Legendary Investor Jeff Phillips on the Benefits of Private Placements (Part 1)
by Gerardo Del Real
Editor’s Note: Below I interview one of the most respected financiers and consultants in the natural resource space, Jeff Phillips. We discuss the importance of having a network in the space to source and vet deals. And we also discuss the numerous advantages of investing in microcap companies via private placements because of the pricing discount and warrant coverage they often offer. Enjoy.
— Gerardo Del Real
Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is one of the most respected voices in the resource space Mr. Jeff Phillips. Jeff, how are you this morning?
Jeff Phillips: I'm doing well, Gerardo. How are you?
GDR: I'm well. As our audience knows by now you and I often chat, and you're one of the people in the business that I really trust and lean on for company specific takes and macro takes. You've been in the business for, correct me if I'm wrong, I believe nearing three decades now, is that correct?
JP: Yeah, I guess so. Pretty close. I don't like hitting decades. Let's just call it 27 years or something.
GDR: Let's call it 27 years, fair enough. And usually when you and I have conversations it's in regards to the market but I thought we would change it up a bit today.
I really want to have a conversation about how important it is to have a network. And look, the bottom line is I wouldn't be anywhere in this business without the network that I've been able to develop over the years. And it's invaluable to me — everything from financings to being able to call a geologist if I don't quite get the technical aspect of a news release or a deposit. The bottom line is: you're nothing without a network.
So I really wanted to reach out and just talk with you about your network, how you've developed it, how you approach it, then we can get into the usual conversation about macro issues. And maybe you can even share a couple of names that you like in the space.
JP: It's crucial. The resource business is full of pitfalls and lots of ways to lose lots of money. It's all about people and reputations and what people have done before. And like you said I'm not a geologist, so I have geologists that I work with that I trust that look at things. If you listen to every company geologist everything's going great. You really need to have an outside opinion, several outside opinions actually not just one. When it comes to the geology you've got to look at the underlying commodity, the country risks. And there's different people that are good at all of that. So a network is crucial.
I've been in the business like you said for 27 years. I actually was active in the business doing consulting and raising money, and I'm more running my own money now and just investing but I know all the players from over the years and different people. So I’m always looking for private placements that I think are interesting. When you a have market sell off like we had from 2011 to 2016 — 2017 was really the bottom — but you've had lots of opportunities to buy things that are undervalued for the money that went into them. And in the next cycle some of these projects will be bought out. So again, it's having a network to be able to identify even in the down times what the undervalued assets are to buy in the market when companies aren't raising money.
Gerardo Del Real: You mentioned private placements. I'd love to start there. For those that aren't familiar can you go over how a private placement — and the many perks that it comes with — can be very, very effective at multiplying your wealth?
It's great to buy into a stock and watch that stock go up and you book your profit or your gain on it. But the leverage of a warrant is oftentimes the difference between a triple digit return and a four digit return. Can you explain to our audience how you go about participating in these private placements and how effective they can be if utilized correctly?
JP: I guess everybody knows what an IPO is where you buy stock and you hope that you're buying it cheaper than where it's going to open and obviously there's been nine private rounds before that at cheaper prices for all the angel investors. So, it's a little different in the micro-cap world and it's the same for all stocks in the micro-cap world but I'm predominantly involved in natural resource stocks. But these are extremely high risk, extremely small companies either looking to develop a known deposit, improve it to feasibility studies (pre and bankable), or they're looking to discover something and have some smoke or some idea why there might be a big deposit there.
You're basically investing very early on and it's always been the case that — even outside the resource sector — these companies constantly need to raise capital. They're not making money. In the case of resource stocks, they're spending it drilling and they're hoping to discover something that's worthwhile selling to someone else. And that's usually why the resource investor is investing in these small stocks.
A lot of these companies spend more money on marketing their shares than they do on actually doing work on the property. So you first want to find companies that are actually trying to add shareholder value, not just using the money to get their share price up so insiders can sell.
Once you identify a company that's really trying to build an asset, a private placement can offer the opportunity to finance the company often below where it might be trading at the time. Say it was at a dollar, they may announce a financing at 90 cents to raise $5 million — so five and a half million shares or something like that. And it comes with a half warrant at $1.40 that's good for three years. What that means is you're buying a share. For all these private placements you need to be an accredited investor which there's certain criteria for that. And no one checks that, you check a bunch of boxes off and say you are when you participate in a private placement.
