We had been looking at natural resource investing for a while and there is usually two type of argument.
Big Picture Investing:
There is a lack of investment into the natural resource world, supply is constrained and price is going to rise.
Buy all the junior miners related to the commodity
Almost did that in 2020 but we cannot bring ourself to pull the trigger.
Buy the commodity future or a company/ETF tracking the commodity price
We bought Uranium Participation Corp which track Uranium prices… But that is as much we had done.
Small Picture Investing:
Understand the geology:
Nothing looks legible to us.
Employ the experts:
The closest we had gotten is to consider purchasing a subscription at Resource Insider which we never did
The struggle continue to invest. There had to be a better way to invest in the natural resource world than being a geologist, a mining engineer or the shotgun approach.
What make this two natural resource investment comfortable to invest while the rest feels not so?
What are the things that we know that makes us think that we had an edge?
What is make us so edgy in the world of natural resource investing?
These are hard to answer.
Sometimes, the subconscious mind keep more things away from your conscious side. Maybe we should lay out all the reasons why we got into the 2 companies.
When we purchased Jupiter Mines, we knew that
Alignment of interest: Management are buying shares
Special Situation: Spinoff coming off from Jupiter (Juno Resources)
Cost Structure: Tshipi project in South Africa has one of the lowest cost Manganese open pit mines in the world
Capital Allocation: Jupiter is a consistent dividend player
Forex: Foreign currency is usually a risk, but for Jupiter who sells in USD and pays in Rand it may become a bonus.
When we purchased Rex International, we knew that
Alignment of interest: Founders continue to own a large part of the company and are pretty old and may want to sell out
Technology: Rex had been very successful in using their technology platform to prospect for fields
Cashflow: Oman production is in production stage which will bring cashflow into the company
Optionality: There is still large tract of Oman field which could be explored
Cost Structure: Production cost for the Oman field could get lower as production expands
Tax efficiency: Rex has been using various tax structure to cover their exploration expenses in Norway.
Acquisition: The purchase of the Brage field is a pleasant surprise and it helped bolster our view that they are shrew operators.
The answer to the 3 questions we had asked ourselves are surprisingly the same.
While we had factored in the price of the natural resources, the possibility of increase in the natural resource price is not a factor in our decision making process.
The key is to invest in companies with clear catalyst which are not related to the commodity prices.
That the learning we had for our one plus year foray into the world of natural resource investing and the conclusion is not much different from our initial focus on special situation investing.
We need a catalyst that is more than just a cheap valuation or a possible increase in commodity prices.
For each of our investment, we require multiple layers of convictions to help us form a special situation!
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