Investing in the small-cap natural resources sector can prove a bit of a lottery – even for the most experienced and battle hardened stock-picker.
There are funds that play the numbers game, but very few that actually take an active interest in the juniors.
Building on their major success with the Resources Investment Trust, founded in 2002 and wound up in 2008, Sam Hutchins and Kjeld Thygesen have returned with the Global Resources Investment Trust (LON:GRIT).
Where its predecessor mainly acquired assets stranded with big institutions, this new trust has invested directly in all 41 juniors it has taken stakes in.
They range from all out exploration, through to development and production, and take in the whole range of resources and geographies.
The model is akin to the one adopted by Praetorian Resources, led by industry veterans Richard Lockwood and Mark Hohnen, in that GRIT pays for its stakes in companies using its own shares.
The investee companies are then free to sell the GRIT stock, which then gives them a valuable source of new cash.
Both Hutchins and Thygesen have significant experience of investment management in the resource sphere – the former was with M&G and the latter with Rothschild. They have collaborated for more than a decade.
“Neither of us have has worked in any other sector than natural resources and in more recent years our focus has been to the smaller end of the market,” said Hutchins.
The reasons that prompted the pair to form the Resources Investment Trust 12 years ago hold true again today.
The mining sector is woefully out of favour, its small-cap constituents have been oversold and the markets, and in particular the tech sector, is on a charge.
The latter fact may not have a great deal of resonance for those who weren’t around for the last cyclical upswing in the sector.
However, the bursting of the last tech bubble coincided with a switch of interest towards all things natural resources.
“The mining sector is down on its knees, the big caps are suffering and the juniors are down, out and completely and utterly shell shocked,” said Hutchins.
“So we thought the timing [for the new trust] could be very right – and oddly, like 2002, the markets are doing well and we are seeing a boom in technology [stocks].”
The first phase, recruiting the companies, has been completed. The trust has acquired stakes of between 15-20%, bought for paper in GRIT.
The plan is to be a supportive long-term shareholder that can help nurse these firms along the value chain.
Many of them have endured a pretty horrid ride as the investment taps have been turned off.
“Those who have been around know this is cyclical,” said Hutchins.
“But there were a number who got into this when the going was good that have never seen this sort of shake-out before.
“They came out of big companies, found it easy to raise money and found their valuations were reasonably high.
“So part of our job is hand-holding and making them comfortable so they can manage the projects rather than dealing with the other things they might not be comfortable with.
“We want them to look at things properly in terms of cost and being realistic about valuations.
“We are past the point where people believed those valuations. We have had that last capitulation.
“That is important. It is only then we can see things move up again.
“We are starting to see people drift back into the sector because it is interesting.”
Working with the brokers, the plan is ensure GRIT stock is placed with institutions, private client brokers, high-net-worth and rank and file private investors.
Unless there is a miraculous turn in the fortunes of the mining sector, then the stock will be placed at a discount to the underlying £39.5mln value of the portfolio.
That discount to net asset value should narrow over time, aping the wider experience of the sector.
Quoted, main-board listed trusts such GRIT are back in vogue following the Retail Distribution Review, which has changed the way investment advice is given.
GRIT’s backers will be if pleased if it can repeat the performance of Hutchins and Thygesen’s other vehicle, the Resources Investment Trust.
“From top to bottom everyone made three-and-a-half times their money,” said Hutchins. “We wound it up close to the top of the market.”
GRIT is unlikely to appeal to income investors, given the heavy emphasis on exploration and development.
But there is room for capital growth, said Hutchins. “We tried to look for companies at value inflection points.
“We will have companies that don’t live up to expectations, but equally there will be those more than exceed our best expectations.
“The portfolio is fully invested, diversified by commodity, by area of operation and classified by production and exploration.
“What we have looked for is small companies with potentially large, world class assets or those on the cusp of a valuation change.”