Resource Expert Jeff Phillips on the Importance of Share Structure when Speculating in the Junior Mining Space

 

Editor’s note: With metals starting the year off exceptionally strong in what looks to be a commodities bull market with legs, I took the opportunity to sit down with an absolute legend of the resource investment space, Mr. Jeff Phillips. Inside, Jeff talks about the importance of share structure when allocating investment capital to the high-risk, high-reward junior resource space. Jeff was instrumental in my early education and success in this Wild West niche sector of the market, and he continues to be to this day. Jeff was kind enough to share some real world examples of well-structured companies he currently likes along with those red flags every resource speculator should be watching out for as part of their vetting process. I hope you’ll find the chat as fun and informative as I did. — Gerardo

 

 

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is an advisor, a close friend, and one of the most influential voices in the junior resource space. I'm talking about none other than Mr. Jeff Phillips. Jeff, it's overdue. It's great to have you on. How are you today, sir?

Jeff Phillips: Thanks for having me, Gerardo. It's always nice talking to you and having a chat.

Gerardo Del Real: It is. And I’ll tell you what's even nicer, I love doing it within the backdrop of being close to $2,900/oz gold, $32/oz silver, copper futures at the $4.85/lb level / spot price at $4.30/lb mark. 

The last time we spoke, prices were not as robust and sentiment wasn't anywhere near where it's starting to go. And I thought, what a perfect time to have you on to talk about how to take advantage of the early stages of what looks like a junior resource bull market that might have several years of run in it.

And of course, you were someone early on in my career that was extremely influential and extremely kind with your time. And really, the first thing I learned from you was all about share structure and how that really allows you to maximize profit potential when things work out.

And so, I thought I'd have you on. And I thought the perfect time to talk about what share structure is and how people that might be newish to the space and don't quite understand what that means, how people can use that as part of their due diligence checklist.

Jeff Phillips: Sure, Gerardo. First off, the markets are looking better right now. I see that with a lot of green in my portfolio, which I always appreciate. But I'm not sure the bull market is starting right now. 

I think we're heading to a world record… just a massive bull market… in the natural resource sector. I've seen a couple of them in the past. After the real estate crisis back in 2008-2009. And the one after the dot-com blowup in 2000 was probably one of the best resource markets I've ever seen. So I do think we're heading to a bull market but I don't really worry much about the timing. 

And you brought up a key point. As you know, I don't do a lot of interviews, and I speak very seldom at conferences. But I did speak at one in the last couple of years. And most of what I talked about was structure because I think it's the most important thing when investing in a junior resource company. 

People will immediately say, ‘A low number of shares outstanding is what you're looking for.” Well, that's only a small, tiny piece of it, Gerardo. What you have to remember is that most junior resource companies are horribly structured deals with people that have very short timeframes, that are collecting warrants, and that are selling their stock as soon as they can. It's essentially organized gambling. 

If you get a bull market, sure, all of the turkeys will fly. But I don't know when that bull market is going to happen. I'm a patient investor so what I really look at is structure. And when I talk about structure, what I mean is, whatever the number of shares outstanding, first off, I want to know where those shares were sold going all the way back to the beginning. Who owns those shares, and at what prices did they buy those shares? Also important, who are the shareholders? 

I’ll look at some of these deals, and they’ll say management owns 30%. I’ll ask how many of those shares are fully reporting? Well, it's 7%. What that tells me is that a lot of those shares that they own can be sold at any time. Why aren't they fully reporting? So that's important to me. 

When I'm looking at a deal, I want to see key shareholders that have a long-term view; management-owned shares that are fully reporting. I want to see that there are other shareholders, like myself, that have a longer-term view where I know they aren't playing for pennies or warrants and that they're actually trying to build a company. 

So those are the most critical things I look at. Obviously, the people and the projects are important. But without the right share structure, and the right shareholders, and management having reporting shares, or key shareholders having reporting shares, I don't want to look at the deal anymore. I've been around too long, and it's a waste of time.

Gerardo Del Real: So just to summarize, you want to know, from inception, how many founder shares were issued, at what price they were issued, and who they were issued to. And then, any time there's a subsequent financing, you want a breakdown, a roster sheet, of the actual shareholders, the percentages they own, and how many of those shares are being publicly reported. 

