All right, my Manas, I've got a special chat that I'm excited to
do. I'm here with the the founders
of Baza Capital, Braden and Will.
Thanks for joining me guys. G'day JD big fan of the pod, so
great to be here. Appreciate it.
We've got a heaps to heaps to talk about.
I was pretty excited reading up on your your funds history.
So I kind of want to start there and I want to start with you
guys starting the fund January ish of of 2020 and just getting
absolutely smashed in the in the first few months.
What what was that kind of like? Talk me through it.
Yeah. I mean, we've been moonlighting
for a while. So we've got the funds set up
and the business set up. But yes, we did indeed push the
boat out in January 2020 and that was in our Baselhack
conviction emerging companies funds.
So right on the avant garde with respect to small caps and you
know, risk being off for a very sharp period and and and a very
sharp decline. But you know, happy to say that
we hadn't fully kind of put put our cash to work at that point
in time. And we'd, you know, done a lot
of work on their companies that we, you know, put into.
And so we didn't need to make too many changes in the
portfolio, even though it was, you know, a pretty stark start
to the fund. And then of course you see what
happened, the V shaped recovery and it, it turned out to be a
great time to start a fund honestly 2020-2021 great period
of outperformance for us and small caps and junior mining,
which are, you know, the things that we focus on.
So we're probably pretty lucky in the end.
So how long did it kind of take to get fully invested in that
fund? You sort of get the cash on the
door. I'd imagine there's a lot of
fundraising that goes on in in the kind of year prior and then
you ended up having a bit of cash balance.
Just sort of reading through those, those monthly reports
worked out well in in hindsight, I guess.
Yeah, it was I think rolling back to that January, the market
was relatively toppy I think was the the feel.
And then when we started deploying, it did take a lot of
time. I'd say we were probably 3/4 of
the way through when the initial reports of what was this, you
know, emerging pandemic coming from China and and overseas.
So, you know, we had I think we all painted a pretty rosy
picture of that initial days. There were certainly some very
dark, dark times, but a. Couple of sleepless nights.
Many, I think there was, you know, genuine excitement with
starting something and then that, you know, goes in lots of
different emotions in that first few months.
But I think the story of 2020 and then large part of 20/21 was
1 of genuine excitement because there was a lot of, you know,
opportunities to deploy money, obviously a lot of capital
raisings from that, you know, April, April, May, June period
throughout 2020. So it was, it was quite
exciting. I think the one investment that
probably marked almost the bottom of the market or
certainly from our fund was that Chalice initial hit, which was
probably the towards the end of March, March 23 and and.
Had you owned Chalice before or did you own it in there, or was
that just something that that stood out at the time?
But very quickly then, we did. Yeah.
Awesome. Would have worked out quite
well. It did, yeah.
I think Chalice was one of the better performers for us in
2020. Certainly it's been a a good
holding for the fund at, at at various points.
We still have a small holding in, in, in the fund at the
moment with Chalice and I think that broadened pretty quickly.
At the time we were towards the, I guess higher end of the metals
and mining exposure, just to clarify to generalist fund.
So at the moment, we probably would have 80% of the investment
sitting in industrials, healthcare, IT services and
circuit, 20% within the mining space at the moment.
In 2020, I think it got up to a high of about 40%, largely
through price appreciation, but also the opportunity set.
So you looked at a good few Goldies at the time as well as
well as sort of having that that cash buffer.
So the the portfolio was pretty, pretty stocked up with that
weighted to your producers. Did you sort of mix it or stay
where you the area you kind of know, know a bit better those
developers and that end of town? It was towards that end of town
and clearly Gold had had a good time of it in 2020.
But I mean we try not to be too macro or make particularly not
make tactical decisions around macro.
And so Brandon and I are out of mining finance for the majority
of our career. And so gold companies, analysing
them, doing due diligence on them, the personalities there,
our network which can kind of enrich that due diligence.
It was just a comfortable place for us to start our investment.
And so, you know, probably a bit of luck that that ended up being
a great place to be investing at the time.
But yeah, we certainly added to it as that, you know, gold
environment was clearly opening up for us.
And then sort of just zooming out on the on the history coming
through 2021, that was a hell of a year, especially in the sort
of area you guys like to play, I mean, for for most sort of
sectors. But what was that part of the
roller coaster kind of like flat out every day a bit more
exciting, relaxing in a way, or is it sort of different?
Yeah. I mean, it was great to start
with the, you know, that initial pretty difficult market because
you're haunted by that and it sticks with you and it and it
gives you a discipline that you're going to take through
your career with you. And actually in my career before
this, I started in the year of the GFC.
So I had a had a very, very similar kind of baptism by fire.
Yeah, you really do need to keep your head.
There's plenty of everything has a different more positive
complexion when you know, things are going up and to the right.
And so we just needed to really make sure that we're still
investing on fundamentals. You know, we weren't grabbing it
every piece of candy at the in the store.
And yeah, we're really happy with the portfolio we put
together at that time, took good advantage of the bull market.
