The Lowell Resources Fund (LRF) is a listed investment unit trust, focused solely on the emerging resources sector. LRF units trade on the ASX (ticker ‘LRT’). The fund is managed by investment manager Lowell Resources Funds Management Pty Ltd (LRFM).
Putting aside the standard “people and project” parameters which are always of key importance, LRFM considers a number of other factors in assessing investment opportunities.
The junior resources sector is a high-risk, high-return investment sector. This means that an investor in the sector needs to see a realistic opportunity for outsized returns. The junior resource sector currently offers many such opportunities, for example a company may be capitalized at a fraction of the NPV of its underlying project, based on feasibility study valuations. One of LRF’s largest holdings is Cardinal Resources (CDV.ASX) (For Full Profile, click here) which owns the 5.1 million ounce Namdini gold reserve in northern Ghana. The October 2019 feasibility study on the project estimated a post-tax NPV(5) for the project of USD 590 million (at USD 1,350/oz Au price), compared to a market capitalization of around AUD 180 million (29 October 2019).
Asymmetric Risk Profiles
In addition to such upside, LRFM looks for asymmetric risk-return profile, whereby the downside is limited while there remains realistic chance to make exceptional returns. LRF is invested in a number of advanced Western Australian gold explorers who would fall into this category. For example, Musgrave Minerals’ (MGV. ASX) Cue gold exploration project currently holds a resource of 440,000 oz of gold. A proportion of this resource could be trucked to one of a number of existing gold plants within a 50km radius, and result in a toll-treat project the NPV of which might equal or exceed the current market capitalization of MGV. The owner of one of these plants, Westgold Resources (ASX: WGX), is a 16 percent shareholder in MGV, which indicates support for the achievability of such a project. Meanwhile, MGV has the potential to discover +1Moz deposits both in its own right, and in joint venture with Evolution Mining (ASX: EVN), which is spending AUD 18 million on MGV’s salt lake exploration acreage.
Aside from pure value considerations, access to capital is a major factor in assessing a junior resources investment. Arguably, it is the major capital hurdle in moving a project from feasibility into production. In many cases, the capital requirement can be as large as the market capitalization of a junior company, or even a multiple thereof. The market consensus must be that a particular company will be able to raise the equity, debt and/or other types of finance to move the project into production. If not, the company will be in a vicious cycle of low share prices from which it may never escape. As a result, LRF prefers to invest in projects with low capital hurdles, all other things being equal. A recent modest investment in a niche player in the clay industry, Andromeda Metals (ASX: ADN), typified this approach. LRF made an investment at circa 0.6cps, based on expected low capital requirements and a managing director with unique skills and experience to identify and realize the project’s potential. When the market began to acknowledge the high-margins and low capital barrier to stage one of the project, LRF was able to exit at approximately 10 times upside. All up capital for Andromeda’s halloysite clay project in South Australia is estimated to be in the order of AUD 25 million, which is eminently achievable for a company with a market capitalization of now AUD 62 million.
Where capital development budgets are larger, the ability of a company to attract funding via alternative, and sometimes parallel, pathways is important. One of the LRF’s larger holdings is Gold Road Resources (ASX: GOR) who discovered the 6.6 Moz Gruyere gold resource in the undeveloped Yamarna gold belt in Western Australia in 2014. By bringing in major gold producer Gold Fields (JSE: GFI) as a 50:50 joint venture partner to fund the majority of the AUD 620 million capital budget, Gold Road was able to minimise dilution for shareholders. As a result, LRF achieved a multiple of nearly 7 times invested capital.
At earlier stages, a company must be able to access primarily equity finance to fund itself through exploration and feasibility. A strong news flow of thick and/or high-grade drilling results is key to explorers maintaining ability to access the market.
The often unspoken ‘elephant in the room’ regarding junior equity investing is liquidity. Lowell Resources Fund is able to invest in pre- IPO/seed stage funding, but it does so cautiously and with the knowledge that seed investment may not access a liquidity event for many years. Further, an IPO and a listing is not an end in itself, particularly for substantial shareholders. For this reason, LRF typically holds less than 5 percent of any single stock. As a result, in most markets LRF is able to exit its position in even small stocks reasonably quickly and with minimal disruption to the share price.
One of LRF’s most recent seed investments has been in Adriatic Metals (ASX: ADT), which secured rights over a historic polymetallic metal mine in Bosnia, as the country was opening up to foreign mineral investment. Lowell took a seed position at AUD 0.13/share. Through consistently thick and high-grade Ag-Zn-Pb-Au-Ba drilling results, Adriatic was able to successfully IPO in a difficult 2018 equity market (with the support of copper producer Sandfire Resources (ASX: SFR)) and move its share price above AUD 1.00/sh at the time of writing.
Finally, while it is obviously important to have management with the appropriate experience, expertise and energy to drive a project forward, this can prove worthless if that management is not committed to the company and project. An uncommitted management may move to greener pastures when markets or projects move against them. Therefore, LRFM looks for a management team which has a personal stake in a positive outcome, either financial or reputational, or preferably both. Companies such as Liontown Resources (ASX: LTR), where the management holds a shareholding of over 20% in the company, demonstrate the benefits of this. Management has stayed committed to the company through difficult times and reaped the rewards of identifying two high grade lithium spodumene projects in WA, resulting in a 5x share price uplift on Lowell’s investment