Early-stage investing opportunities: James West and Tobias Tretter
The Midas Letter Opportunity Fund, a new niche fund, focuses on early-stage micro-cap miners in the junior resource sector. This sector has been an underperformer in recent months despite high gold prices. In this exclusive interview with The Gold Report, the fund's founders, Tobias Tretter, the managing director of Commodity Capital AG, and James West, publisher of The Midas Letter, explain why they are bullish on micro-cap miners even in the face of improving economic numbers that may stall gold's rise and name some juniors they expect to shine.
The Gold Report: You've established a rather unusual fund, the Midas Letter Opportunity Fund. Tell us a little bit about it.
Tobias Tretter: We launched the fund in January, so, it's really brand new. We have about $3–5 million (M) in the fund already, and we're adding to it. Our goal is to reach $20M. We established the fund in Luxembourg, which is a big advantage because what happened to MF Global could never happen to a fund established in Luxembourg. It is protected by law so the assets are secured and separated from the bank accounts.
James West: This new fund, which as Tobias suggested is a Luxembourg-registered Special Investment Vehicle, is a sub-fund of Commodity Capital AG, of which Tobias is the managing director. The fund is capitalized by members of the Canadian A-List of mining entrepreneurs on one hand and the A-List of high net-worth, private family offices in Luxembourg and Switzerland, to provide a place where the two groups can access each other's value propositions. Access to pre-public deal flow is good for the fund, and the fund gives European investors a window into these pre-public opportunities and a chance to participate in secondary and tertiary post-IPO rounds.
TGR: You appear pretty young, Tobias, but you're apparently a very experienced investor. Tell us a little about your background in investing and how you came to be a fund manager.
TT: I am pretty young, but nonetheless I have a lot of experience. I've been running my family's finances since age 16, so, I guess they're pretty happy. I've been investing in the mining business now for over 12 years. I have a lot of experience in running different funds, including working with the biggest banking and asset management group in Germany. I was a fund manager at another company that had about $215M assets in gold and commodity funds.
TGR: How about your background, James?
JW: After a period of operating as a corporate finance and investor relations and financial marketing practitioner, I started publishing The Midas Letter back in 2008. I found that the writing led me to ever bigger audiences. People wanted to know what I thought was a good company, what I thought was a bad company. That turned into Canada's national business networks listing my opinions on small caps regularly as well as on gold and silver. So I've been an investor, an IR guy, a president of a public company. And I've raised money. I've done a lot of things in the space.
I started building websites for public companies back when you had to explain to CEOs what a website was and why they might need one. It was through the process of translating over 400 companies' printed data into electronic form that gave me a "compressed MBA," if you will, in mining economics and geology, and basically absorbing the language. It was the logical step to start the letter.
TGR: Will the Midas Letter now focus exclusively on your new fund?
JW: My personal investing activity will continue to make up a lot of the content of the newsletter, but most likely, my personal activity also will reflect opportunities the fund uncovers. This will also free me up to shoot more Midas Letter Mine Tour videos at developing projects around the world to answer questions that all investors, institutional and private, have about these projects.
TGR: You're a Canadian, James, and Tobias, you are European. What brought the two of you together?
JW: A mutual friend. I was being offered so many pre-IPO and early-stage private placements. Essentially the CEOs wanted me to write about their companies, so in the creation phase, they offered me shares at the founders' prices. I was telling this mutual friend that I had all these great opportunities but not the infrastructure to take advantage of them. So I was passing on a lot simply because I didn't have time to look at all the deals and the company structures. I didn't have the bandwidth or the manpower to take advantage of these opportunities.
Our mutual friend told me that I should have a fund and he knew just the guy to run it. So he introduced me to Tobias at the Denver Gold Show in 2010. We found that we thought similarly about companies. He had the experience in establishing the infrastructure to run a fund in Luxembourg, and we arrived at an agreement to work together, with Tobias as the fund manager and me as the portfolio adviser. With his deep experience and connections in the industry and my access to early-stage deals, together we believe we have a winning proposition for investors. We'll give them access not only at an earlier stage, but also to a higher quality of deal flow than they have normally.
TGR: Obviously, you want this fund to grow dramatically. What's your target for assets in the next three to five years?
TT: It's not possible to invest much more than $20M in early stage stuff. I think our goal is to give people or investors, especially in Europe, the possibility to invest at very early-stage companies. Most of the companies are coming to Europe with the stories more or less already told, and they are trying for an exit strategy and to find European money. I think the time for that is over. We want to get investors on the boat from the beginning.
TGR: Will the assets all be in mining companies or do you foresee other resource companies in the fund mix?
TT: Primarily mining. Our goal is to invest at the early stage and then follow-up, establishing long-term relationships to grow together with the companies and help them flourish. We are not looking for the quick returns, the quick money.
TGR: So you'll focus on micro caps in mining?
