Can you tell us a bit about Far East Capital and your background within the metals and mining space?
I’ve been operating as an analyst in the equities market since 1982. In 1991, I left County NatWest as a specialist gold mining analyst to team up with Andrew Forrest to set up Far East Capital. It was a specialist corporate advisor, fundraiser, and research house then, looking at the smaller developing mining sector.
Basically, I’ve been in and out of Far East Capital ever since. Andrew Forrest went off to become a billionaire with iron ore mines, and I like to say I taught him everything he knows about mining.
In 2008, Far East Capital sponsored the formation of BGF Equities with two brokers in Melbourne and after three years, Canaccord bought it out. I had to stay with the company for another five years, and then I went back to Far East Capital, going back to what we were originally doing.
Two notable things that I’ve done in that time was set up First Graphene (ASX: FGR), which has now been going for 10 years and is the world’s leading graphene specialist. And more recently, I’ve become executive chairman of Aguia Resources (ASX: AGR), which has got very high-grade gold in Colombia and phosphate in Brazil.
I still do a lot of the research, advisory, and mentoring, but with the state of the equity markets, I’m not very interested in raising money for the junior mining sector when it’s in such a state of depression. I’m just as well equipped to be building businesses and I see far more upside in building the Aguia business. I might circle back to the equities markets a bit more deeply, but at the moment it’s not very productive.
Let’s talk a bit about what’s going on in the commodities markets today. What’s piquing your interest right now?
Without doubt, it has to be gold. Just about everything else is depressed. You have a bit of a run in antimony and really specialist metals, but the volumes and the amount of money that you can make are very limited.
I think we’re seeing a change in the gold market that we haven’t seen before. In the last 40 years, gold was the barbarian metal, according to the central banks.
Today, in the last year in particular, there’s something different. You’re seeing a consistent rise in the gold market, but without getting terribly overblown at any point in time.
That to me suggests that there are parties in the gold market who want to accumulate gold, but they don’t want the market to run away. They’re not looking to trade as a short-term exercise. This trend is pointing to China as it seeks greater independence from the global financial systems, that’s where gold comes into play.
So, I think it’s not a position of speculators building up positions in gold, but it’s parties actually wanting to hold it for the longer term. I really can’t see anything better than gold at the moment.
When it comes to the juniors, the important thing is that you can sell the gold the same day you produce it. For all of the battery metals, virtually everything except silver, you have to find a buyer. For lithium, graphite, manganese, etc., you’ve got to enter the supply chain, and you must enter the markets. The markets have been distorted by Chinese activity in recent years and most of them don’t have a transparent terminal market, like the LME. So, for a junior company, it’s wonderful to have a big ore body and it might be bright, good grade, but how are you going to sell the product?
That’s what so many of these junior companies don’t realize. Gold is not a generic product in a particular geology. You get lots of different types of geology, lots of different grades and metallurgy, and so within that gold sector you’ve got a whole range of projects that may or may not be economic and successful, but so long as you do your homework, there are many that will be.
Copper is an essential metal, but look at how the copper prices performed this year. It seems like whatever brokers or promoters are pushing, that’s the order of the day, but that day might not turn into a month, six months, or 12 months. So, it’s really quite a perilous time.
Uranium is still good too. Over the last 12 months, the ETFs have been buying uranium, but before they’ve bought uranium, they will be buying into uranium stocks. They then go to the market to buy the uranium. Everyone gets excited because the uranium price is going up, but the source of that strength is the ETF activity. And just when everyone’s getting excited, the ETFs will be selling uranium stocks and cashing in.
We’re seeing a lot of market manipulation. And that makes it difficult. That said, with the market so depressed, and a lot of commodity prices down, we’re at that stage of the cycle where you could buy a lot of these, and if you’re prepared to wait six or 12 months, you look back and say wasn’t that a great time to buy? It’s just human psychology.
How are investors looking at the gold markets?
A lot of investors are not engaged in gold as much as you would expect. You’d think gold producers would be doing very well at these prices and you need to make sure that they haven’t got these ugly forward selling positions. There are a lot of gold exploration companies that are still not seeing love from the investors.
