Mr. Geiger is Managing Partner at MJG Capital, a limited partnership specializing in long-term natural resource investments. The partnership adheres to bottom-up security analysis and maintain a long-only portfolio of resource equities. Holdings include explorers, developers, and producers of energy metals, industrial metals, precious metals, and agricultural minerals. Mr. Geiger is also co-founder of a venture-backed technology business recently valued at $100m.
Last week I connected with Matt Geiger who is managing partner at MJG Capital and we talked about his journey into the resource space, Gold, Uranium, and Benjamin Graham.
Hi Matt, welcome to The Next Bull Market Move. Let’s start with your background and how you got into investing/speculating within the resource space. Have you always been interested in the markets?
Kerem, it’s a pleasure to be joining you. My journey to the resource space is a bit unique in that I grew up in the heart of Silicon Valley and have no family ties to the industry. At first, friends and family found my obsession with such a dirty, old-fashioned industry as downright bizarre. However, this was more than okay with me as I’m a contrarian thinker and if anything the skepticism encouraged me.
I think a confluence of factors attracted me to the space. The first was my fascination from a very young age with Texas Hold'em poker and, more specifically, the principle of expected value. It was groundbreaking to realize that low probability bets can actually be very rational if the expected payout is sufficient.
Then came my introduction to the work of Warren Buffett and Benjamin Graham in my early teens. It is famously said that value investing either makes sense to you right away and you embrace it, or it doesn’t. To me, the concept of buying $1 for 50 cents was thrilling and made sense intuitively.
Finally came my realization that I wanted to specialize in an industry that would be relevant for the rest of my lifetime. Natural resources are one of the few industries that you can say with full certainty that this will be the case, given that both global population and average consumption per person are growing exponentially on a planet with finite resources.
Let’s talk about Gold. It seems to me that we are on the verge of a big break out to 1400 and above at some point this year. What’s your opinion on gold and how it might play out over the next few years?
Gold is a great place to be right now. I’d encourage your audience to follow Ray Dalio’s advice and hold at least 5% of one’s total assets in gold or gold equities. I’m of the opinion that we have been in a stealth bull market for roughly two years now, with the gold price continuing to make higher highs and higher lows. Gold has been consolidating above $1300 since the beginning of this year, and I think we have officially kissed the $1200’s goodbye. It is likely that we will break $1400 this year, however I don’t expect gold to test its all time high of $1900 until 2020 at the earliest.
For those in your audience looking at gold juniors, I’d focus on discovery-oriented gold plays and NOT on optionality plays. This is a discovery market and, unlike what we saw between 2002-2007, not all ounces will be treated equally. New discoveries and high-quality ounces will dominate in the coming years over big, low-grade marginal projects.
All this said, gold is actually my least favorite metal. The reasoning for this is two-fold. First, 90% of gold production goes into jewelry (50%) or coins/bullion (40%). I have a personal bias towards the metals that power our 21st Century lifestyle, and only 10% of gold production goes towards consumer and industrial applications.
Secondly, and I think this point is very much underappreciated by the market, there has been a misallocation of resources within the junior mining industry towards gold at the expense of other metals. In 2017, it is estimated that 51% of ALL mineral expenditures globally were focused on gold. This means that gold received more attention than all other metals combined! Given gold’s limited value to society, this obsession with gold seems excessive.
I much prefer a metal like silver, which has precious metal properties but is really more of an industrial metal. I’m particularly excited about silver’s role in photovoltaic solar cells, where we have seen silver demand growing at a compound annual rate of 20% over the last decade.
I’ve talked to a friend of yours-Collin Kettell-many times in the past about Uranium. Does this sector interest you? I would argue that this is currently the most hated sector within the resource space that’s filled with apathy and frustration (despite the fundamentals getting better and better).
Absolutely. Uranium is right up there alongside silver as one of my favorite metals. Aside from the ag minerals, there is nothing more contrarian within the resource sphere than U308 and the associated equities.