JW: Absolutely, but hundreds of companies form every year. We're looking to identify the premium opportunities. Through our mutual connections we've done business with pretty much everybody of merit in the industry at some point or another. And so the value we offer to our unit holders is that we will identify the top 20% of the opportunities out there, and participate in them from the early stage.
The fund isn't large enough to be meaningful to large-capital positions and private high-net-worth family offices. But by virtue of their participation in the fund, they will have access to continuing private placements as the company grows. Neither Tobias nor I is a trader, and we are both of the opinion that if one of our stocks doubles we don't rush out and sell it. We'd look to participate in the next financing. Because our vision is for the long term, we identify the assets and the teams and we invest in them continuously until they reach production and it becomes an institutional story or a major company takeout. And that's our exit strategy.
TGR: Interesting. So what is your performance goal with this strategy of getting in very early and following these companies through to production or acquisition?
JW: The great thing about being a participant in companies before they've gone public is your entry level is pennies. The average price of a seed financing is $0.05 to $0.15/share. If you build a position where the average cost is below $0.20 before the company goes public, when they start out as trading entities, it's not uncommon for our positions to be double the price that we paid for them. And usually by the time the company goes public, it diverts a portion of the proceeds to marketing.
So we generally start at 100% performance. Nobody can guarantee delivering triple digit performance. In good markets we can achieve that objective easily, and we can still achieve it in bad markets. It's aggressive, but that's why you can only bring €20M to this market because there's not more than $20M worth of good financing to do in any given timeframe. We have to keep the fund small to keep that target realistic.
TGR: A few weeks ago, Bo Chew, portfolio manager with Chartwell Asset Management and manager of the Magna Opportunity Fund, told The Gold Report that he invests in the Midas Letter Opportunity Fund because he likes the two of you, and because the fund is unique. He said that with approximately 80% in placements—30% of it in seed and pre-IPO—your fund gives him access to some placements for his fund, as well as to warrants and a position at significant discounts on pre-IPOs. So other funds may take positions in your fund, but who are your primary target customers? Are you looking for high-net-worth individuals?
TT: Both groups are welcome to the fund. Our goal is to have about 50% of the investors out of Europe and 50% out of North America. Because one of our objectives is to have a long-term relationship with investors who are interested buying opportunities—investors with a long-term view—we're not looking for those who want just a couple of months' investment.
TGR: What is the minimum investment?
TT: The minimum investment in the fund is €125,000—about CA$180,000.
TGR: How long do you require people stay in prior to redemption?
TT: The fund has a monthly net asset value calculation, so investors can redeem on a monthly basis. We don't expect them to do so, but it's also a huge advantage for investors. They don't have to stick with us, as opposed to being in a closed-end fund for many, many years without having an opportunity to redeem their positions.
TGR: One would think, though, if they subscribe to your philosophy they'll hang on. After all, that's the whole idea behind your proposition.
JW: Some investors expressed the view that the lack of a closed timeframe for the fund is a disadvantage and a reason not to invest in the fund. But our attitude is based on knowing investors we bring to the fund before they invest. We make sure they're like-minded in terms of investing in assets in teams for the long term.
Short-term volatility events, like the crisis of 2008, are not occasions to rush out of investments and sell everything as so many did. That's our opportunity to accumulate more. The bottom line is the world is getting bigger. We're running out of resources, so they're going to grow in value. There's no doubt about that. You can't go any other way. So as long as an investor isn't going to panic any time the market drops 100 points, you can execute on this business strategy. And by leaving the fund open-ended we're demonstrating that we don't view it as our right to hold investors' money hostage. It's their money, and they're free to take it whenever they want. However, we're looking for investors who will continue to grow with us. If we deliver triple digit performance, nobody will really want to leave.
So our overriding strategy is to put the interest of our unit holders ahead of our own and thereby our interests align with theirs. We're all working in concert toward a common goal.
TGR: Will your fund have a commodity focus?
TT: I guess the focus will be more on the precious metals, but that's by nature. Whatever the metal, our focus will be management teams. We don't lack good projects, but we really lack good management teams. We lost at least two generations of good mining engineers, good new geologists. That's the real challenge. We've been in the business for many, many years. We know the people. We know the good people who have the good track records. We know who found mines in the past and are highly likely to find new mines in the future.
TGR: So you base your choice of companies on track records of proven management success in the mining space.
JW: That's a prerequisite. People new to the business are always starting companies and trying to raise money from investors. Coming from some other industry where they've been investors or directors, they think, "Hey, I can do it, too." One of the reasons the performance for individual investors in the resource sector is so dismal is that a lot of them are attracted to these people because they're good at sales. But that's about the extent of their skills. Good salespeople cannot put a mine into production. It takes a different skill set.