But yeah, have been able to still, you know, have good
returns. Speaking of candy, have a look
at this piece of eye candy, Paul Natali from Grounded.
What a good looking rooster as I've alluded to before.
And mate, the precursor to the eye candy that is a grounded
can. Grounded village in
construction. That's candy.
This out. Wow.
I'm seeing bloody diggers with Grounded on them.
I'm seeing bloody grounded signs everywhere.
Grounded you. It's Grounded gear that is a
full turnkey construction solution for the mining
industry. JA trap far.
Right camps look divine. Divine mate, anything that sits
above the ground on a bloody mine site grounded can build it.
All your non process infrastructure, just get onto it
right And and the best thing is they're building they're
bringing the building standards from the greatest country in the
world to Australia, the motherland Sicily, right.
Unfortunately, looking at that photo before like Paul Mottoli
is married. So the closest thing you can get
to Paul himself is a grounded camp, so.
Get yourself sorted. So so why don't we talk a bit
about the the fund, the initial fund that was set up.
The bars are high conviction. How many companies do you like
to hold? What do you sort of classical
holding periods if you like and all these kind of broader
details to start? Yeah, we'll go through the one O
1. So as a high conviction, that
initial fund that we launched in the start of 2020, it's a
traditional long only emerging companies fund only invested on
in the ASX as well. There are probably three key
differentiators to other traditional small cap funds.
The first being we take it relatively concentrated
portfolio. Our top 10 holdings would
probably comprise close to 7080% of total fund.
I think the total portfolio is between 25 to 30 at the moment.
That's largely due to our approach of the mining tail
running a commodity bucket as opposed to an individual
industrial business. Has it has it been refined or
was it always from the go that many sort of companies that was
the the way you guys wanted to go about?
It, it's probably shrunk over time.
We, we are an emerging fund manager.
We always are quite introspective and wanting to I
guess improve and reflect what we have been doing.
And I think some analysis that we ran close to 18 months ago,
it was quite obvious that the largest holdings were
disproportionately better contributors to alpha, meaning
that even accounting for their waiting, they were generating
larger returns for unit holders than a tail that we were
maintaining. And it wasn't, we weren't
holding 100 companies. You may have instead of been
holding 25 to 30, we could have been holding 5040 to 50.
And so a lot of that centres around the reason for being more
concentrated, having high conviction in a name and really
just keenness to keep things simple was the overriding
factor. And we looked at each other and
said, let's just build a portfolio of, you know, really
the core ideas. And for that there wasn't too
much changing within the portfolio.
A lot of it was just naturally letting those larger businesses
appreciate and probably taking a more harsh view to the long tail
that we were maintaining. That's, that's really
interesting what you say about the, the return sort of being
driven by those best peaks. Do you do you put that down to
putting more work, having more conviction?
Is that, is that a market structure type thing where these
guys go into the Atfs, they attract more capital, more
generalist funds. Look at them.
What, what does it kind of come down to the the fact that a lot
of these sort of markets are subsets of markets end up
accruing to to one, one sort of powerful name, Yeah.
I, I think it's, it's not so much the size of the company,
it's more the size of our holdings.
So actually one of our best returners ever was only a kind
of a forty, $50 million market cap IT services company that
ended up getting taken over and, and that ended up being a, a
fantastic win for us last year. But it's, it's more so that I
think, you know, it may even sound obvious, but we have the
conviction to to make these our largest holdings and there are
reasons for that. It is the amount of work we've
done, but it is clearly the amount of attractiveness there
is there. And then these stocks that were
more sitting around than maybe 1%, two percent, 3% of the
portfolio. Clearly we've got the foot in
both camp because we're not comfortable to put it 5% plus.
And so it really makes sense, I guess that what we found was the
ones which we where we did have that confidence were the ones
that returned best. So why not just cut out the the
ones that we didn't have the conviction on?
Yeah. Yeah, I'm, I'm keen to to hear
how you find these names, how you screen for these names.
And I think we should talk about the responsible investing or
the, the mandate that you guys operate with to, to kind of
start with. And I think one of the one of
the questions to ask off the bat is, is it kind of misunderstood
the the reputation of this style of investing has changed quite a
bit over the the guys that you that the period that you guys
have been in kind of operations. How do you think about
responsible investing as a broader sort of sector or
thematic at the moment? Yeah, I guess we don't think of
it as a sector or a thematic. We, we think of it as, you know,
a philosophy, philosophy for investment and probably wouldn't
say it's misunderstood. I think it probably just means
different things to different people.
And for us, it's always been really important that we invest
in line with, you know, our values and, and, and where we
see the future heading. And so it's no surprise that
electrification and decarbonisation is a big theme
of what we do, both in terms of what we don't invest in, but
also in what we do invest in. And then as an adjunct to that
and, and what's really important, particularly on this
podcast is metals are such a big part of that.
And so while we're responsible investment, there wouldn't be
many out there who are responsible investors who are as
comfortable as us to invest in mining stocks and particularly
those that are tied to electrification.