The sector has been in a relentless 7-year downtrend since the Fukushima disaster in March 2011. Over this period, the uranium price has plummeted from over $70 per pound to roughly $20 per pound today – a fall of over 70%. Uranium equities have fared far worse, with most down over 90% over the same period. It has been nothing short of carnage.
However, the long-term fundamentals remain very much intact. Aside from hydropower, nuclear energy remains the only form of base load power generation that can operate around the clock without emitting CO2. There are currently 448 nuclear reactors operating worldwide, with a further 57 currently under construction. China, as usual, is leading the charge with 19 reactors currently under construction and a stunning 180 reactors in either the planning or proposal phases. The PRC government understands that clean air is a political necessity if they want to stay in power, and nuclear power helps further this goal.
On the supply front, the global cost of production is roughly $39 per pound of uranium. This means that, aside from the possible exception of KazAtomProm, every single producer of uranium is losing money at spot prices. This is clearly unsustainable and, as Rick Rule likes to say, “the price either has to go up or the lights will go out”.
Two of the world’s largest producers are taking matters into their own hands. KazAtomProm, which is the world’s largest producer, has announced two different supply cuts: 5 million pounds in January 2017 and a further 24 million pounds in December 2017. Additional supply cuts from the Kazakhs are possible. Cameco, the world’s largest publicly traded producer, announced in November 2017 that it would be mothballing its flagship Cigar Lake Mine for a minimum of 12 months. After Cameco conducts its annual meeting in August 2018, it is HIGHLY likely that the company will announce an extension of the shutdown for another 12 months.
To sum it up: Uranium demand is increasing as the world continues to embrace nuclear as a CO2-free, base load power source. Supply is contracting with two of the world’s largest producers announcing multiple cuts over the past 18 months (with more likely to come). Despite these dynamics, the U308 price has yet to move off of its 10 year lows. What else could you ask for as an investor?
Here is a quote from Benjamin Graham about the psychology behind investing and speculation, “The intelligent investor is a realist who sells to optimists and buys from pessimists”, and it reminds me that the battle to become successful within the markets starts with being aware of your emotions and how they can work for and against you. Your thoughts?
Mr. Graham referred to the market as having bi-polar disorder – ecstatic one day and depressed the next. If this is true, then the resource industry has an exceptionally bad case of the illness. Due to the capital-intensive nature of the business, the swings between good times and bad times are particularly pronounced. The market really does seem to be going either straight up or straight down.
As human beings, we love validation and we love being told that we are smart. However, we must resist these base emotions if we are to prosper as investors. Inevitably, the best investment opportunities are often the ones most ridiculed. And in contrast, the most dangerous investments are the ones that feel most comfortable.
If you want to succeed in this market, learn to embrace the cyclicality and the volatility. They are your friends and provide you the opportunity to buy and sell to those who are not able to control their emotions.
And finally, have faith in the power of mean reversion. Nothing goes up forever and nothing goes down forever. Only when this concept is internalized will you have the confidence to buy in the pits of despair and sell at the peaks of euphoria.
And finally, give our readers some information about your fund and your criteria for picking investments? How can readers reach out to you?
MJG Capital Fund, LP is an open-ended investment partnership specializing in natural resource investments. We are long-only and hold a portfolio of 15-25 positions. Holdings include explorers, developers, and producers of energy metals, industrial metals, precious metals, and ag minerals. We also invest in agriculture, forestry, water, dairy, and protein.
Investments are selected on a bottom-up basis with a particular emphasis on serially successful management teams and upcoming catalysts. Roughly half of our positions are initiated through private placements directly with the company. These placements almost always include warrants.
For those interested in learning more about the fund or our investments, please visit www.mjgcapital.com and reach out through the Contact Us page.
Many thanks Matt.
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Disclaimer - Interviews are conducted in the name of research and learning from the best. Only you can decide what makes a good speculation/investment.