Jayant Bhandari | Mining Company Management Must Focus on Creating Value on a Per Share Basis

Jayant is constantly traveling the world to look for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. He was a Director on the board of Gold Canyon, a publicly-listed Canadian company, until its merger with another entity. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies.  Jayant runs a yearly philosophy seminar in Vancouver, Capitalism & Morality.

0:05 Introduction

1:35 Commentary on current junior gold sector

6:42 Commentary on share rollbacks of junior miners

9:43 Two current arbitrage opportunities

13:22 Commentary on possible USD devaluation and loss of status as the world reserve currency

16:18 Thoughts on the US economy from around the world

18:29 Upcoming Capitalism and Morality Seminar

TRANSCRIPT:

Bill: So Jayant, welcome back to my Mining Stock Education. It’s been a while. And let’s get started by getting your general thoughts on the junior gold mining sector.

Jayant: Thanks for having me, Bill. The funny thing for now in the junior gold mining sector, Bill, is that while gold price has gone up over the last few weeks, junior mining sector, the gold stock sector, has not been doing very well. It has actually been falling. I have seen several companies desperately trying to raise money. I have in my list at least four companies in front of me that have heavily discounted their financing price, and they are still struggling to raise money from the market. So that is the situation, a very bad situation in the gold junior sector in my opinion at the moment.

Bill: What do you think about … I saw, I believe it was Midas Gold in Idaho, they did a financing, I’m doing this from memory, at 60 cents I believe, when their shares were trading like 68 cents, and it’s for some investors that are currently invested in the company. What are your thoughts on a situation like?

Jayant: Bill, this is one of the companies I was intending to talk about when I said that they are using heavily discounted price to raise money. I feel very sad about the shareholders of these companies because the current shareholders are the actual owners of the company, and for future shareholders, the management destroys the value of the current shareholders. Now, I’m not necessarily blaming the management of Midas Gold, but what I’m saying is that this is a very strange way of raising money when you discount the financing price, based on the current share price to raise money.

Now, this is happening because there’s a lot of desperation in the market in general. The gold junior mining sector companies have failed to create value, which means that people are not too eager to give them money. And I completely agree with these people that why should I be giving money when I know that the next financing will be at a even lower price than it is now? So, I think really the managements of gold mining companies have to start focusing on creating value for shareholders on per share basis before they get confidence of investors back.

Bill: The market is difficult right now for pre-revenue junior exploration and development companies to raise money. When this situation occurs and their share price is trending down, and then they offer these financings at below the current market value of their shares, do you think it’s reasonable if they only open up the financing to existing shareholders and not new shareholders?

Jayant: Well, legally, it is actually very difficult, from what I know. I have also seen that rights offerings, which is pretty much the way to open up a financing only to the current shareholder is concerned, has not done very well. You require a lot of legal procedures before you can actually open your sell for rights offerings. Then, also rights offerings, because of different jurisdictional rules, is not open to everybody. Many people who don’t live out in certain jurisdictions have either a problem participating or they can’t participate. So, all kinds of things suffer.

I think that really what these companies have to do is to ensure that they start creating value for their shareholders, which means that every financing should be at a higher pricing than it was earlier, and they continue to add value to gain investor confidence. And when they raise money at a higher price, I’m all okay with that because I will have made money by then.

Bill: One of my extreme pet peeves with management is when that I’ve seen share prices fall from 60 cents to 20 cents over let’s say six to eight months, and there were financings done at the 60 to 40 cent range, and then when it bottoms out at 20 cents, then you get the press release where they just issued themselves hundreds of thousands or millions of options at 25 cents. That’s one of my great pet peeves.

Jayant: Well, also when they reprice options, and that infuriates me, and I really don’t want to own companies like those because they are not run by business people, they are not run by entrepreneurs, they are run by bureaucrats, and I don’t want to give my money to bureaucrats.

So, yes, Bill, I have zero interest in investing in companies where management does not have a skin in the game, where the management does not understand the value of shareholder money, and they don’t respect it. I want to get out of those companies. Mostly, I don’t even buy shares in such companies.

