quality project to advance to a construction decision. Then you need to spend hundreds of millions or billions to actually build it the damn thing, at which point you’ll start to see your first cent of revenue. That’s one potential turnoff for VC types when they look at the mining space.
A second turnoff is the disconnect between being publicly traded. The Silicon Valley model, especially over the past 10 or 15 years, is to keep these companies private for as long as possible, jack up the private evaluations as high as the market can bear, and then dump it onto an unsuspecting retail audience through an IPO and exit your position.
In the junior space, it couldn’t be more different. With $2 million market cap companies, it’s very common for a company to go public right off the bat. At the end of the day, it all comes down to valuations. There’s a share count and there’s a share price. You multiply those two together, you get the company’s current valuation. Whether that share price is public and it’s changing daily, or whether it’s private and it’s set in stone from fundraise to fundraise, it’s still a game of valuations. And if you can find an opportunity that you think is worth X, either from an intrinsic value or speculative value, the valuation’s down here, for all intents and purposes, whether it’s public or private, the opportunity is still there.
With the current bull run in gold and the sensational gold price that we’ve been seeing this year, do you feel then that this will encourage more of this generalist and nontraditional mining capital coming into the sector? How do you view gold equities within your fund? Are you bullish on gold? Is gold your preferred commodity of choice?
It’s easier with the wind at our back now. The narrative has been in place for a mining bull market for a few years now, and it’s been a longer wait than many expected. But obviously, with the metal price increases we’re seeing and some of the speculative attention returned to the juniors just over the past eight to 12 weeks, that argument is that much more convincing, because a lot of people just need to see price rises before they believe the narrative.
Let’s talk a little bit more specifically about your fund. What’s your investment style? Do you like gold producers, juniors with a bit more of an exploration risk around them but potentially more value to be created down the line? What’s your commodity angle?
I’m pretty commodity agnostic. At the moment close to 70% of our portfolio is weighted to either gold or silver equities, through a combination of some tactical allocation decisions, as well as the outperformance amongst the gold and silver- focused names within our portfolio. I can definitively say that this will never become a precious metals-only fund, however easy as it would be to raise money with that kind of mandate. This sector is risky enough and tricky enough where if you confine your opportunity set to just a couple metals, you’re creating a lot of unnecessary risk and also potentially missing out on other investment opportunities.
I firmly agree that we’re in a precious metals bull market. Whether you want to say it’s been going on for five years, or really has gotten into gear since spring 2019, where we broke above that key 1,375 technical level, that’s just semantics at this point. It’s hard though – nobody knows how long this is going to last. I think we have a good 12 or 18 months to go, but I’m unsure beyond that. Either way, I think there’s a lot of money be made.
We get into trouble in this industry when you have larger producers making acquisitions with the assumption that metal prices are going to rise forever. We certainly saw that in the last cycle, especially on the precious metal side of things. The big gold producers took on massive amounts of debt, bought large low grade highly capital-intensive projects that have really attractive numbers at $2,500, $3,000 gold. But as we know, this industry goes in fits and starts, and there’s no straight path from one gold price to another.
I really hope that producers can stick to high quality acquisitions that work at gold prices 20 or 30% below where we’re at right now. If the gold price keeps rising, then great. But I don’t want producers to repeat the mistakes that they made in the last cycle.
In terms of the investment class, we need to be smart, focus on ethical teams, focus on teams that have been through multiple cycles, focus on teams that have been busy for the past 10 years advancing their projects through really tough times. There is a lot of responsibility on both sides of the table for us to stay disciplined, and I think if we do that, this cycle will be more sustainable and less of a sugar rush, like we saw in 2016. It would be nice for this to be drawn out over a few years, even half a decade, versus a 12-18 month pop followed by a pretty painful hangover.
Aside from gold or precious metals, are there other metals that show attractive prospects over the next five to 10 years?
When I look at a given opportunity, it’s always with a people first approach. I believe that the further you go down the value chain, the more important the people are. You can put a mediocre CEO in charge of Apple or Amazon or Google, and those companies would be fine for three to five years as they have a lot of momentum behind them. But if you’re in the junior space, either in exploration or development stage projects, you’re making life or death decisions on a weekly or monthly basis. So you really need people that are properly incentivized to do the right thing, have done it before, and have that support network to fall back on if there are tough decisions to be made.
Then you need to look at the asset. I look at spot metal prices or even below spot metal prices. When you’re evaluating a given project, I don’t think you want to be plugging in metal prices that are above spot price. There are maybe a few exceptions, uranium being one of them, but for all intents and purposes, we want projects that will work at the current metal price. If metal prices go crazy, then great. That’s gravy on top. Maybe we won’t get quite as much leverage as some of the large optionality plays, but that’s just fine. It’s a slightly less risky game to play.
