An old maxim is that the best place to locate a new business is beside an existing business in the same space. How often do you see another coffee shop next to Star Bucks? In the mining world, we have seen a plethora of streamers that in some way have copied Franco Nevada's streaming model. In the exploration sector, at the top of commodity price cycles, many new junior explorer issuers arise, hoping to raise equity capital and duplicate a recent major discovery that caught investors and miners' attention.
The tech sector has demonstrated time and time again, the big successes are when a new business plan is disruptive, rather than copying an existing business model. In the sports world, to paraphrase Wayne Gretzky, don't go where the puck is, go to where the puck will be. Can this be applied to the world of resource focused finance and investing? Does any of this fit with LNC's stated change of business and how can that be disruptive?
Lithion's ($LNC) latest news indicates a change of business, financing and a name change to Queens Road Capital (QRC).
From the news release dated September 16th:
Lithion Energy Corp. will become Queen's Road Capital Ltd., a leading financier to the global resource sector. The Company intends to become a resource focused investment company, making investments in privately held and publicly traded resource companies. It is intended that the Company will acquire and hold securities for both long-term capital appreciation and short-term gains, with a focus on convertible debt securities and resource projects in advanced development or production located in safe jurisdictions.
The availability of traditional financing in the resource sector has deteriorated significantly in recent years, leading to a number of quality resource companies and projects being undercapitalized and in need of financing. Management of the Company anticipates the availability of many investment opportunities, has already identified a number of alternatives and is in discussions with a number of companies.
This lead me to cogitate on what exactly is QRC's new business plan and how it might be executed. Considering the regulatory constraints on raising ever increasing amounts of capital, especially when it impacts a change of business and control, buying meaningful sized spin offs from miners doesn't make sense as QRC states they will be merchant bankers, not operators of assets. Neither will QRC initially have the capital to do so. Competing with other streamers from the start doesn't make sense as the space is crowded and competitive. The initial capital raise is only $31 million, so how can QRC become a leading financier to the global resource sector, and how can the first deal be a block buster deal?
Business media commented a few days ago that the energy sector has shrunk to under 5% of NYSE. Miners must be a fraction of that. The mining sector is even smaller than the energy sector, and has become trivial as a percentage of bankers' loan books. This was reflected by CIBC's sale of their 50% interest in CEF to Li Ka-Shing's Chueng Kong Holdings. Other bankers must also hold debt to miners on their books, either directly, or as part of bank loan syndicates. The banking industry usually moves as a herd, so there are few if any avenues to sell their mining loans. Other than rare multi billion dollar loan syndicates financing tier 1 project development by major mining companies, it seems safe to assume that bankers would like to exit lending to miners as it has become too small to keep in their loan books.
So where is the opportunity for QRC? Gilman has acted as a merchant banker to the mining industry for over 20 years now and is well known to both miners and bankers. Would bankers lend to QRC and take some equity to get their loans to miners off their balance sheets? For example, many banks now sell equity funds to their retail clients. On the commercial side, banks do bought equity deals with energy and mining clients, and then download balance sheet risk by selling the equity to their own funds which are sold on to their retail depositors, effectively downloading loan portfolio risk to others and collecting fees for doing so and managing the assets. Would Chueng Kong Holdings leverage their residual CEF mining loans by selling the CEF loan book to QRC (for debt and equity) and still have Gilman running the shop? Perhaps Gilman has lined up deals on other bankers' loan books to miners? Any such deal could be a block buster of a deal, and set up QRC to consolidate other bankers' loan books to miners around the world. What more can a merchant banker do with an existing loan? When the debt is due, or if the lender approaches the borrower, debt restructuring possibilities include convertible features, streaming and equity, which helps restructure under capitalized miners' balance sheets, and cash flow to QRC with leverage to increasing commodity and equity prices.
This same opportunity has arisen in the energy sector. The "build it and flip it" era has ended, as investors are now demanding a return of capital and a return on capital from investments. Bankers are quietly reducing lines of credit to energy companies, signalling they are exiting lending to the sector. With the right people from the energy sector debt markets added to QRC's board and management, QRC's business model could also be expanded to the energy sector.
QRC's stated business model provides the opportunity to rapidly grow and achieve size in a global debt market, specializing in the downstream commodity sectors at a time when commodity prices are at historic inflation adjusted lows, and at a time when capital and operating constraints can only result in future increased commodity prices. It will be most interesting to see how QRC's business plan is executed.
Disclosure: I have taken a position in the shares of LNC and may buy or sell at any time and without notice. I have no affiliation with Queens Road Capital Ltd of any kind. The commentary is entirely my opinion based on my research and experience.