And because we invest in the people first, we don't really have to worry so much about the projects. Their track records and abilities demonstrate that they will find and build the good projects. We know they'll take care of our money. They'll invest it wisely. If one project doesn't work out, they'll fine another one. With a good management team, investors can sleep better at night knowing they're looking after your interests.
TGR: Timing is everything when it comes to investing in commodities and commodity-driven stocks. For the last few years, precious metals prices have been on the rise based on negative headlines about government debt and liquidity manipulation in the U.S. If there is no more quantitative easing and gold prices settle down, doesn't that make this a difficult time to start investing in junior resource stocks?
TT: Yes, you are totally right. The rising gold prices have been the result of the increasing money base. Even though many people think that the U.S. economy is getting better, the worldwide government debt problems are not solved at all. Greece will depend on money from other European countries for decades, Spain and Portugal might be the next countries that need to be supported and if you point your view to Argentina, you will remember that one country's financial problems can affect the whole world.
The central banks worldwide have done nothing else than fight against every crisis with printing more money and postponing the problems. So I don't see them stopping quantitative easing at all. Nevertheless even at gold prices of $1,500/oz or $1,600/oz, the junior mining companies are incredibly cheap. Most of the juniors are trading as low as if the gold price were $1,200/oz. So we don't see a lot of fundamental downside potential from the current levels. The psychological component, which drives the market mainly short term, can unfortunately not be measured due to the crisis.
In addition to the low prices of junior companies, the majors and the big junior companies have had huge cash flows over the past months and they have been able to get their balance sheets in good shape. They are sitting on a big war chest and have to decide whether they would like to pay dividends, buy their own shares back or acquire other companies. All three strategies should be helpful for the sector and I think a big increase is just ahead. In the past, the junior and the exploration sector offered the biggest upside potential. We see the same potential coming right now.
TGR: Could you talk about any representative companies that you'd want in the fund, and maybe some management teams? Just to give potential investors an idea of the types of companies that might be involved?
TT: Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX), which went public in May 2011, is a good example. Its CEO, Amir Adnani, is also CEO of Uranium Energy Corp. (UEC:NYSE.A), the newest uranium producer in the United States. I've known him for many, many years, and he's always done what he told us in the past. We'd definitely participate in any of his new companies in the future. Brazil Resources' first stage was a $0.05/share round and then the company did a couple more financings. The company went public at $0.65/share, and now its share price is $1.40/share.
TGR: His success has been dramatic. Are there any others that you'd like to point out?
JW: One of my favorite companies just because of its constant stream of great news—which makes me look much smarter than I am—is Newstrike Capital Inc. (NES:TSX.V), with Richard Whittall as president and CEO. Newstrike, which is developing the Ana Paula deposit in Guerrero, Mexico, continuously issues drill results that are better than 100 meters and up to 5–7 grams per ton. Its people are quietly focused on growing the resource, but Newstrike's an overlooked opportunity because it isn't out there waving its arms around. For us, that's representative of a best-case scenario in terms of a management team that's more focused on building the asset than on telling the story and raising money.
That said, Newstrike has plenty of money in the bank. It just completed another bought-deal financing and the asset continues to grow. In that situation, you just put your money into that investment, leave it alone and let it do its thing. At the end of the day you're going to see a return in the high triple digits. For our unit holders that's going to be a homerun.
TGR: Is there anything we haven't covered that you'd like to mention?
TT: I think it's good for investors to know that we're not just investing other people's money; both James and I are also investing our own money in The Midas Letter Opportunity Fund. And investors would want to know that the custodian takes care to ensure that there's no front running or insider trading.
JW: I'd like to add that the fund is quoted on Bloomberg and Reuters and is available through FundSERV at any bank.
TGR: Thank you for taking the time to talk to us today.
Tobias Tretter is managing director and chief investment officer for Zurich-based Commodity Capital AG, founded in 2009. He is responsible for making investment decisions of the Commodity Capital Global Mining Fund and for selecting the indexes. Tretter is a graduate of Bayreuth University in Germany, where he obtained his business administration degree with a focus on finance and banking management and wrote his practical thesis analyzing the lifecycle of raw materials companies. He began his career with Credit Suisse Asset Management and also worked for Fujitsu Siemens and Dr. Jens Ehrhardt Kapital AG, gaining practical experience guiding and supporting the DJE Gold and Resources Funds. He has also been a consultant with ERA Resources GmbH and Ullmann, Schmidt & Co. Resource Consult, Augsburg Commodities Research.
An independent capital markets entrepreneur and investor, James West publishes and edits The Midas Letter. He has spent more than 20 years working in corporate finance, business development, and investor and media relations for companies involved in mining, oil and gas, alternative fuels, healthcare, Internet technology, transportation, manufacturing and housing construction. He has helped numerous small companies in the resource sector raise money, further their projects, build their identities and get their stories in front of investors on the lookout for quality investments with excellent returns.
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Source: Sally Lowder
1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
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