So it was really important to us to be able to kind of bridge
what's seen as, you know, kind of these two different sets of
investors, one that's, you know, happy to invest in anything,
just give me the risk return. And then the others who are
more, you know, I want to invest in what's good for the world.
I mean, we kind of see it as why can't we do both?
And and so we invest with risk return as our first and foremost
and you know as as a North Star as it should be for a fund
manager, we do cut out things and and we do add scale up our
investments in in some positive industries.
But our opportunity set operating in the ASX listed
small cap space is such that we can still invest in about 1012
hundred companies. And so we really don't feel like
we're being stifled by the things that we're cutting out.
And so, yeah, we just see it as a really positive way for us to
invest. We also and it's in this is
important I think because of the way we structure our responsible
investment framework. We tend towards industries with
with long term tailwinds and you know that is circulated being,
you know good investment in our view anyhow and and leading to
good risk returns. So yeah, I, I probably, yeah,
hopefully that gives you a bit of an insight into it maybe to
add. Yeah, I mean, just in practise
maybe Braden, what that kind of looked like, looks like because,
well, you've spoken about the, you know, there's no shortage of
companies that 1200 is a lot to kind of choose from.
But setting up the fund like this, I'd imagine there's a,
there's a mandate and that sort of plays into perhaps how you,
how you screen for companies to maybe on a a sort of day to day
kind of basis. I'd love to learn what that
actually means, how you you pick out opportunities.
And maybe just to, so you get deep a bit deeper into
responsible investment. I think some of the confusion,
if there is, I think a lot of you know, perhaps your listeners
and and others would have a good understanding of what is the
core of responsible investment or ESG.
But the confusion maybe around with how different funds and
there are lots of different methodologies and how that's
actually then applied because everyone has quite different
processes. We'll go through ours.
There will be different processes and people will apply
in different ways with different negative screens.
Some funds will use the United Nations Sustainable Development
Goals, UNSDGS, some nation, some funds will track carbon
intensity and have that as a key metric.
There just hasn't been something that centralises a lot of
responsible investment reporting and that's unfortunately where
some of the confusion lies. There's no joke code at the
moment. So you know, clearly setting out
what's measured, what's indicated, etcetera.
That just hasn't come to the industry as yet.
We're clearly hoping it does because it'd be great then have
everyone reporting and then allow whether it's prospective
investors or particularly companies that we meet with have
a great idea about what's what's is actually applied.
So coming back to bars are capital and the bars are high
conviction fund just. Before you get into just to keep
going on the response best because I think it is important,
but I mean that's why what we value most in our business is
transparency. So people can see on our
website, you know, our information memorandum on the
back of our monthlies what we do and don't invest in.
And so the unit holder makes their choice about whether
that's something that they're comfortable with as well.
I mean, I think maybe people start to have an issue with it
when they feel it's been forced on them or is, you know, lacks
transparency and, and you know, it's like someone's trying to
force their values on onto them. So we would have a unit holder
set that some are very focused on the responsible investment
side of the business and you know, probably maybe gravitated
towards us because of that. And then some that were probably
a bit more ambivalent towards it.
And and they're just there, you know, because they're they enjoy
the risk return hopefully. But yeah, to to get into
actually how we build the portfolio.
So it comes on the outset. So as we define our universe,
we'll use what's called negative screens within the industry.
So they're typically on a sector, gambling, tobacco are
common negative screens. And so you run through now
mandate the ASX listed universe and then we'll screen out.
These are the companies that would have primary operations
that relate to gambling or tobacco and there's some common
negative screens that you run through and we list ours all on
our reporting website, keeping it as transparent as we can.
And so that then reduces our investment universe and then as
we progress through the investment process, which is
typically then risk and return driven, engaging with management
teams, going through financial reports, the notes, collecting,
you know, information, building our financial models as we meet
with the companies often within also asking questions around
what's your strategy for, you know, introducing renewable
energy to your project. Do you have a strategy?
If not, sometimes there's an opportunity for us then to
introduced to perhaps it's a consultant that can help provide
some initial feedback and and that's, you know, something that
we're really helpful to do. But you know, ultimately the
management teams and the businesses obviously making
their own decisions and there's hundreds of thousands of other
shareholders that have their say in the business and how it
operates. So I'm.
Keen to learn a bit more about how the two of you kind of work
together and then how that kind of feeds into actually picking
the companies that you ultimately investing.
Do do you find, you know, do you, for instance, need full
agreements on each name that goes into the portfolio?
Do you let one take the lead on on a name if they've done a bit
more work? What's that sort of working
relationship like? Yeah, I.
Think I can start by saying, I highly recommend if anyone's
going to start their own fund that they do it with two people
because, you know, particularly in those early days, we were
able to, you know, kind of take a lot of confidence from the
discussions that we'll about be able to have with each other.
And, you know, when one person was emotional one day, the other
person could, you know, pick up, pick up the, the ball and, and,
and vice versa. But where, as it relates to
Brayden and I, we've actually worked together in two other
places before this, so investment bank UBS and, and
then a boutique advisory called Vesparum Capital.
