Rick Rule is Chairman of Sprott U.S. Holdings Inc. and a highly experienced investor and speculator focussing on public companies with a market capitalization below $1 billion. Sprott is a broker-dealer and investment firm specialized on the natural resource sectors employing more than 130 professionals and managing around $10 billion in resource investments. Sprott is the worlds largest investment house focused on small capitalization natural resource stocks.
Why is Sprott so successfully attracting gigantic amounts of clients funds to invest in the junior market even in this depressed state of the commodity market? Because they know that it is the junior exploration market that offers the greatest percentage gains and not the already successful discovery stories and producing mines that are leveraged, almost exclusively, to the underlying commodity market price only.
I have stated in the past on many occasions that I do not cover and invest in senior mining companies, because these are more riskier investments in my eyes as being dominantly dependent on the market prices of their respective commodities. Real and vast shareholder value is generated by investing early-stage and is maximized by discoveries and developing them into mines. Once a production decision is made, I tend to close my positions by selling into that good news.
In a recent interview with Palisade Capital, Rick discussed his outlook for the junior market in 2014 he believes that the bottom is behind us. In 12-24 months, Rick expects that we will be in the midst of a spectacular bull market in resources:
Bear markets are the authors of bull markets. A market that is off 75% is a market that is 75% less risky. It is my belief that the bear market, that we were in, was ugly enough that the bull markets response will be pretty spectacular, too. My suspicion is: what we have seen so far is simply a dead-cat bounce in the better issuers they were so oversold that the absence of selling and some small amount of buying took them up fairly substantially. And that is indicative of what happens in a bear market bottom.
So which are these better issuers that were so oversold and have formed a bottom being on the rise already?
Take a close look at Western Potash Corp., an advanced-stage development company that more than doubled since December. Or take a look at Commerce Resources Corp., an advanced-stage rare earth metals development company that rose 150% since December. Another company we have been following since late 2013 is Lakeland Resources Inc., a uranium exploration company active in the prolific Athabasca Basin in Canada which has increased its market value by 80% already and starting one of the larger drill programs in the basin soon.
With our many reports on these companies, and their specific commodity markets, we explained why we are certain that these commodities are set to rebound strongly now as its these markets that provide limited downside risk at the very moment in contrast to precious metals, which markets are believed to be manipulated heavily and thus dont offer rock-bottom prices.
Zimtu is one of the very few vehicles on the TSX that supply shareholders uniquely with vast upside potential no matter what commodity prices may do. Thus, Zimtu is advancing to a bull itself free from any market state and time.
All the flowers of all the tomorrows are in the seeds of today
As an investor and analyst, I am always thinking about tomorrows. However, being specialized in the junior exploration sector, its getting tougher and tougher every day.
On the one hand, new deposits are getting scarcer and scarcer, especially in safe jurisdictions. While digging deeper and deeper, grades are getting lower and lower. On the other hand, energy and construction costs are increasing every year, whereas raising money to develop a deposit into a mine, or even for grass-root exploration, is more and more difficult.
When I was in university, a long time ago in the early 70s, we were talking in Economic Geology that about 1 in 3000 mineralized anomalies became a mine. So the typical Howe Street or Bay Street investment proposition is that you take a 1 in 3000 chance for a 10 to 1 return that makes the lottery look like a very very very good deal.
(Rick Rule, Chairman of Sprott Inc.)
In light of all this, why would anyone in this world play this game of exploration? Because those few that indeed discover a mineable deposit make gigantic piles of fortunes not only the finders but as well those who invest in them.
The magic question: How to be successful?
Simply put, mineral exploration is a numbers game. Because the odds of success are so low, it makes sense to run through as many projects as possible to maximize ones chances of hitting it big
The idea of the prospect generator business model is to advance as many projects as possible to get as many tickets in the lottery, so to speak to maximize the odds of getting a discovery.
There exist dozens of prospect generators on the TSX that try to generate as many projects as possible and thereafter trying to find a partner who takes it over and advances it with a majority interest leaving the prospect generator with a carried minority stake. If only one out of 10 projects (or so) makes it, the business model of the prospect generator was a full success and its shareholders benefitted generously.
Its all about quantity? No, but add quality and you succeed
Why are so many prospect generators a lame duck? Because they lack one distinctive feature: People who bring you the quality not only once but on a regular basis. Such a company does not exist?