Bill: There are some companies out there that I would consider are decently run, but they’ve been developing a project and they have a resource, but they’ve been at it a decade or more. Because of that, then their share structure is going to be a little more bloated. I’m thinking from a North American perspective, not from an Australian perspective, where the share counts tend to get a little higher. But let’s say you get a company with two to four hundred thousand shares outstanding. They have a resource they’re exploring and they’re developing. What are your perspectives, what is your perspective, and what would you like to see in terms of a potential share rollback in that scenario?

Jayant: Well, I have no problems with a shared rollback. I think what matters to me is market capitalization. Now, I have no problems that some of these junior mining companies will fail. It is, after all, a probability-based game. You don’t know what is in the ground, and you invest money into the ground based on a certain expectation.

What I am interested in is that overall, as a portfolio, these companies should create shareholder value, which means that even if these projects take another 20 or 30 years before they go into production, and these days these projects take a really long time to go into production, as long as my share price performs, I am not worried. If the share structure got bloated, I am not worried. I’m only worried about whether these managements are able to create value for me as a shareholder, particularly as a portfolio of companies.

The problem has been, Bill, that I have been in the industry for almost 13 to 14 years, and that time when I started working in the industry, the junior stock index was around 3,500. Today it is less than 600, which means that on inflation-adjusted basis, we have lost something like 90% of value from the index, which means that that is the amount of money that the managements of these junior mining companies have blown away in this by destroying value in these companies.

Bill: You have taught me, Jayant, to look for arbitrage opportunities in the junior mining sector. And we did an interview, my first interview with you about two years ago now, and for the sake of the listener, if you want to learn about how to find arbitrage opportunities in the junior mining sector, go flip back, if you’re listening on a podcast, to two years ago, or on YouTube, you’ll see my interview with Jayant, and I encourage you to listen to that interview. In fact, I’ve talked to some people who have been at junior mining investing quite some years longer than me, that didn’t even think to look for arbitrage opportunities, and I’ve pointed them to my interview with you, Jayant. But with that being said, what arbitrage opportunities are you looking at right now?

Jayant:  Well, there are two companies I can talk about right now. Both modules are closing within this week, so you have to do your due diligence very quickly. Now, there’s a company called Core Gold. The ticker is CGLD. And it is being acquired by an Australian-listed company. There is a 60%, six zero percent …

Bill: Oh, wow.

Jayant:  … arbitrage upside in owning Core Gold. Now, there are problems within the managements of the two companies. There’s probably going to be a fight in the court, but when I am looking at a 60% arbitrage upside, Core Gold is trading at 22 cents Canadian. It actually fell to 20 cents Canadian yesterday. I think that at these prices, my probability-based upside is very good. I’m happy to buy it for a 60% arbitrage upside.

Bill: Is it share for share deal or share for cash?

Jayant: It is a share for share deal, and your shares will convert into Australian Stock Exchange listed shares, which means that you very likely want to buy Core Gold in a brokerage account that also allows you to trade in Australian Stock Exchange, something like Interactive Broker, which will automatically convert your Canadian stocks into Australian stock and will allow you to sell your Australian stocks at a very minimal brokerage fee. And that’s what you have to understand before you buy Core Gold.

Bill: Are there any other arbitrage opportunities you’re looking at?

Jayant:  There’s another company called M2 Cobalt. The ticker is MC, and also this company is being acquired later this week. It is trading at 17 cents. There is a nice spread between buy and sell, so I would just give a buy order at 17 cents and sit on it. There’s a 32% arbitrage upside in owning M2 Cobalt.

Bill: And is that a share for share deal as well?

Jayant:  It is, again, a share to share deal, yes.

Bill: And I remember you saying your favorite are share for cash.

Jayant:  Well, because then my downside is really well protected. The risk with share to share deal is that what happens if … the company that is acquiring, that company’s share price falls after the merger. And that has always a risk I take. But what, Bill, every investor has to do is to really look at the pro forma valuation as well. In my view with both the companies that I have mentioned, the pro forma valuation looks sensible enough that I’m not likely to take too much of risk investing for arbitrage right now.

Bill: Jayant, what are your thoughts on the possible US dollar devaluation and the US dollar not being the reserve world currency?

