How to Invest like Billionaire Eric Sprott
In last week’s article on the Palisades blog, I discussed some fundamental similarities and differences between the tech space and junior mining. One distinction I touched on was the fact that junior mining predominantly exists in the public sphere, while tech start-ups find financing in the private arena.
It is worth expounding on this topic as in most cases, regardless of sector, investors can find more advantageous terms and greater returns by funding a company directly, as opposed to open market purchases. This is especially the case in junior mining.
Today’s single largest check writer in the junior arena is Billionaire Eric Sprott, and like I stated in last week’s article, this is likely going to take Eric from billionaire to multi-billionaire status. So what does Eric do that the average retail investor does not?
The answer is participate in private placements…
Most junior resource companies are exploring for the deposits of tomorrow. They do not mine anything, nor do they produce any cash flow. Instead, they are constantly spending money on G&A, including salaries, audits, and exchange fees, as well as exploration expenditures like prospecting and drilling. As such, these companies are in constant search of financing dollars. The way that they raise this money is via private placements.
Simply put, a private placement is a sale of stock directly to a private investor.
Private placements often go unannounced – at least most of the good ones. They are offered to a small group of investors. And by the time they are press released to the public, they are often fully subscribed.
Private placements themselves are not unique to the junior mining sector. However, there is something very distinctive about Canadian private placements, which can make such offerings particularly lucrative for investors. What I am speaking of is the warrant.
A warrant is identical to an option, except for one difference – it comes attached to a share. When purchasing a unit from a company, those units consist of a share and warrant. A warrant affords an investor the opportunity, but not the obligation, to purchase a share at a set price for a set time period. Over the years, warrants have become a standard feature in private placement offerings by Canadian junior mining issuers. Only a tiny fraction of Canadian private placements today are done without issuing warrants.
Let’s use a real life example to explore how such an offering can play out. In 2016, Wallbridge Mining ($WM.TO) completed a unit financing at $0.08, which included a full, 3-year warrant at $0.10. If an investor plunked down $8,000, the investor would have received 100,000 shares of the company, as well as 100,000 warrants. Those warrants would allow the investor to purchase an additional 100,000 shares of the company at $0.10, at any time during the next 3 years.
Following the financing, Wallbridge made a major discovery at their Fenelon Gold Project and its share price began to rise. Three years later, in August 2019, its share price reached $0.50. That investor holding his original shares would have made 6 times his money on the shares. However, because that same investor can now buy additional shares at $0.10, by exercising his warrants, his overall return is closer to 11 times his investment. His $8,000 would have turned into nearly $100,000.
As you can see, such warrants can be highly lucrative, providing added leverage for investors in a junior resource market boom.
So why doesn’t everyone invest via private placements?
First, there is a regulatory barrier that prevents most investors from participating – namely the accredited investor exemption. Individuals must either earn a minimum of $200,000 per year or claim a net worth of greater than $1,000,000 to participate in private placements.
Other barriers to entry include a lack of access to deal flow. Passive investors are not able to make the contacts required to access the plethora of deals available. Investors can hire brokers to help them, but it still requires an investment of time.
American investors face additional disadvantages. Securities regulations in the United States require investors in private placements to hold their shares for a minimum of 6 months and sometimes up to 12 months; by contrast, investors in Canada and internationally only have a 4-month time restriction on their shares.
American investors cannot deposit Canadian stock into their US brokerage accounts. Meanwhile, if you attempt to open a brokerage account in Canada today, you will find that most brokers no longer accept American clients. You can thank FATCA for that.
And when it comes to warrants, Canadian and international investors can cashless exercise their warrants, selling a stock short prior to paying the company the funds to exercise. American investors, though, are forced to take the massive risk of first sending a company a check to exercise their warrants, waiting four weeks to receive a share certificate, and only then being able to sell. That time lag can burn American investors badly if the company’s stock price slides back toward or falls below the exercise price of the warrants.
So just how powerful is a junior mining warrant? I saw it firsthand growing up during the last bull market in precious metals, which began in 2001. My Father started deploying capital in the junior resource space in 2001, primarily via private placements. His portfolio appreciated by 800% in 2002 and 800% again in 2003. That compounds to a 64X return in a matter of 24 months! Think this is an isolated occurrence? Not so.
A major resource investor who I know well began the last cycle with $450,000 in his brokerage account. By 2011, he liquidated the entire account for $110M. That’s a 244X return.
Now, are these types of returns achievable again? Hard to say – a lot will rest on how significant of a bull market that we get. But one thing is for sure, such stratospheric returns were only attainable through private placements.
Eric Sprott has become the biggest figure in the junior resource space in 2019. After benefitting greatly from his investment in Kirkland Lake Gold ($KL.TO) (shares have appreciated from $2 to over $50 per share in the last five years), Eric has used the proceeds of this investment to deploy around $250,000,000 into deeply depressed juniors. Considering that he still holds around $1B in Kirkland Lake stock, its safe to assume he has a lot of firepower left.
$250M is no small amount in the context of the overall market, and for this reason, some have argued that Eric is singlehandedly funding the junior space, with the majority of his deployment going toward private placement financings.
But aside from Eric, very few check writers currently operate in the junior resource space. As a result, the disparity between prices of junior resource stocks and much larger mining companies has become extreme. The trickle down effect that typically happens is far more muted this time.
One reason for this disparity may be the advent of passive ETFs. The passive ETF market in the United States has grown exponentially over the past decade. Gold investors, seeking to invest in the junior resource space will often times buy the Van Eck GDXJ, or Junior Gold Miners ETF. The GDXJ has become a bit of a misnomer, as its size ($4B) has limited it from buying any junior mining companies – it now only holds positions in mid-tier producers and up.
Investors seeking true exposure to the junior space are now forced to find ways to get their money into Canada to buy individual resource stocks, or alternatively invest in companies that have a secondary listing on the OTC (most of these listings have very low trading volume). Furthermore, investors are effectively blocked out of private placement financings, preventing them from attaining the prolific gains that mining speculators dream about.
For this reason, I have spent the last several months building a company that will fill this niche in the market; it will offer investors direct exposure to private placements that they themselves cannot participate in. Palisades Goldcorp Ltd., backed by some of the best and brightest in the industry, already holds a $100M portfolio of junior resource equities. Between its extensive access to deal flow and its ability to command favorable terms from the companies it invests in, Palisades is poised to amass a diversified basket of shares and warrants from across the junior resource sector. Palisades anticipates a going public event in 2020.
If you want to invest like Eric Sprott and the biggest names in the business, it is imperative that you begin educating yourself about private placement financings. There are significant gains to be made across the space when a bull market does arrive, but the most sensational stories and life changing gains comes from investing in these financings. Feel free to visit www.palisades.ca to learn more.
Until next week,
Founder & Executive Chairman
Palisades Goldcorp Ltd.