So before we started bars, we had a really good idea for how
we work together. And I think over the years and
you know, many years we've worked together.
Now we've probably built somewhat of a fraternal bond,
which is allows us to really have quite robust discussions
and really, you know, kind of one person comes up with this
idea, not just glad handed and yeah, let's go.
It's really why. And you know who, you know where
that idea come from? What's the analysis you've done?
I agree with that aspect, that type of thing.
So that's been. Really positive for us and, and
I think you know, we can, we've we've always able to dust
ourselves off after one of those robust discussions and, and just
get on with it as well. So we kind of have that real
understanding in terms of our individual attributes.
And Brayden is just an absolute efficiency machine, just
crunches through data screening analysis.
And so that really helps us to take that huge opportunity set
down to a, a smaller opportunity set.
And probably where like I come into it and we, we're going to
meet in the middle is a very OCD.
I, I, I'm, I'm very focused on our processes and our risk
management and yeah, really keen for us to make optimal
decisions. And so putting those together,
we probably made in, you know, where we're making the actual
investment decisions. I think what's interesting JD,
and something that we certainly learned a lot has been
psychological aspects of investing can at times be the
most valuable or at least could be on the other side the most
detrimental. And So what we do with each
other as well is get to understand someone's taken the
stock through from, you know, initial screening through to
investment. They're very, you know,
confident, perhaps too much for, you know, they have this.
I've done so much work in this. We need to step in and then, you
know, check each other's biases as well as sometimes someone can
be too negative on a story. It just helps to have that
second brain personality, call it that will be in a different
head state as you in any given day to then just check.
And essentially the best thing is to be, as you know, not
dispassionate, but just to be as level headed when you're making
decisions. And just having the two, two of
us working together has helped us, or at least that's that's
really what we strive to do. Do you?
Find one of these more cynical. I think we can.
Be equally cynical. And I think that's what helps.
Yeah. So it'll usually Mystic people.
Oh, yes, we're gonna have to, we're glass half full in
general. But I think when it comes to, we
do play the good cop, bad cop because it I think it helps to
have the person who's got the exuberance about a a particular
story, probably because I've done more work on it and and,
you know, maybe fallen out of love with it to some extent to
have the person really challenge that on the other side.
I I think is, is highly valuable.
And so, yeah, I think we can both play that role in yeah.
But this, I mean, this does obviously doesn't have to occur
with, you know, going out and joining, investing accounts and
going out and doing everything with a a partner side by side.
I think just having a discussion with someone who's either very
cold or new to an idea could be anything.
You could be looking at, you know, a new gold company that
you've picked up and then to have a cross check with someone,
someone new and you take them through essentially, you know,
protocols in my investment thesis.
It could be one of your friends, it could be, you know, a broker
that you really respect that's incredibly valuable.
I think one of the key learnings for me personally has been the
real value of some of the probably more the softer
qualitative pieces of analysis or, or, or skills or assessment.
I think when we came in to funds management, our backgrounds were
quite analytical, like coming from investment banking and,
and, you know, really focused, you know, OK, what's the
numbers, what's the modelling that's has been called the bread
and butter. But we feel most comfortable
sitting in, you know, the notes of an annual report and
unpicking some of those insights and building a financial model.
But really value comes from asking someone that's either in
the industry and is working at a competitor or I actually started
civil engineering at, at uni 15 years ago and we were looking at
an engineering consultancy business.
And a lot of my peers and, and friends still are in the
industry to be able to pick up the phone and just ask some of
those softer questions. How hard has it been to hire
people? You know, what do you think of
this competitor? You know, have you come across
them on, you know, other, other transactions or other bids?
This is the, the softer skills. Sometimes you find that a
conversation with, you know, a, a research analyst may throw up
a fatal flaw in your analysis and saved you 1520 hours of
work. So some of the softer side of,
you know, talking to either friends or ex colleagues is
being incredibly, incredibly important.
And I think from our initial approach, which focused around
analysis to then build that in, we're probably finding we do
more of that as we progress. So going deeper on those sort of
softer skills, you talk about defined meeting management has
become an absolute staple. Or are there cases where you can
sort of learn enough from from the paper, from interviews or
these sorts of things beforehand that would?
Be one of our rules effectively have to meet management and
given we're in small caps, even though we're a relatively small
fund at this point in time, our access is really good.
So we in general will be able to meet anyone that that we wish to
in, in, in terms of companies that we would like to invest in
and and we'll often do that multiple times before making
investment and then once we're invested regular catch UPS.
One more on just sort of starting the fund who needed the
the final push to to maybe leave a job or get over the line or
was it a an idea that had been scheming for for quite some time
I. Reckon Brayden came up with the
idea. I remember the cafe we were
sitting in when he approached me on it.
So probably me, but I don't think I needed too much
encouragement. I, I think I talked to my wife
about it that weekend and she just, she, she knew I didn't
love my, my previous job. She said go for it.