Jayant: I don’t buy that. I think US, America, is still the best country on the planet, and American dollar is still seen as gold by most people outside the United States. Also, as I mentioned to you earlier, I’m currently in the US, and US is still, is a relatively cheap country to be in, which means that from a currency exchange point of view, I still see an upside in US dollar. So, all in all, I think given what else is available, US dollar will continue to be reserve currency. There might still be an upside in owning US dollar, at least until the time Trump is still in power.

Bill: The foundation of my investments start with physical gold and silver, and then from there, I get into speculating in the mining stocks. What’s your perspective on the amount of physical precious metals that investors should hold and start their investment fund with?

Jayant: What people really have to understand is that protecting your wealth has become extremely difficult in today’s world. Particularly in the third world countries and increasingly in the Western countries, private property is getting less and less respect. The banking system is increasingly in the control of regulatory mechanism, and your bank accounts can be frozen at a flip of an electronic switch.

People have to hold some of their wealth in their own hands and in my view, gold and silver provides one of those basic tools to protect your wealth. And if you don’t understand the stock market, just don’t invest in the stock market. Just by some of these tools to protect what you have. So, it depends totally on person to person, but I would not be surprised if you want to hold one or two years of your expenses in gold bullion.

Bill: Outside of the system?

Jayant: Absolutely. If you are an American, preferably outside the country as well, do it completely legally, but do it in a way that keeps some of your wealth outside the control of your governments. The problem is, your own government is actually your biggest enemy, particularly as the world becomes increasingly leftist, and as the world increasingly becomes institutionally against private property, you have to find ways to protect your own property.

Bill: Jayant, you travel the world. You literally are on different continents. Even as I email with you over the last couple of years, you’re all over, so you’re interacting with investors and people all over the world. Can you give me some feedback on what people outside of the US and outside of North America think about the US economy right now?

Jayant: It depends on people. A lot of people are very negative about the US. And the problem, Bill, is that Americans are very self-reflecting people. They are very self-deprecating people. So, when you see those American shows and which talk about how idiotic Americans are, Americans accept that, and foreigners happily accept that. The problem is that Americans are self-deprecating, and a lot of people outside America are very arrogant. So, they start to think that they are somehow superior than Americans are, which is actually not true. There is a lot of idiocy around the world.

And I was actually recently watching Idiocy, the movie. The reality is that a lot of the world outside America is more idiotic than America is. And I don’t really care what people think about America. I love this country. I think there’s a lot of greatness in this country, although I must confess, I feel extremely, extremely sad that that greatness is going away very rapidly.

Bill: When it comes to the US economy, are you thinking we might be at a top here or could you see it continue to trend higher?

Jayant: Well, I think we could easily have achieved the top already because companies do not invest for the short term. Companies invest for the long term. And I think same people probably already recognize that after Trump, the US will become increasingly leftist, and when you invest, you invest for the long term.

So, it is entirely likely that we might have reached the top, but I truly like what Trump has achieved so far, but in our democracy, his control only lasts for the next two to six years. So, unfortunately, that’s the situation we are at right now.

Bill:  Jayant, you’re a free thinker, you speak your mind, and you won’t let the thought police control you with their political correct ideology. And as I mentioned at the outset, you have a seminar, a philosophy seminar called Capitalism & Morality. As we conclude, can you share with the listener what to expect from that seminar?

Jayant: The seminar is held, will be held on the 3rd of August at in downtown Vancouver, Canada. This is a seminar which I have run for the last 10 years. And Bill, my interest is to expose people to the idea that Western civilization was an extremely unique event to happen in the world. And let us try to preserve those great qualities of Western civilization, which produced a huge amount of intellectual and financial capital for not only the West, but also for a lot of people who were lucky enough to get fruit off Western civilization. So, my interest is to help protect this philosophy or Western civilization, but I also get a lot of fun doing it.

Bill: And as I said at the introduction, there will be a link to that seminar in the show notes below, as well as a link to the upcoming Sprott conference that immediately precedes the Capitalism & Morality conference, so please check out those links. Jayant, as always, I love our conversations, and I look forward to seeing you in Vancouver.

Jayant: Thanks very much for the opportunity, Bill.