Why is that part so important to you, because, again, that’s something I was fortunate enough to learn early on but is often overlooked. Oftentimes, people don't ask the question, ‘Are your shares fully reporting?’ How do people get around not reporting shares… and what are some of the potential downsides to not having reporting shares within a share structure?

Jeff Phillips: Gerardo, remember, you're talking about Vancouver and Toronto… and where there's a will, there's a way! There's probably a hundred different ways I've never even thought about. 

For example, you could have a company president, and I'm not saying they're necessarily doing something illegal, but they may have family and friends… sometimes their wives' accounts and their children's accounts, as just an example, aren't being controlled by them. It's not required to report those shares as insider holdings but, obviously, those people can sell those shares without reporting. 

Again, as the share price goes up, you're inevitably going to have some selling. But I'd like to know that management and everyone else who’s involved are on the same page as me. If I'm holding my shares, they're holding as well, so to speak. 

And there are ways in which people are able to place shares in other jurisdictions that aren't reporting in their name. I mean, we could do a whole interview on some of the crap I've seen in my more than 25 years in this business. A lot of the time, people, and even insiders, are trying to make it so that they can flip their shares.

And then, you have the other problem of where you're doing a financing and placing shares with a bunch of new shareholders. A lot of these people are coming in through brokerages, or through other avenues, and they're only there to collect the warrant. 

You really only want to bring in money that's strong and that’s going to stick with you and let you develop your projects over the longer-term. Otherwise, you're on a vicious treadmill where you’re continually doing financings at either the same price, or worse, at lower prices, even if you’re advancing your projects because the financings are going to people who are just trying to flip and collect a warrant. 

Gerardo Del Real: Excellent. Jeff, can you give me some real world examples of companies that you either work with or have holdings in where you like the structure, where you’ve vetted the share structure and management and where you can say… this is a good example of what a solid share structure looks like and why?

Jeff Phillips: Sure, as you know, Gerardo, I've had quite a few successes over the last 25 years on well-structured companies that have been able to weather market cycles and be in the game when the game starts. I could go back and give you some real barnburners; those 10,000%-type winners. 

But I’ll keep it to some more recent ones where I've enjoyed financing the company, and where, for obvious reasons, I’m still a committed shareholder because of their sound share structure.

One example would be Bravo Mining (TSX-V: BRVO)(OTC: BRVMF). Luis Azevedo is the chairman of the board there. I looked at that deal very early on and was asked, pre-IPO, if I would help structure the deal, including vetting and bringing in strong shareholders. 

What I liked about the Bravo structure was that Luis, even though his founding shares were very cheap, they were fully reporting. He owns roughly 50% of the shares outstanding. And you can look at the company’s filings and see that his shares are fully reporting. 

In other words, you have a guy who’s locked in to build a company and perhaps eventually sell the company. That's how he's going to make his money. He's not making money, like 90% of these junior companies, by selling stock that’s owned by whoever they've put it with. So I like Bravo Mining. 

They've raised close to C$100 million on the IPO and post-IPO. The stock has done really well. It has pulled back of late but it's still around 200% higher than where it was pre-IPO where I was involved in the initial financing. I've actually bought shares higher than where it trades now. I love the deal. Again, I'm very patient. I'm just a shareholder; I'm not a consultant for Bravo anymore. 

They have other large shareholders, including BlackRock and Tembo Capital at around a 10% stake each. Their roster also includes some pretty knowledgeable people in the resource space. Around 80% of the stock is with long-term players. Previously, Luis built a mining company and sold it for over C$400 million… so I'm betting on this guy. 

Again, Bravo Mining is a company that's structured incredibly well. It came out of the gate post-IPO doing incredibly well and is still doing well. They’ll be coming out with a new resource soon. It’s a fantastic project in Brazil, and permitting is going well. 

They've made a new IOCG (iron oxide copper-gold) discovery that they'll be drilling this year. They're sitting on ~C$24 million in cash. That's the kind of company I want to own. Great structure. Would you like another example?