But anyway so the simple fact is, in my example you buy the stock at 90 cents. It's at a dollar. There's a four month hold period on that, which is a whole nother subject. Depending on what brokerage firm you've used in the U.S. it could be longer. But for the fact that you're buying those shares and having to hold them and the stock is probably not extremely liquid, it doesn't mean you couldn't sell the shares in over a few days when it is free trading, you also get this half warrant. Well, that half warrant, in my example, that's at $1.40 for three years, means that any time over the next three years you can combine for every whole warrant that you own — two half warrants together is a whole warrant — you can buy another share of stock at that price so you can exercise that right.
So if something goes very well or the market like we're heading into here is a bull market and that stock’s trading at $2.50 a year from now... not only have you made money on the stock you bought, the 90 cent stock, you also have your half warrant at a $1.40, which you can exercise and get more shares and you're already in the money.
A lot of professional players in the resource business and brokers that have clients are trying to get people in private placements are following the model that if we can sell the stock for what we paid for it or higher and then after four months we have these warrants that we could exercise. You can sit there and wait and see if the company develops and how it does over the next three years. And quite often, those are well in the money and you can make a lot of money on those also.
Gerardo Del Real: And just to be clear, I mean you're somebody who's done incredibly well. This is a strategy that you employ: using private placements and warrants. And obviously with your net worth and your influence you're able to somewhat dictate the terms. But you continue to do it. So this is something that for you over many, many years has worked in the kind of market that we think we're in and coming into, a gold bull market, is that accurate?
Jeff Phillips: Yeah it's even more important into a bull market because during the downturns there's lots of good values and some great companies have good treasuries and aren't raising money. I'll step in and start buying lots of stock in the market if I like the asset and like the company and know they don't have to raise money. But as you get into more of a bull market like we've started into now it's more important. I like to do private placements because a lot of the stuff's gotten more valued, has moved up from the bottom. Since I'm taking the risk I want to have some warrant coverage.
Gerardo Del Real: Absolutely. Where can people that fit the criteria, that are accredited investors that maybe don't have the network or the access that you have, where can people access these types of deals?
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JP: Well, predominantly if we're speaking specifically about the natural resource sector it's with a natural resource broker. That’s the main source of these unless you're in the business. Brokerage firms, especially in Canada but some here in the United States, are raising money for these companies and looking for what they believe are good deals. Brokers offer those to their clients to participate in the private placement if they're accredited individuals because that's what they do and they get a commission, the brokerage firm.
But brokerage firms have become less important than the last 10 years. You're seeing a lot of private groups such as myself. I look for companies and people come to me and say, "Jeff, we need to raise $4 million." Well, I'm not raising all that money. I may be putting $500,000 into that financing myself, but I may go out and reach out to guys I know that are good shareholders and can help companies. We're longer-term shareholders and don't want to have a bunch of short term shareholders that are just collecting warrants. We'd like to have a big win, that's what I go after. I can help them raise that money.
And all of these private placements from a company standpoint, you're just renting the money. So you want the best money that can help you develop your company or support you in the future, not be sellers right away to collect warrants. People come to me because they know I tend to be a longer-term shareholder. And I know a lot of people in the business, so that's why I get opportunities to look at my own private placements.
But like I said, you can do it through brokers. And then there's so many deals out there that don't know every deal that's going on. And I have brokerage accounts. They send me private placements but I pretty much only do my own.
The only other private placements I've done are through your colleague that you work with Nick Hodge who runs a private placement newsletter, not just resources, but micro cap private placements. And Nick often gets offered deals because of his connections and his network. And I've participated and done very, very well with Nick Hodge.
GDR: As have I. And obviously I'm biased, right? We're friends, we're colleagues. I'll put my bias hat on as I always say because I wouldn't be talking my book if I wasn't biased, but the bottom line is I've done extremely well with the access that Nick's provided multiple times.
I believe hands down he has the best private placement service out in the business right now. And again, I'm biased, but the numbers support my thesis. And I think this isn't a track record that he has for months or for a year or two. He's been doing this for quite a bit now.
Stay tuned for Part Two of this interview tomorrow.
In the meantime, check out Nick Hodge’s private placement service — Hodge Family Office — by clicking here.
It’s only available to 250 high net worth investors, and those spots are already going fast.
Let's get it!
Gerardo Del Real
Editor, Resource Stock Digest For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Resource Stock Digest, Junior Resource Monthly, and Junior Resource Trader. For more about Gerardo, check out his editor page.