It does exist. And I have been getting involved with such a rare opportunity. The reasons for it are straight-forward:
It is a prospect generator with a unique and proven business model.
It is among the most overlooked stocks on the TSX Venture potentially becoming one of the most treasured.
It has a market capitalization of $6 million only although the value of its assets exceeds $8 million.
It holds investments in more than 40 exploration companies.
It has exposure to a growing portfolio of early-stage opportunities.
It provides investors with a healthy diversification of commodities, geography and people.
Its management team has raised over $150 million in the last decade alone.
It can gain access to financings at levels not generally available to the public.
One of its core holdings has seen a turnaround in share price, increased its market cap from $57 million to $115 million since December 2013, and has more than $25 million cash in the bank.
Another of its core holdings more than doubled since December thanks to a breakthrough in metallurgy sitting on one of the worlds most promising rare earths deposits to be put into production, I have been arguing.
Another of its core holdings tripled its share price over New Years and will soon see one of the larger drill programs in the Athabasca Basin after having measured on its property one of the highest radon values ever detected in the basin.
The prospector generator I am talking about gave birth to all of the above mentioned success stories (which are not over yet but just starting to materialize).
It is also the mother of another 5 to 10 more companies that have above-average likelihood of being successful in the foreseeable future.
This prospect generator continues to build companies and launch new projects.
It has already announced 3 new transactions in 2014.
It has only 11 million shares in the market with no warrants outstanding and thus has one of the tighest share structures I have ever come across when considering the pipeline of success stories and new projects on the way of making it in a similar fashion.
This opportunity has a name: Zimtu Capital Corp.
Zimtu is unique among the publicly listed prospect generators because its not only generating vast numbers of projects but also creating companies and building them up.
Main point is that the odds of success for such a prospect generator and its shareholders as a successful long-term business in this risky/volatile market is much greater than typical prospect generators and infinitely larger than individual exploration plays.
Alphastox.com Interview with Ryan Fletcher, Vancouver-based Director of Zimtu Capital
Please give our subscribers an overview of Zimtu Capital Corp. and its business model?
Ryan Fletcher: Zimtu Capital Corp. is focused on the mining and resources sector through prospect generation, and the creation of royalties and companies. Our business is diverse, however, its straight-forward with three main drivers: A) The generation of exploration properties, and subsequently transacting them in return for royalties, cash and/or shares; B) The creation of new exploration/mining companies, with investment exposure to the seed/pre-IPO levels, and; C) The provision of management services to issuers including: administration, compliance, governance and marketing and corporate development services.
We operate in a very volatile space, mineral exploration and resources, that has significant upside on successes and discoveries, and do so in a way that limits risk, exposes our shareholders to many sources of upside, and maintains share structure.
Please give us a brief introduction to Zimtus team and their experience in the business?
Ryan Fletcher: Zimtu Capital Corp. is led by Mr. David Hodge, President and CEO. Mr. Hodge has been the driving force behind outlining the vision of the company, and has built a team around him of diverse skill sets and nurtured both the teams development and corporate success as well as that of the companies Zimtu is involved with. The Board is of mix of experience and youthful energy and creativity with myself, Patrick Power, Sven Olsson (Germany), and Sean Charland (Toronto).
Given the business, the Boards strengths are weighted in corporate finance, marketing, corporate development etcetera, however, we come from different perspectives and bring our ideas, expertise, skills and networks of colleagues to benefit Zimtu shareholders. We also have sound governance and accounting with Frances Petryshen and Jody Bellefleur on the team. Recently we also established an independent Technical Advisory Board, consisting of Michel Robert, Jenna Hardy and Ian Graham, professionals with 100 years of cumulative experience going through the process of designing, starting and operating mines in many commodities and locations. This gives Zimtu a tremendous advantage in choosing the projects with the highest potential for future success.
What is the value proposition for investors? Why invest in Zimtu Capital?
Ryan Fletcher: For investors looking at the company right now I would point to the following:
Right now the Zimtu business is fundamentally strong, yet our shares are trading around $0.50 down from their high of over $2.00 in 2011. Through the TSX Venture bear market we have stayed the course and rather than re-coil and batten down the hatches we have built, looked for opportunity, created new companies, developed new properties, built our team and continued to push ahead, stronger, with a intense work ethic and team approach. The down turn in the exploration and junior and Venture markets have created a lot of opportunities for us, we are putting in the hours and benefiting from them. Well this hasnt resulted in share appreciation, yet, the seeds are being set.