I think she had a lot of respect for Brayden and, and what we
might be able to achieve. So I think once we decided to go
for it, it just was pretty 1 directional.
Yeah, awesome. That's a great support too.
Yeah, let's let's talk about some mining related businesses.
So we, we were chatting prior to this and we thought we'd go
about it a different way. Obviously we love to talk about
mining companies, but there's a whole sort of subset of
companies out there that can, you know, ride the same sort of
wave if, if you like, of a commodity cycle or various
commodities and their respective cycles.
So maybe it's a sort of picks and shovel way, but as a broader
sort of space, whether it be sort of mining services and all
these sort of other, other companies that we we're going to
chat about, they they have been pretty unloved for for quite
some time from from my perspective.
Is that something you guys would agree with?
Unloved from the perspective of perhaps trade at lower
valuation, is that what you're getting at?
Yeah, Yeah. I mean, I think a lot of that
comes to what's the market's appetite for cyclical risk and
you know, divergent views on the commodity outlook, divergent
views on where we are at the like which point in the economic
cycle are we at the moment. But in terms of just general,
you know, we look at mining services, probably stretch it a
little and say what are the businesses and companies that
stand to benefit from? You know, we're pretty
constructive on that mid to long term outlook for commodities,
whether it's tied through to those commodities needed for
electrification or through to, you know, a growth in emerging
markets in all the commodities that'll be consumed as global
GDP or GDP per capita increases. So for us, what are the
businesses that stand to generate?
And it isn't just businesses that have, you know, the
capability around drill and blast, although the, you know,
fantastically leveraged to that thematic.
But we look at, you know, companies that in the WA
economy. I think if you're bullish on the
outlook for commodities, you probably are then going to be
pretty bullish on the outlook for the WA economy, which is
already, you know, the jewel within the Australian crown at
the moment. And we say that coming from we
say that coming from Melbourne right here.
But essentially yours Hartley's is a good example of a business
that we've invested in a fantastic balance sheet was
really the key draw card for us. But we believe that that will be
a business that throughout the cycle will have its moments.
And we think that if you are constructive 5 to 10 year
outlook, it may not happen in the next six months.
It'd be great if it did, but that's a great business that's
really set up to whether if there is, you know, whether the
storm, if there is, you know, continued softness in the
particularly junior mining space.
But they've got great leverage to a recovery in, you know,
mining capital raising volumes, you know, the general wealth of
WA increasing. They've got fantastic, you know,
private, private client advisors, wealth advisors that
we work with over the years as well.
So that's an example of a company that you wouldn't
necessarily think is a directly related to, you know mining
services, but mining adjacent businesses is how within our
fund we'll also take that thematic and and invest in not
just the upstream mineral producers, but then have a
broader set of industrials or financials that are tied to that
mining growth. That's such a fascinating way of
playing the the resources space. How do you think about valuing
name like this? Like you mentioned heaps of cash
on the balance sheet, I'd imagine it's the type of company
that would just pay have a very high payout ratio when it comes
to it. But in a in a time like this,
how do you get there from a valuation perspective?
Yeah. There's there's some great ways
to look at it. It's multifaceted, but just what
draws to it and and Brayden somewhat mentioned in this is
currently 135 mil market cap with $92 million of cash
investments. So you've got this really strong
capital support to your entry price and so that gives you a
lot of DE risking. Then you look at the history and
in the 20 or so years that EUR has been listed, they've paid
345,000,000 bucks of dividends and $40 million of capital
returns on top of that. So that's almost triple the
market cap that you're currently looking at.
So it does show that they've had a strong propensity to to pay
out previously. And they quite recently did a
major payout to shareholders when they they actually divested
their funds management business. So then you look at, OK, well
what kind of profitability metrics can these guys do,
noting that it's highly cyclical.
You look at their history and in the really tough times, they are
generally able to stay break even, maybe small losses here or
there or or small profitability. But then what you look at is in
the good times, so 2021 probably being the most recent example of
that, they had a net profit of over 50 million bucks.
So at the top of the cycle, you're buying something that
could be on a three times PA as well.
All that capital backing as well as all the tailwinds that we
believe they have through this multi decade boom ahead in in
metals and and the strength of the WA economy.
And then on top of that, you've got this strategic aspect of it.
So we actually think EUR Hartley's would be a fantastic
entry to the WA market for either a larger East Coast
competitor or even potentially an international organisation,
even believing that WA has some attributes that lend itself to a
really strong location for wealth management.
You know, the amount of billionaires, I think there's
more 100 millionaires per capita in WA than anywhere else on
Earth. And so you've got this real kind
of Switzerland, Norway potential even as well.
Yeah, I think. I saw Peppy Grove 2021 too.
Was the highest earning suburb or post code in in Australia.
Yeah, fighting out the likes of Melbourne and Sydney there.
Yeah, there. You go and we've operated with
them for a long time at both through bars and in previous
careers. There is a mark of quality to
Euros Hartley's. They've got a great, a lot, a
lot of great personnel. They're growing their business.