Gerardo Del Real: I would love another few, if you don't mind, while I have you.

Jeff Phillips: Sure, Aldebaran Resources (TSX-V: ALDE)(OTC: ADBRF) is a company that I really like, and have liked, for several years. John Black is the CEO, and he’s another executive who’s previously built a junior mining company and subsequently sold it to the benefit of shareholders. Aldebaran was actually spun out of that prior deal. 

Back then, in what was a pretty weak resource market, I began looking at Aldebaran’s structure and had noticed that John Black and management owned about 10% of the company and that they also had a major financial backer in Route One, which is a fund that doesn't do a lot of resource deals. 

In fact, the only resource deals they seem to do are John Black and Ross Beaty deals. Ross Beaty, of course, having a pretty good name in this business. I guess you could say the guys at Route One only like to bet on ‘proven’ mining winners. 

So as I looked further into the deal, I noticed that Route One owned about 45% of the company. Aldebaran had received its flagship, Argentina-based Altar copper-gold project from a major miner called Sibanye-Stillwater. They had come in as a large shareholder at an approximate 15% stake, which, together with Route One, made for a very sound share structure. South32, a major copper miner out of Australia, has since come in at around a 15% interest. 

Last quarter, Aldebaran announced a deal with a subsidiary of Rio Tinto where that subsidiary can acquire a 20% interest in the Altar project by making payments totaling $250 million over an approximate two-year period.

Alderaran’s stock has since gone from under a buck to over two dollars. And part of that success is due to the underlying share structure. Everyone involved is aligned with the ultimate goal of building and eventually selling the asset. 

The same can be said for Bravo Mining. I still like both companies, and I remain a shareholder of both. I don't consult for either… but those are two good examples of share structures that I like. 

Gerardo Del Real: In terms of market cap, Aldebaran sits at roughly C$380 million; Bravo is currently around C$250 million. Both have extremely large-scale and robust assets anchoring the valuation with a lot of exploration upside. Do you have a company that you’re following that’s a bit earlier-stage but still structured properly? 

Jeff Phillips: Yes, absolutely, One is Kingsmen Resources (TSX-V: KNG)(OTC: KNGRF), which is advancing their flagship Las Coloradas silver-gold project. That project is basically the consolidation of an entire past-producing silver-gold-copper mining district in northern Mexico. 

When I first began looking at Kingsmen, it had what I would consider a pretty tight structure. Then, in talking further with management, we eventually agreed to do a slight restructuring wherein we set up a financing with zero warrants. Our idea was to have four or five key people finance the company and have those same people write checks at higher prices, which we recently did. 

Kingsmen is looking to commence phase-one drilling later this month, I believe. It’s a district that’s never seen modern drilling. It was previously owned by one major and two mid-tiers who were never really able to consolidate the full district. 

Looking at Kingsmen’s structure today, we’re talking about a junior miner with a small group of long-term-minded shareholders, including myself, who together own approximately 9% of the company; management and close friends own another 30%. So it’s a very well-structured company. 

Of course, that doesn’t mean it'll be successful. The drills will ultimately tell that story. But having that sound structure enables Kingsmen to be flexible in its ability to pivot and navigate the many challenges of operating in the junior resource space. 

So Kingsmen is a very interesting earlier-stage play. I'm really excited about the upcoming drilling, and we'll see how that all plays out.

Other times, you run into companies where, to no fault of their own, have a share structure that’s not quite ideal. One example is MineHub Technologies (TSX-V: MHUB)(OTC: MHUBF). I was looking at the company early on, and I knew some of their key shareholders out of Haywood Securities. 

MineHub came out of the gate really well but things hadn't materialized quite as quickly as they’d hoped for on some fronts. They found themselves needing some new shareholders, and I was able to come in and finance the company at C$0.20 per share, which was approved by the main shareholders. MineHub has since brought in a 19% fully reporting shareholder. In essence, the company's share structure has been cleaned up. 

MineHub is developing a unique first-of-its-kind technology that allows for real-time digitized tracking of where commodities originate from all the way to their ultimate destination… basically from mine-to-smelter. And they’ve been able to bring in a number of big players from the mining space, including BHP, Codelco, and Sumitomo. 