The company currently has approximately $8.5 million in shares/equity on the balance sheet; yet our market capitalization is $5.6 million. Not only is Zimtus share price depressed, but those of our core companies are as well. Some of these companies are stronger fundamentally now and we also have exposure to more companies with greater percentage interests then we have in the past. On a market turn, Zimtu, coiled-up, should perform.
Business Model and Share Structure: Rather than a standard exploration company that acquires a property, funds, and looks for a discovery, which has greater potential risk of failure based on internal (management, finance) or external (commodity prices, jurisdictional), etc. risks; through the prospect generator model we are able to expose are shareholders to many different companies, commodities, royalties, which provides greater potential upside well mitigating failure on the risk of one company, commodity or project.
We have also been able to maintain our share structure with 11,265,487 outstanding, having gone public in 2009.
How does Zimtu generate revenue?
Ryan Fletcher: Zimtu generates revenue from providing management services (administration, compliance, marketing and corporate development, etc.) to companies. The last 12 months we generated approximately $1.2 million. We expect in the next 12 months to achieve higher revenues. We also generate revenues on the sale of any equities from our portfolio, however with our core companies and investments we are long-term in our vision alongside management and are looking to be with them to the end, provided management continues to push ahead and execute.
Can you give us some comparable companies and how does Zimtu plan to catch up to these peers?
Ryan Fletcher: Some of the better known prospect generators that I view as our goal posts are:
Some big companies; with nice share structures (share prices) have been built with the model. Most started with humble beginnings, much like Zimtu. We are at a earlier stage, and intend on growing the business through the three central value drivers.
What kind of investments can Zimtu participate in that arent always open to the public?
Ryan Fletcher: Zimtu is able to position ourselves in seed/pre-IPO positions in companies, as we are involved in the creation of them and in supporting them longer term. The lower entry prices mitigates risk. We are also providing access to this area of the market for our shareholders, that is normally inaccessible. Even vis-à-vis professional funds and investors we are able to gain access to larger positions as we are involved in the structuring, nurturing and supporting these companies over the long run. We are also able to originate royalties through the generation and transacting of mineral properties; normally private individuals do not have access to these, however we are providing for our shareholders.
What do you think is going to be the biggest driver for Zimtu in 2014?
Ryan Fletcher: Execution of our business plan.
Over the last 24 months we have made strides in the business and have certainly been putting in the long hours and sweat equity and making great steps.
If we stay focused and continue to build up the value in the three areas of the business, the business will be stronger at Christmas.
If a business does well, the stock eventually follows.
Palisade Interview with Rick Rule
In a recent interview with Palisade Capital Corp., Rick Rule explains the nature of prospect generators and the risk-reward benefits that are afforded by this specific sector that is still fairly unknown to most investors or as the interviewer, Collin Kettell, summarized:
Rick has helped to finance around 55 prospect generators in his career, which have resulted in 22 economic discoveries and 15 takeovers. In this interview, he explains that the concept of 15 major wins out of 55, is a very good result when compared to the exploration industry as a whole. For this reason, Rick believes that prospect generators have the potential to far outperform any other group in the exploration sector. Rick is looking for prospect generators that have several projects, and most importantly farm them out. He explains some of the metrics that he utilizes to identity the best prospect generators.
Click here to listen to this compelling interview with Rick Rule.
A topic that you have been quite vocal on is prospect generators. Can you explain what a prospect generator is and the risk-reward benefits that you see that have led you to deploy capital in this sector?
Rick Rule: A prospect generator is a team of people who exhibit substantial geological or commercial or political expertise, and whos value proposition is to generate geological target concepts. Rather than financing and drilling the targets themselves, [they] farm out or bring in joint venture partners to do the heavy lifting. When I was in university, a long time ago in the early 70s, we were talking in Economic Geology that about 1 in 3000 mineralized anomalies became a mine. So the typical Howe Street or Bay Street investment proposition is that you take a 1 in 3000 chance for a 10 to 1 return that makes the lottery look like a very very very good deal. The truth in exploration is that they are not asset intensive businesses, they are really knowledge-based businesses because every property is a liability the opportunity to spend money and not an asset given the probability they come to success. So maintaining ones interest in the knowledge base, by farming out the interest in the project base, is the rational way to pursue this business in exploration.
