Interview: Anarcho Capital’s Jayant Bhandari – M&A ‘the Trade of the Year’(originally published on Mines and Money website - June 2014)
In his work for Anarcho Capital, Jayant Bhandari advises institutional investors about opportunities in the junior mining sector. Previous to this, he worked for six years with US Global Investors (San Antonio, USA), a boutique natural resource investment firm, and for one year with Casey Research (an investment publication). Before emigrating from India, he started and ran Indian subsidiaries of two European companies. He still travels multiple times a year to India and takes a very active interest in understanding and writing about the Indian economy and culture. He is an MBA from Manchester Business School (UK) and B. Engineering (computers) from SGSITS (India).
Following on from his appearance at Mines and Money Hong Kong earlier in the year, Jayant was kind enough to take the time to answer our questions on the state of the mining sector, give his tips for natural resources investors and offer his advice for mining companies looking to attract investment.
Jayant Bhandari will be speaking at Mines and Money London 2014, 1-5th December at the Business Design Centre, London.
Mines and Money: Jayant, you have been a critic of some of exaggerated promotions within the mining sector. Can you explain?
Jayant Bhandari: Mining companies as group—particularly the gold sector—has been a value destructive sector. It consumes more investor-cash than it distributes in capital gains and dividends. Were mining the only sector in the economy, we would all be living in caves, at best. Of course, a large responsibility lies with the investors who approach this sector with the mentality of the gambler. They invest based on hunches. They deify managements and value projects on mythical yardsticks rather than cash-flow generating capacities. On top of this they “value” projects using gold price that is much, much higher than the spot price. The incentives these investors provide create fissures for the wrong kind of people who are great promoter rather than value-creators to rise up. Such investors often get what a lottery ticket offers: nothing. But then these investors are operating in an easy-money ecosystem in which banks offer negative real-interest. Savers have mostly no choice but to divert their money to high-risk or over-priced or in some cases promotional companies with moose pastures, to have a hope of getting some yield.
MM: Have mining companies improved their behavior or is there still some way to go?
JB: In my view, it has become extremely difficult for mining companies to raise money in the market. Investors have understood that when the prices of commodities go up costs often follow, and mostly increase faster. The result has been that despite that gold price has gone up many times in the last 15 years, stock prices of most gold mining companies have fallen rather badly, despite that they raised money when the stock prices were higher and that they distributed negligible dividends. There has recently been a lot of talk about such companies trying to reign-in on their costs and indeed some of them have shown improvement, but you must eventually see a structural change in their thinking. The managements must change their culture from that of lifestyle-for-management to mining, from producing glorious ounces to real cash-flow. The recent acquisition of Osisko Mining by Agnico-Eagle and Yamana, who is my view overpaid, tells me that the shift in culture is yet to happen. I am not sure if a change at this fundamental level will come unless they go through more pain, unless there has been creative destruction. Entrenched interests just don’t change that easily.
MM: What’s the one key piece of advice you’d give to an investor looking at allocating to a junior mining company?
JB: Be rational. Do a risk-reward analysis and invest only if a company offers a probability-adjusted upside. Invest for cash-flow not for some mythical rules of thumb like ounces-in-the-ground. If you cannot see value, wait for other opportunities. Focus on preserving your capital. What I am speaking about in this conversation is not because I have been able to avoid these pitfalls, but because I have learned a very hard way.
MM: For 2014 and going into 2015 which areas of the mining industry do you expect to see recover?
JB: When the market falls, all companies fall. In this correction, good companies have fallen as well, crystallizing value for investors. These good companies are likely to offer upside based on what they have, and they might be able to opportunistically acquire new projects cheaply, adding more value. I prefer junior mining, which can avoid incurring too many expenses by going into hibernation if the market does not recover for commodities. I would be very careful about companies that have operating gold mines, for most them have little or no profit, slowly corroding away their value.
MM: You’ve spoken recently about the upturn in the M&A market and opportunity for investors as a result, do you expect this to continue into 2015?
JB: M&A is likely the best aspect of this industry today. This is the trade of the year, and perhaps for the next few years. There are many cash rich juniors trading at a discount to their cash value, for the market believes that they cannot find projects to use their cash and will hence slowly dissipate it to inflation and general corporate overheads. At the same time there are many companies that are trading at much lower than what their projects are worth, for the market believes that they will fail to raise money. In an ideal world, they would have married much earlier, but egoes and personal aspirations of managements make this an uphill task. The reality of market is today forcing such marriages, triggering value from cash and projects both, for early investors. In fact, quite surprisingly, arbitrage can continue to exist even after an official announcement. I see M&A activity as the key theme of this year and maybe next, providing profit opportunities to those who can anticipate. Gold mining companies must go through similar reorganisation.
MM: At Mines and Money Hong Kong you were concerned about the prospects of the gold mining industry. Has anything happened since then to make you change your mind?
JB: Gold stocks tend to correlated positively with gold price, as has happened in the recent weeks in the aftermath of the crisis in Iraq. Alas, increase in gold price might not result in profit performance—oil price has gone up along with gold, which will likely mostly negate any increased profit expectation. . Analyst reports still value companies based on multiple of NPVs while using higher than spot gold price and using a very low to none discount rate—I find all this quite irrational and certainly something that fails the first test of investing: protect your capital.
MM: What do you see as the key developments for the gold market over the next year or so?
JB: I continue to expect news of low profitability from gold mining companies. This will sustain pressure on their market valuation and will keep putting pressure on them to significantly reorganize. This will make pricing of stocks volatile, perhaps providing opportunities to profit from share volatility and corporate reorganizations and M&A. Some people comment that I am wrong in believing that a new breed of suckers won’t join the fray. As the aphorism goes, maybe this time it isn’t different, but even then I prefer margin of safety. Moreover, this time it can indeed be different: in the last decade or so, given internet, access to corporate information has matured. Investors are much more informed, impacting the conduct of those trading at the margin.
MM: What advice would you give to mining companies looking to attract investment?
JB: Focus on the bottom-line not so much on the top-line. People might no longer invest merely for ounces in the ground.
You can hear more from Jayant Bhandari, along with many other leading lights of the mining finance sector, at Mines and Money London 2014. Click here to view the brochure.