My bias has always been towards the battery metals, the metals that help us live our 21st century lifestyle: the nickel, cobalt, and lithium that are going into EV batteries, the vanadium going into our grid storage batteries, the rare earth metals going into our wind turbines, the silver that’s being used to capture electrons from the sun in our solar panels, the uranium that’s feeding our nuclear power plants.
Those were the metals that really attracted me to the space to begin with. I firmly understand the value proposition for gold in a highly volatile world, with a lot of money being printed, interest rates nominally near or below zero, and real interest rates across the board zero. I like where we’re at gold-wise, but it’s not really the metal that drew me to the space originally. I’m not a gold bug by nature.
You’ve touched a bit on exploration risk. What sort of stage companies do you like? Where do you think value is being created as an investor into this space?
We’re very much early in the value chain. We only have one producing miner in our portfolio. Our cashflow producing names are almost always royalty names. We do have a couple of farming companies in the portfolio that are making money from a more traditional sense. But in terms of our mining names, if it’s not royalty, then it’s probably not making money.
I’m very reluctant to bet on a single asset in the pre-discovery stage. I prefer the prospect generation business model, which has been around for 10 or 15 years. There is a lot of controversy on whether it works though personally, I think it does. Again, that business model was designed originally to avoid dilution, just like the royalty model.
I like to have multiple shots on goal, high quality geological teams that can scout out prospective terrain, secure the tenure, advance it as far as possible without drilling, and then have the credibility and connections within the industry to bring in partners to spend their own money. To me, it doesn’t matter if you own 100% of the asset. Discoveries are hard, and I’d rather have as many shots on goal as possible.
We also look at post-discovery plays. This is quite a popular mode of investment right now. These are companies that have been drilling a project, and then suddenly they hit a hole and the market realizes that there’s potentially something big there. We don’t jump into these all the time, but when we do, it has worked out well.
Adriatic Metals is one of our post-discovery investments. We saw their initial drill hole in mid-2018, where they had 64 meters of 26 grams per ton gold equivalent, what we thought was just a mindblowing hole. Within six weeks of seeing the initial drill hole, I was comfortable with the investment. We decided to initiate an investment, and here we are a couple of years later looking at one of the top polymetallic development plays in the world, in a company that most likely is not going to be around six or nine months from now. And so that model has worked for us.
The third basket we look at pre-cashflow would be the high quality development projects. Something like Adriatic has turned into: a project that is low capital intensive, has an NPV well in excess of the initial CapEx, has an IRR hopefully above 30%, quick payback, a long enough mine life, something that a major company would want to come and buy to then take into production.
To tie this back into the state of play in the current market and the current geopolitical issues going on, has COVID-19 and market downturn impacted the way that you conduct your investments, the way that you conduct your process, your due diligence, the way that you meet with companies? Have there been any knock-on effects?
No we haven’t changed all too much. The focus for me is always going to be the people. When I look at an asset, it is always going to be plugging in current metal prices or below. I’m never going to be speculating on $3,000 gold or $4 copper. As much as I believe we could see that in the coming years, market timing is just not my game. To me, it’s better to focus on the higher quality projects, even if you’re giving up a little bit of upside.
The COVID-19 crisis has shaken up a lot of people in the general markets, and I think that’s part of the reason we’ve seen this flight into precious metals. I think the jury is still very much out whether copper, whether zinc, whether nickel, whether the agricultural minerals, really whether agriculture in general is going to follow on the heels of precious metals or whether it will lag behind for another 12 or 18 months before picking up steam.
There are a few technical levels to explore. If we see copper pop convincingly above $3 per pound, if we see oil jump above $45 per barrel, there are certain key technical levels that have yet to be broached for the industrial and energy metals space. So I’m watching that somewhat closely. I’d almost prefer for the precious metals to ride on their own for 12 to 18 months, because that will give us a good opportunity to take profits on the way up without trying to call the top perfectly.
What is your biggest challenge at the moment? What is keeping you up at night as you navigate investing within the junior mining sector?
The speed at which the cycle is progressing, at least on the precious metals front. I think everybody has been shocked by this.
Another concern is the amount of new companies that are being created, because it dilutes capital from the higher quality names.
Another concern is the amount of new companies that are being created, because it dilutes capital from the higher quality names. While there is a lot of money flowing into the sector, it seems like Bay Street has the ability to make a new company every day. I don’t want investors to get overly diluted, and for the quality of the overall junior industry, which even at the troughs of bear markets, to dilute even further. At the peaks of these bull markets, you have to assume 80 to 90% of these companies are untouchable and run by people that you wouldn’t trust your own money with. I keep going back to the idea of investing in a management team – you need to think of this in regards to whether this is someone that you’d like to go in business with, someone that you trust with your own family capital. I think that’s a really good lens in which to evaluate management teams and whether a certain investment should be made.
You can watch the interview here: