Our Philosophy

Why Invest in Natural Resources

In the late 2000s a new asset class of “commodities” emerged. With the rise of emerging economies and investors’ search for physical assets as an alternative to currency, the modern world saw a commodities price boom. In light of the recent global slowdown, a bulk of the pundits called for the end of the commodities supercycle.

However, one cannot overlook the fundamental supply and demand realities of the commodities markets. Despite apparent slowdown in the growth of the emerging economies, modernization is continuing, cities are growing, as global urban population is expected to nearly double in the next 30 years. Even among the developed economies, infrastructure is in need of major rebuilds, with bridges, dams and electric lines in dire need of capital investment. Using copper as just one example of many, Africa, the fastest growing continent, has virtually no copper consumption per capita, while emerging nations such as Taiwan and South Korea are consuming upwards of 20kg per capita. Even the largest growing economies such as China and India lag behind significantly with 5.5 kg and 0.4 kg, respectively.

The outlook on the supply side is also grim. Existing mine reserves are depleted each day, and the new mine developments that are required to replenish the depletion are harder to come by. New discoveries are lower in grade and harder to access than in the past. In each of the past 10 years, actual copper production has lagged behind projected production, by upwards of a million tonnes. Changing world dynamics give a further reason to invest in the commodities. With the world population expected to reach 9 billion in the next 30 years and declining arable land due to changing weather patterns, yield growth is essential for food production. Growth in the middle class in emerging economies such as China and India, means that consumption of “luxury” food items such as meats, fruits and vegetable is increasing.  Both of these factors result in increasing demand for fertilizers.

Demand for common household goods is increasing exponentially as people in the emerging economies become aware of convenient household goods like refrigerators and washers. All of these changing world dynamics are connected back to one focal point– raw materials to produce such goods.

Why Invest in Junior Resources Companies

There are several ways to gain exposure to the commodities sector– direct exposure to commodities trading, through senior equities and through junior equities. Junior resource companies have the greatest amount of exposure to the commodities prices. Exploration and development require different skill sets than production; thus, large global mining houses often leave the exploration and development to junior miners to source new deposits. This means that they form an essential part of the chain of development and that M&A is consistently at work in the sector.

Junior resource equities are traded on underlying commodity of the development asset and market’s perception of the value of the asset relative to its peers. A significant amount of volatility and variance to the intrinsic value of the shares exists because the assets do not trade on multiples of earnings and catalytic events exist at a greater number compared to other equities (new discovery, engineering studies and M&A). Junior resource companies have minimal financial metrics for typical financial analysis, therefore, we believe there is a need to closely follow the management’s ability to deliver on asset development, cash spending, and corporate finance activities, while deeply understanding the technical merits of the underlying assets.

Naturally, the junior resource market is full of stories that are worth $0 ie, would never become a mine) and the volatility is even greater than the commodity market itself. Meanwhile, we believe there are misunderstood and underfollowed equities with strong underlying assets among the thousands of junior resource companies.

Extract believes that, as a result of the heavy volatility and requirement for relatively specialized due diligence compared to other sectors, this sector is among the best to find market inefficiencies.

Extract can achieve high absolute rates of return in the market because of

  1. immersion and extensive relationships in the sector,
  2. technical knowledge, and
  3. ability to manage and track companies and their catalysts.