They've got this new graduate programme, which is kind of
cultivating new, new talent. And they've got a bit more of a
focus on this more wealth management side of the business,
which is $4 billion under management, which is another way
that you could value them and, and have a look at it from that
perspective. And that is, you know, truly a
large amount of farming in the context of the WA market.
People don't. Generally think of brokers as
not looking after themselves to to kind of put it bluntly, do
you think there is enough inside ownership in the business that
shareholders are the ones that get rewarded when when times are
good? That's the thing that gives us
comfort is it is really highly owned by the key decision makers
as well as Hartley's got purchased through your script.
And so there's a lot of the Hartley's people that came over
and a lot of them are, are really great, you know,
executives and and other personnel as well that are
highly personally invested in the business.
So yeah, while people will have their own P&L internally, you
know, I, I, I imagine there is a lot of drive to get shareholder
returns. Awesome, like a podium is
another name you guys suggested and it was pretty interesting
digging into this. So I think it's a name that'll
be familiar to a lot of people that follow the resources space.
They you know, be with the projects, these sorts of things.
So it was quite interesting digging into it. 90% weighted to
the resources space with a bit of other sort of infrastructure
work and also quite a strong weighting to African projects.
I think it's all 60 odd percent as well as gold.
How do you think about the diversification of projects
within within the business there?
Yeah, like a podium has been a holding for probably close to
two years for the fund. So we've initially like, again,
it's it, it's not always the case, but had a very strong
balance sheet. They have a real focus on not
issuing shares and, and, and EPS.
I think they've held 39 million shares for the last, you know,
15 years. And so it's yeah, it's, it's,
it's rare to say and, and really pleasure.
And that was quite attractive. When we spoke with Peter, the
Managing director, we spend a lot of time working through
there was a period, I think it was 2013, 2014, 2015 where, you
know, there were a number of probably projects that they had
successfully delivered that rolled off without that backlog
of work to keep forward. And and that's when you saw the
profitability take a hit. And just understanding the
evolution of the business from that period probably close to 10
years ago to now. And I think the the depth of the
team this the spread of the team, so different parts of the
a mining project that would be focused in on, I think there was
a big focus on getting expertise in many different commodities.
So gold has been a key focus, but copper and also lithium and
you know, two commodities where there's projects currently being
delivered. A lot of studies they're doing
are really or delivering a really big project, which is a
real step. You know, a huge step forward is
the barracks project in Pakistan, Rico Dix.
That's that's an enormous project that will take like a
podium a number of years to deliver and and obviously will
have a positive impact on earnings is our view.
But they've been able to diversify across multiple
commodities. They've got a great team.
The biggest bottleneck to growth has been finding staff and
that's been probably a feature of or rather engineering
consultancies over the last two or three years.
And you know, when we spoke to the management, there was a real
focus on no, we just have to make sure that we attract the
right staff and they weren't just on an expansion for the
sake thereof. So very measured, very, very
disciplined and diversification and, and, and managing that
risk. Part of that due to the balance
sheet, part of that's due to being able to deliver different
projects and work at different components of a of a mining
project. And also I think their
industrials business delivering projects for CSL, you know
that's a, that was a project that they delivered in
Melbourne. So there's there is a lot of
diversification within the business notwithstanding a key
attraction to us is the outlook for particularly copper and
particularly, you know their ability to deliver projects that
probably require, you know a high degree of technical
expertise and being able to navigate, you know, some tougher
jurisdictions that they've just shown time and time again they
can deliver so. One of the sort of challenges
for a lot of similar type companies was finding people.
Like you mentioned is finding people to build the things or
work on like engineering projects as well as in the in
the offices as well the the white collar sort of jobs.
Do you think most of that at least in Australia has kind of
washed through and they shouldn't have that sort of cost
inflation that could be onerous on on the margins of the
business? Yeah.
Look, it's absolutely a key question.
I think we've, you know, we've been asking and listening to,
you know, Agms and, and the financial reporting on how easy
is it to, to retain labour. We were catching up with
actually a company recently that was talking about, they just
gave their staff an out of cycle, you know, essentially a,
a pay rise. And they had a, at at the time
that, you know, pretty heavy blue collar workforce and they
looked around and said, this is fantastic.
We weren't expecting this. And so there is that, you know,
still pressure from from from wages.
I think it's going to vary not just state by state within
Australia, but also the disciplines.
It'd probably start to find that it's going to be much easier to
find staff in the white collar prior to blue collar.
I think that's still, you know, like if you are or, or, or you
know someone in that industry, it's certainly one where there's
a lot of work still and actually finding people who, you know,
have the ability and, and, and the resilience to work in tough
environments is, is, is, is obviously getting harder and
harder. So I think for workers that can
do that deserve clearly to get paid.
Companies are having to pay up. The white collar is softening.
That's the feedback that we get at the moment.
That's for sure to. Your comment on the the cycle is
not lasting for forever. What, what are the signals that
you'd look for that it's not quite working out or you know,
that might be company specific, it might be across the the whole
space where we're talking about, but how do you sort of catch
that before it it kind of happens?
