It is difficult for retail investors to sift the wheat from the chaff in the junior miner sector. In this interview with The Gold Report, Rick Winters reveals how RMB Resources, a resource merchant bank, figures out what projects to invest in and those to pass over and talks about some of the companies that made the cut.
The Gold Report: Rick, RMB Resources invests in resource companies throughout the world. Why is RMB flocking to resource companies when most investors seem to be running in the opposite direction?
Rick Winters: RMB Resources is the resource merchant banking division of the FirstRand Group, one of South Africa's major financial institutions. We've been in the business of providing finance to the junior resource sector for 18 years. We look at junior resource opportunities everywhere in the world outside South Africa.
As resource investors, we're always in the game, even when the market doesn't seem to care. Our product mix may change with market conditions, but we stay in the market and are always active.
TGR: With the risk-off sentiment that's prevalent in the market right now, are you making changes to your overall strategy?
RW: As a merchant banking operation, we look at junior resource finance and focus on relatively higher-risk, higher-return opportunities. In times like this, when junior resource equities and mining equities aren't in favor, we look more toward quasi-equity and quasi-debt investments as a way of providing finance to companies. We do this when we have confidence in their projects, using their projects as security for a debt structure. This saves companies from dilution in a time of very low share prices.
TGR: Can you talk more about quasi-debt and quasi-equity investments?
RW: We invest all along the spectrum, from pre-initial public offering seed capital through to corporate debt and project finance. When we talk about quasi-equity and quasi-debt, it's a reflection of the stage that a project or a company is at. Quasi-equity tends to be higher risk.
One example of such a transaction is Bullfrog Gold Corp. (BFGC:OTCBB). We have funded Bullfrog Gold as a quasi-equity opportunity because it has a very attractive project that's had a significant amount of work done on it in the past—a feasibility study, initial permitting and the like. But now, it needs funding to confirm what was done in the past and to expand the project. The transaction uses the project as security for the facility. We have a significant warrant package associated with that facility that represents the return we need for the risk profile.
An example of a quasi-debt transaction would be Solitario Exploration & Royalty Corp. (SLR:TSX). It has a project in Nevada, a gold heap-leap project, Mt. Hamilton. That project completed a final feasibility study in 2012, so the project is well defined. Solitario continues to optimize that feasibility study. Once again, the project is used as security for a debt facility but because the project is well defined it has a lower risk profile and our required warrant exposure is consequentially lower than a quasi-equity opportunity. That facility is to provide working capital to complete the permitting process so that the company can go forward with obtaining project financing and put the project into production.
TGR: What is the total amount of your investments in resource companies, both in 2011 and in 2012?
RW: We have a lot of movement in and out of our portfolio but, generally speaking, we have a portfolio of about $100 million (M)in equity and around $200M in debt.
TGR: Do you expect those levels to increase in 2013?
RW: Not necessarily. But we'll probably see our debt portfolio grow in 2013 because of the nature of the market.
TGR: With all the companies knocking on your door, how do you decide which ones you're going to invest in and which ones you're not?
RW: We really stay with the fundamentals. In a buoyant equity time, the spectrum of the projects that we look at is much broader and we do look at exploration and very early-stage projects and seed capital. But we're doing much less of that these days.
We're focused now on projects where we can assess the project and the opportunity technically. We assess the tradeoff between what we believe will be the fundamental value and the opportunity for the project to actually become a cash-flow generator. In other words, we're looking at the feasibility stage and above.
TGR: What are some investment themes that you expect will govern most of your investment decisions in 2013?
RW: The last year and a half has been an unprecedented period for the industry. We expect 2013 to be the same. We seek to patiently invest. We continue to have a minimum three-to-five year investment horizon.
We focus first on people and identifying good management that we've done business with in the past and that currently has good opportunities. We focus on projects and make sure there's sufficient asset value to justify the risk-return profile. We also focus on our companies' abilities to promote and raise capital because the mining business is very capital intensive.