It’s still what I would consider very high risk. Yet, because of the positive restructuring, the company is now in a far better position to bring in additional key shareholders who have that long-term commitment I’ve been talking about. 

The company’s future is looking brighter and brighter. And if they can continue to develop their digitized platform and can continue to bring in big-name players, they now have that much needed shareholder support and structure to possibly develop into a huge winner. So I really like MineHub Technologies. 

If you pull up their chart, you’ll see that they’ve done quite well since some of these pieces have been put in place with fully reporting shareholders who are looking to build the company and not simply flip shares, issue options to themselves, and collect warrants.

I’ll give you another one, Gerardo. And I won't name the company this time. But your business partner, Nick Hodge, who, as you know, I’m a subscriber to your guys’ private placement service and I often participate in some of the private placement deals you guys put together. 

In those previous examples, we were talking about instances where companies wanted me to look at their shareholder list and add people to it and also become a shareholder myself. But as I was saying, I often participate in private placements, many of which you guys have introduced me to. And the one I’m referring to now is due out soon, and it’s one where I’ve been involved in helping structure the deal. 

And what I can say about it at this juncture is that the chairman & CEO is in the Canadian Mining Hall of Fame as someone who has been credited with a number of district-scale mineral discoveries. Of course, all of us have had deals in this space that haven't quite worked out for one reason or another but this particular gentleman has a pretty impressive track record to say the least. 

He owns roughly 50% of the company, fully reporting. A fund he’s involved with owns another 25%, fully reporting. So right there, you have 75% of the company’s shares fully reporting, Gerardo. They’re currently putting together a financing at a market cap that’s reasonable to me. 

And so I agreed to look at the shareholder roster and also to participate in a big way myself. And I thank you and Nick for introducing me to it. I do believe it’s one of those deals where you’re going to have to exercise a bit of patience. But, again, we’re betting on a guy who has built and sold a number of resource companies to the benefit of shareholders. And he’s looking to do the same here. On top of that, last year, in what was a bad resource market, he actually had a discovery hole that was quite significant and that they’ll be following up on next month. 

I'd encourage everyone listening to check out your and Nick’s private placement letter, Private Placement Intel. I think it's well worth it. 

We could do a whole interview on that, Gerardo. Several of the deals I've recently written checks for through your service I’ve done very well with… so I thank you for that.

Gerardo Del Real: Absolutely. Jeff, that was fantastic. It had been a while since I’d had you on… so I appreciate the time and I appreciate you being so generous with those picks and with the breakdown there… ‘Jeff Phillips University’ as I used to call it early on in my career! 

It's been invaluable getting to know how to vet deals, and it has helped me and Nick, and many others, tremendously. When we're looking through investment decks — and we're getting pitched deals almost daily — it makes it a whole heck of a lot easier to identify well-structured deals that we can offer to our subscribers versus the ones that simply do not pass the sniff test. 

Anything to add to that, Jeff, before I let you go?

Jeff Phillips: Just that the most important thing is structure. Again, you're outright gambling if you're just playing the junior resource market without looking at how the company and the financings are structured. 

I think the best way to play the junior resource market is to focus on four or five well-structured companies and then spread out your risk capital. Of course, even with a solid structure, you still need a little bit of ‘drill-bit’ luck on your side. 

But again, your best bet is to find four or five companies that are well-structured where a minimum of 50% of the company’s shares are held by people who are fully reporting and fully committed to moving the company forward. Again, the overall exit strategy should be to build the asset through exploration and drilling to the point where it begins attracting the interest of a larger player. 

I think you can do really well with four or five companies like that. You might have two or three, or perhaps even all of them do quite well in a commodities bull market… and hopefully one that really goes through the roof to the extent where it doesn’t really matter much what the others do. 

Again, always pay attention to structure and make sure it’s aligned with what you're planning to do with your shares… and things will usually work out. 

Gerardo Del Real: Well said, Jeff. I can't thank you enough for your time. I really appreciate it… let's do it again soon.

Jeff Phillips: Absolutely. Thank you, Gerardo.