Oh look for different businesses will be different inputs for one
of our holdings that was acquired 2023 was DDH and you
know a key signal or leading indicator was.
ACM activity or looking at how many, like what's the quantity
of capital that's being raised by smaller companies to go out
and then commit to exploration programmes.
So that would be probably 1. But like, I think at the moment,
we're seeing that largely or hopefully bottoming out at the
moment and, and we'll see an uptick of that, you know, junior
minor capital raising activity. But that would be 1 kind of
leading indicator for the for parts of the mining cycle
utilisation where you can get that data is fantastic for
different businesses that are probably more, you know, asset
driven mining services. So when you can get data on
utilisation, starting to see that turn.
I think for us, we well definitely is timing extremely
important for mining services just being prepared by managing
risks wherever you can. I think from our perspective,
having debt and seeing that as a key risk and a lot of the, the
big issues with mining services and when things can go South is
when there's a very large debt load or gearing within a
business. As a general rule, we will model
out the debt and covenants. But when you see in an investor
presentation, you know, one or two or three slides where they
have to go and explain this is our covenant ratio and this is
where we see it in gearing. That's probably the first orange
flag. And then from that you then have
to go and do your own modelling on to say, OK, I, I'd like to
understand what the gearing ratio is.
I understand interest coverage for this business and that's a
risk that I'm confident on if revenues drop 2030%.
Yeah. You know, where possible to find
a business without debt is, is is obviously key.
Not with not to say that you don't see material draw downs or
you know, in, you know, balance sheets being impacted when you
do see the cycle reverse. But it is, yeah, it is something
that we try to manage as best we can on the debt front.
And I, I think you've. Seen from the two examples that
we are comfortable to invest in them because they have been good
at managing the poor cycles for themselves.
And then when it's the good part of the cycle, you know, it kind
of takes care of care of itself. But just as you need to have
discipline when you're buying and you know, hopefully you're
getting towards the bottom of the cycle for some of these
names, you need to have discipline in, in selling.
And, and when you're investing in cyclical businesses, it can
be a bit more active in the way you invest as opposed to, you
know, more of a like kind of a long term compound, a kind of
classic industrials company with, with, with steady growth.
So you just need to recognise that when times are good, that's
not going to last forever. And maybe it's time to manage
some of your position. And just as when times are not
so good, maybe that's a good time to be having a good look at
it the the. Last company I'm keen to chat
about and I'll disclose that I actually own a few of these ones
Vysan. So yeah, I'm pretty excited to
to talk about this business and get the perspective that you
guys have to start with a couple acquisitions in the the past
quarter 11 bigger than the other that CMP and wastewater
services. How did you kind of think about,
you know, that this is a, a company like we spoke about
before that doesn't love to issue paper unless they kind of
need to and there's a, a, an appropriate opportunity.
And I saw in your, your recent note that you guys chipped in
having invested a year or so ago.
So how are you thinking about those acquisitions in and the
the business in a broader sense? Yeah.
So we talked with James Clement, the MD of ISON, quite often.
And I'll just start by saying he he's probably one of the better
managing directors that we've come across in small cap space.
And so we've got a lot of confidence in what he's doing
and then the team that he's been able to build underneath him.
And they have some very strict criteria when it comes to
acquisitions. And they also see this giant
opportunity in water infrastructure on the East Coast
when they already are quite, you know, well covered in in WA.
And so the acquisition of CMP has materially diversified.
Their client said, I think they go from almost 100%, you know,
mining in WA to, to down to 70%. And that that 30% that comes
from CMP is largely government and, and water agencies on, on
the East Coast. There's going to be something
like $60 billion spent on water associated infrastructure in the
East Coast over the next 5 to 10 years.
And so James and his team made the really strategic and clever
approach to, to CMP and, and have been able to absorb that
into the business. So that adds a new division for
them and a new geographical location.
And then the wastewater services also EPS accretive and also
makes a lot of sense. It's still in WA, but it does
provide them with a new division to their their water service
offering. And really what they're trying
to do is be a vertically integrated water services
provider across consulting, engineering, design,
implementation and of course, and, and maybe you're like
you're about to ask about this, but they have this blue sky of
this water asset management that's that's coming over the
top. And so, yeah, yeah.
Came to unpack that more and what that could sort of mean to
the the valuation of the business and the potential
competitors that might come into the arena if if you know that
they seem to be the first mover in in that one.
But you know these things in in capitalism attract opponents.
So how are you thinking about that?
Yeah, so. I mean, if you look at the the
current business and take the acquisitions into account,
you've got the company business trading on, you know, somewhere
between the 15 to 20 times PA multiple which given the growth
and execution that they've been able to show that's quite
comfortable. It's not you know, you're not,
you're not getting a super cheap, but it's quite
comfortable. But then there's not really any
value for the water asset management in that.
