Brief interview with Warren Gilman of Queen’s Road Capital on his outlook for commodity markets and how that is reflected in his company’s investment strategy. Some notes from the interview are below (paraphrased and for personal reference only, any mistakes in transcription are my own):

His outlook – they are a private equity capital provider for the mining industry. Even at the best of times, private equity has to compete with public equity markets for opportunities. In a bull market, short-sighted CEOs tend to raise as much equity as they can, with little to no consideration for shareholder dilution. So they have to compete with that mentality. All other things being equal, it is generally harder to deploy capital in an equity bull market. But this is a different equity bull market. Commodity prices are doing very well, but equities aren’t keeping pace. Particularly true in the North American gold space. They are seeing value opportunities in that space, reflected by the recent investment they made in Contango ORE, which is a US-listed but Alaska-focused gold company.

On gold, many projects have benefited from the injection of capital from the big bull market ~2 years ago where they raised a ton of cash. Projects are now further advanced, better defined. Great time for them to come in now that equity markets are less receptive to follow-on issues and especially at lower prices from where companies raised money a few years ago. 

Beyond gold, because commodity prices have escalated to such a degree, there is now a plethora of opportunities which 3-4 years ago were not that attractive but today are. Competing with public equity markets but in a crowded field with lots of opportunities. 

QRC’s approach – rule number 1 is do not lose shareholder money. They take that very seriously and employ a variety of techniques to ensure it doesn’t occur. First, they are focused on debt securities, not direct equity investors normally. Have that protection of a debt position on a company’s balance sheet. Second, they go to relatively safe jurisdictions in the mining sector. Third, they try to diversify the portfolio amongst different commodities, projects and geographies. Commodity agnostic. Reduces risk but also increases opportunity. If he was a gold-focused investor limited to gold, when gold goes through a tremendous bull market, you shouldn’t be investing. Same for copper and nickel. That’s probably a time to be selling into the rally rather than deploying capital. Being commodity agnostic helps them find opportunities in out of focus sectors.

Current areas of focus? He talked about gold. Tough to find opportunities in other sectors, so need to look at equity specific reasons. Los Andes Copper is one example. We are in a tremendous copper bull market, and this is a world class ore body stuck in a Toronto-listed company. No one followed it or had heard of it, so you have tremendous value hidden in a moribund public company. Since they have gotten involved, the stock has doubled and liquidity has gone through the roof, because they have brought attention and shone a light on the ore body. Another example is Osisko Green, which will invest in the battery material sector, whatever that will result in when it de-SPACs. Opportunity there was to come in as a founder and participate in the benefits of a founder shareholder position within the SPAC.

They keep an eye on metals that are off the beaten track. The biggest single investment he made with Mr. Li, and perhaps the most successful of all of them, was buying the Niobec mine from IAMGOLD back in ~2014. Opportunities to invest in the niobium sector in a producing mine don’t come along very often. By keeping an open mind, they were able to step in and take advantage of that opportunity. Constantly looking for opportunities for metals that are not on the well-worn track. 

On jurisdictional risk –  it doesn’t matter what the law says, you need to have social license and the community behind you. You have to first of all know you are still going to own that project in 30 years, that someone isn’t going to come along and take it from you. That relates to geopolitical risk, legal framework and rule of law. But, even with the legal right to own it and mine it, will the people allow you to mine? See this going on in Peru on a daily basis where people have the right to mine but the local communities are stopping it. MMG are running into problems with Las Bambas on a continual basis. Classic example of needing the local communities behind you.

Difference between Australians and Canadian markets? The Australian market is what he calls a hot house. Relatively small market with fewer opportunities, with an investor base that is focused more on domestic opportunities. Some relatively large institutions and a very mining-focused retail market looking domestically, so valuations in Australia are generally higher than the rest of the world. That arbitrage has existed for going on 15 years. If he can find relative value in Australia he will go there. Hopeful someday that will happen but thinks it may need a pretty significant correction in the Aussie dollar to correct that valuation arbitrage.

Does he see Australian companies increasingly moving into the Americas? They are seeing great opportunities in the gold space, but also in battery metals and lithium. The lithium boom that has gone on in Australia for the last 2 years is phenomenal and has been somewhat missed here in the Toronto market. Several multi-billion dollar companies have been created in Australia in the lithium space that no one in Canada has even heard of; they will continue to expand into Canada.  

On uranium – one of those sectors that not that many people follow. Not as small as niobium which he mentioned earlier but still a relatively small sector. NexGen’s Arrow deposit will displace or eliminate nearly 70m car equivalents of CO2 generation per year. By comparison, Tesla will produce maybe a 1 million cars this year. And yet the entire industry, including Cameco, has a market cap of US$30bn vs. Tesla’s market cap of US$1tn. Because the sector doesn’t have a LME or COMEX traded metal, there is no price quote that changes on a minute to minute basis. Uranium has a very illiquid spot market and predominantly a long-term contract market, so people don’t follow it as much. This is a sector that will mushroom in the coming 20 years.

Seen some uranium companies buy physical to support the price in the last year or two, why don’t gold companies do the same? The gold market is pretty large and pretty liquid, although perhaps not as much as people think. One company’s purchase of gold would be a drop in the bucket, and wouldn’t have any influence on the price. But one company buying uranium, because the market is so small, can have a material impact on the spot price. Certainly seen the enormous impact of SPUT on the spot market in the last ~6 months. Reflection of how tight and illiquid the market is. If you take 1m lbs off the market, you have a material impact on supply/demand.

News flow from QRC over the next 12 months? They will hopefully get the nod from the TSX to become a main board listed company. Will also declare their second annual dividend, quite an achievement for their second full year of operation. By the end of the year, the aim is to be a much larger, more diversified main board listed company with a history of dividend payments.