I think physical gold is more of an insurance policy within an investment portfolio. You don’t go excessively overweight in gold. If you want leverage to the gold price, go for those companies that have projects with merit, that haven’t forward sold. There’s a lot of small companies out there that could make very good money.
They might not be big mines, but with these gold prices, you don’t need a lot. And with the equities market being so difficult for raising capital, the junior companies that are going to do best over the next few years are those that have got very good economics on the gold projects, small or large, that won’t have to go back to the equities market and put up with the 30% discounts a lot of brokers are imposing upon them if they go to raise capital.
Generally, investors’ attitudes towards gold are surprisingly disjointed. There’s not a great amount of enthusiasm and I think that’s probably to do with lack of depth of management. I do think there’s still a lot of opportunity for the gold space. We need to get away from the concept that it needs to be a 100,000oz producer to be worthwhile investing in. 20,000oz a year at these prices can make you a lot of money.
What is it about a company or a junior miner that would make you want to invest? What makes it stand out and do you think your investment criteria is different than your peers in the market?
My criteria is different because of my position in the industry. I’m not that much a trader, I’m more of an analyst who will look at the bottom line.
For many years, people have been saying that management is 80% of the decision making process. Good management is discipline, working hard, being responsible, and being capable. But there’s another element that I think stock market investors need to consider, and that’s leadership.
Leadership, both of your operating staff, your company staff, and your investors. It brings management together, using human psychology and skill. I think that good leadership is necessary for your investments to outperform the market, rather than just move with the market.
If the market trusts you, if they know you’re capable, and if shareholders know that you’re working in their best interests, that’s going to make you stand out from the pack. I think the big problem with the smaller end of the market is that directors are paying themselves in most cases at least twice as much as they’re worth. If they’re not producing a cash flow, if they’re just exploring or pumping the market, that’s just a direct wealth transfer from shareholders to directors and we should try and put a stop to it.
Some people say that the model within the junior market is broken, but it always seems to recover in time. We’ve had so many IPOs come along with terrible projects. They should never have been allowed to list. We probably need to see 200 companies die before we get back to the core number of companies that investors are prepared to support.
Today, companies are going through wealth managers directly, rather than going through brokers, and they need to develop a rapport and a relationship of trust with them. The wealth managers, in theory, are more responsible than brokers were in advising on buying shares. The wealth management people have a greater level of relationship. It may or may not be fiduciary, but it is stronger than that with your average stockbroker. If you get these people on board, and you deliver, then you’ve got a friend for life. That’s really the business model.
One of the other considerations with the junior end is excessive compliance. You’ve got the stock exchanges with very complicated listing rules relating to mining companies. And they’re administered by lawyers, not market people. This leads to a world which is just so expensive to comply with.
There are so many companies that want to get an announcement out to the stock exchange because that’s part of the continuing disclosure legal requirements. But you see many examples of the stock exchange sitting on these releases for days, if not weeks, which makes a joke of continuous disclosure. So, there’s certainly over regulation, to no benefit of anyone.
One of the things I do with my newsletter and the advice I give people is ensure its educational. I point out aspects of the market that people should be aware of.
Maybe there’s a need for something that sets standards that companies should adhere to, but without the threat of going to jail. I’m in favour of more self-regulation within the industry without the need for lawyers. We need to have a body which says this is how you should behave. Self-regulation is always better than excessive legislation.
Looking forward, are there any market trends that you think investors should be watching out for?
I already see some green shoots coming through. There is money being made on select stories. It’s all about not really following a trend, but it’s stock specific, and reactive to news flow.
Punters are coming back into the market because there’s a feeling that we have bottomed, but coming off the bottom is not going to be universal. I think that investors need to make sure that whoever they’re backing has promotional skills as well as leadership skills. They need to be able to raise money. Interest rates look as if they’re peaking. That’ll have some impact, because the original bear market was induced as much as anything through interest rates going up. Quality prices came down.
I think China is still a worry. We’re not getting reliable information on China. They are still the biggest consumers of every commodity and they want to be the biggest producers as well. I can see the market wants to go higher at the moment, but selectively.