I have done this with some very certain success over the last 30 years. I have been involved, by my account, in something like 55 public prospect generators, I have participated in 22 economic discoveries, and been the beneficiary of 15 take-overs. If you think about the concept of 15 major wins in 55 starts and compare that statistically with any other type of means of discriminating between exploration investments, the pay-off from prospect generator/joint venture business model portfolios as compared to any other kind is unassailably better.
What specific qualities are you looking for in a prospect generator and where can investors go to find these select companies?
Rick Rule: I am looking for companies that generate multiple projects, but more importantly farm them out. We are looking for companies that generate good enough ideas, that have good enough reputations, and that the industry is a willing participate in their exploration activities.
You can measure this financially; the important metric is third party expenditures on your behalf minus general costs and general administrative costs. Now that is a long window, but lets say that a joint venture is spending $10 million to earn in to your prospect generators property and lets say that you have a 50% carried interest what that means is that the third party is spending $5 million to advance your interest. If you are spending 6 or $7 million, in order to get $5 million spent for your benefit, you are an inefficient generator. If by contrast you are spending $1 or $2 million in general and administrative expenditures to get $5 million spent for your benefit, then you can see the obvious leverage in this market.
In order to track this one self, all the investors really need to do is pay attention to the published quarterlies and annual balance sheets and income statements of whatever prospect generator, or of course one could hire us to do that for you.
Dont Be The Hare
You know the story of the race between the tortoise and the hare, right? The tortoise always wins with an artifice. The core of this tale also applies to the stock market, where private investors compete with institutional investors.
The hares, aka private investors, are not able to win the race, because the tortoise always arrives earlier. That is to say, the pros are mostly positioned cheaply in a stock before private investors even hear about a new stock.
What about the idea right after Easter to finally stop being a hare?
Investing on par with the pros
Any profit is based on the entry price and the earlier one is capable to purchase shares of a new and aspiring company, the higher is the potential gain.
Of course, most bets dont pay out which is the reason that, principally, the venture capital sector requires many potential ten-baggers in its portfolio to compensate for all the lame ducks.
For private investors it is virtually impossible to decide which new company will be among the winners. That is the reason why private investors and professionals likewise require diversification!
But even then professionals have an informational advantage that cannot be catched up to. How can private investors make up such disadvantages?
Imagine an investment with that you can purchase shares with the same conditions and with an early-signing discount automatically and simultaneously as the pros do and at the same time being protected by diversification.
This goose that lays golden eggs does not exist? It does!
The business model of Zimtu Capital guarantees that private investors can participate at the same level as the pros. Zimtu is active as a specialist for the financing of junior resource companies for more than a decade and is publicly traded since 2009. The company is headquartered in Vancouver, where most of the resource companies are born.
Every single day, the Zimtu team has new offers on their tables yet only a few ideas make it to an investment. Zimtu works a bit like a publishing company, yet no books are made but resource companies are discovered, financed and introduced to the stock market.
As Zimtu is publicly traded itself, shareholders of the company via the Zimtu stock are participating one-to-one as soon as a new deal has been made. It cannot get any fairer. The intrinsic value of each Zimtu share simply is a sum of all its stakes and interests in other companies.
Major portfolio holdings have multiplied in 2014 already
One of the largest positions in the Zimtu portfolio is the advanced-stage potash development company Western Potash Corp. (TSX: WPX; Frankfurt: A0QZLM). Zimtu was a founding shareholder of Western Potash and still holds its seed financing shares at 8 cents. Western Potash has increased its market cap rocket-like during the last months and now ranks among the largest positions of Zimtu. Other current high-flying portfolio members are Commerce Resources Corp. (TSX.V: CCE; Frankfurt: A0J2Q3) as well as uranium explorer Lakeland Resources Inc. (TSX.V: LK; Frankfurt: A1JLHR). Both share prices has more than doubled in 2014.
Interestingly, the Zimtu share price has not (yet) increased in the same manner. Measured on the intrinsic value of its portfolio holdings, the relatively unknown Zimtu looks like a bargain at the moment. The discount to its NAV stands at a staggering 30%.
The whole is greater than the sum of its parts
It should not be forgotten that the intrinsic value of a company is always merely a snap-shot through the rear mirror. Much more important for shareholders is what the future will bring. Rockstone Research will therefore put some of Zimtus potential upcoming high-flyers under the microscope shortly.
At this point only a few stakes are mentioned:
Zimtu holds 2.5 million shares of the freshly created Kapuskasing Gold (TSX.V: KAP), which stock increased 5-fold in 2014.
This recent deal shows how Zimtu connects people, properties and prospects in a way to equally benefit Zimtu shareholders alongside.
Zimtu already holds some 2.5 million shares and 1 million warrants with an exercise price of $0.10 until 2019.
This kind of transaction, shows that much upside can be achieved with little downside risk.
Kapuskasings stock was halted at $0.07 in late February and resumed a few weeks ago, currently trading at $0.15.
Kapuskasing acquired the Borden North and Rollo properties near Chapleau in Ontario. The Borden North Property is on the southern flank of the Kapuskasing structural zone, approximately 50 km northeast of Probe Mines Ltd.s Borden gold deposit, which was discovered in 2010 and hosts a multimillion ounce gold zone.
The Probe exploration team, along with prospector Mike Tremblay, was the recipient of the Ontario Prospector Associations 2013 Ontario Prospector Award for the Borden gold discovery.
Mr. Tremblay joined the advisory board of Kapuskasing Gold after it acquired these 2 properties.
As you see, Zimtu is all about people and creating opportunities.
Zimtu also holds a considerable equity stake in Prima Fluorspar (TSX.V: PF), which stock is halted thanks to a major mining transaction being negotiated at the moment, potentially making Prima Fluorspar, over night, one of the few major fluorspar producers on the planet. Because Prima Fluorspar is halted, investors can no longer buy the stock. So its too late. However, Zimtu is right on since the very beginning currently owning more than 8 million shares.
Zimtu also holds nearly 9 million shares of Pasinex Resources Ltd. (CNSX: PSE; Frankfurt: A1JWFY), a company that Zimtu also created from scratch on. Virtually over night it has become a stock that is likely to see appreciation in the upcoming weeks and months of drilling a high-grade zinc property in Turkey likely to advance it to production within shortest time frame due to a joint venture with one of the largest Turkish miners, Akmetal. Pasinex is trading extremely tight at $0.09 cents at the moment imagine the impact on Zimtu if a stock like that takes off. And the outlook for Pasinex turned from bad to fabulous a few weeks ago. As you may know, exploration companies active in Turkey had a really tough time recently, as all exploration projects were forced to be put on hold due to a decree by the Government of Turkey denying any exploration permits.
Recently, the Turkish Government issued more than 50,000 exploration permits. Thus, the devalued share prices of exploration companies active in Turkey are likely to recover now, no matter what the gold price or overall commodity market may do.
These are the stories to follow as individual market conditions have created opportunities with rosy outlooks and thus somewhat limited downside risks.
Most of these young and aspiring juniors under the Zimtu umbrella (still) have tiny market valuations and trade at pennies.
However, it is them that inherit enormous upside potential considering that these are ready to advance to the next level. And each one of those has a tremendous impact on the valuation of the Zimtu stock itself. With just 11 million shares in the market and so many equity holdings in its portfolio, the leverage for Zimtu shareholders is bigger and better than ever.
The Bull is Back only for the Bigger and Better
The market for junior exploration stocks was challenging, to say the least, during the last 3 years. Only the best survived and will make it to the next level.
This speaks for Zimtu and that it is uniquely poised to rise stronger than ever out of this crisis and is in a better position than ever to profit from an upcoming rebound in commodities. It requires only a few of the bets inside the Zimtu portfolio to work in order for Zimtu to outperform the market with ease. The risks have been mitigated to the max, letting the bull run - for You.
The author, Stephan Bogner (Dipl. Kfm., FH), owns shares of Zimtu Capital Corp. and thus would profit from a share price appreciation, whereas the author may sell those any time without notice. Please read the full disclaimer within the full research report (available as a PDF below) as a conflict of interest exists with Zimtu Capital Corp. and none of this content is to be construed as a "financial analysis" or "investment advice".