And that aspect is hard to value for now until we really see some
nuts and bolts put around it. But just for the listeners who
who aren't as as O5 with vice on what they've done is they've
collected a bunch of water titles in WA and they've done
that in a really clever fashion. And, and some of the most
compelling water titles, they've also, and this is just
fantastic, what they've been able to do is they've entered
into joint ventures with traditional owners and they will
share the economics on a, on a 5050 basis.
And so they've they've really ensconced themselves well in
being able to be a a strong operator and and obviously get
the good regulatory outcomes on the water, water services that
they're providing. And what the grand plan is in,
you know, the vast spaces of WA, there is some areas that have a
lot more water than is required and some areas which have a lot
less than they're required. And there's a lot of mining
projects, infrastructure projects, agriculture, energy
projects that require water that are currently, you know, if not
stranded, but you know, paying more than they would like to be
or, you know, or struggling for water.
And so the idea for the team with the vice on water asset
management business is to transport water from the, you
know, where they're able to find big aquifers on, on, on native
title land to the places where it was where it is required.
And so that's going to require a huge amount of infrastructure in
terms of pipelines and the like. And their idea is to partner
externally for the funding and, and potentially, you know,
management to some extent of that with, you know, more
established and, and larger major infrastructure providers.
And they've brought in Richard Lowry, who is an ex investment
banker, but also water infrastructure kind of
experienced guy and he is leading that operation.
And our understanding is there's going to be, you know, a lot
more information on this coming out over the next kind of three
to six months. And what sort of timeline do you
think about that, that business? Is that something that comes
into effect? I'm sort of thinking 3-4 years
it it could be. Obviously it's a journey to get
there and things need to to get built.
But if you're if you were to look at the blue skies, that how
you kind of think about it. Yeah.
What? Do you think from a timing
perspective, yeah. I think three to four years is
probably right before you start to see the projects really get
going. In saying that, I think we
probably start to get a better handle on the economics or
whether that starts with just the sizing of the water resource
and and and how they would go about structuring or tolling
what's the toll fees etcetera over the coming 6 to 12 months.
But you know, that's that's our hope and and for us it as Will
said, you've got really the core operating profitable business
that's really underwriting a lot of our attraction to vice on.
And so as we get a lot more information on the economics for
the water asset management, it's just going to add to that.
And how do you think about the company moving away from, I
mean, I guess the against the other companies who've spoken
about the, the cyclicality of the business, it sort of started
as a business that is pretty exposed now with the the rigs to
the mining cycle. But it seems to be on a on a
journey to move itself away from that.
Where do you see them on that journey right now?
Yeah, like a lot of other mining services companies, there is
this big focus on diversifying away from mining, which sounds
funny, but also WA to some extent.
I mean, we're invested in another electrical services
provider that was traditionally as a Southern Cross Electric
traditionally 100% mining that are now that's much less a part
of what they're doing. And and what they're really
trying to do is de risk that cyclical nature of mining with
vice on. I mean, we see this as a natural
expansion and they'll still get great benefit from mining, but
you know, to to grow and be able to expand and be able to kind of
smooth out some of their growth trajectory by being on the East
Coast. That's really positive from our
perspective. Of course, this water asset
management is going to be highly leveraged to to mining.
So they may actually kind of increase their exposure as they
go through, but that should be more of an infrastructure style
kind of steady income style risk.
So I mean it is it is multi tinged.
They've got the cyclical mining, the more steady, you know, kind
of water consulting to governments and the like, which
they're building out and then hopefully an infrastructure
style play. So altogether it should make for
some quite, you know, rich risk return.
Yeah. I think at the moment they're
probably seventy 8090% would be, you know, outside in guessing
percent of the way through the diversification that they want
to achieve. I think FY24 there was still you
know, I think they had some rigs in a nickel project that they
had to you know, push elsewhere within the portfolio.
So I think there's there, there has been some of that of recent
times drag, but with the acquisition and particularly of
the East Coast consulting business, we see them as really
well and truly on the way to getting that diversification and
you know, giving themselves some immunity to to that, you know,
harsh cyclicality of the mining so of, of mining services.
So we've, we've talked around the mining industry for quite
some time, but you guys are pretty tapped into the, the
capital raising cycle, in particular with the, with the
juniors. And it's been pretty, pretty
active. Even even today I saw a, a good
few coming through. And I saw in your quarterly you
mentioned you're looking at 3:00 to 6:00 opportunities a day,
which I'm sure keeps you kind of busy.
How, how do you look at these opportunities?
Are you, I'd imagine you're familiar with most of the
companies beforehand. Is it a, is it a quick answer
once you know the sort of to see the term sheet, you know the the
details or what's that process like?
Yeah. So you have to be able to say no
quickly and a lot because of just the the huge amount of
opportunities that come through. But I mean we're talking about
cycles a lot. But cap arising's in mining
companies come in to come in quite sharp waves.
And so where there's been probably a year or two of quite
subdued kind of activity in that space, we are we have seen a
ramp up in the last two months, not to say we haven't seen you
know ramp UPS over over that last two year period.
So we're still just working out how sustainable it is at this
point in time. But what you do say at the start
of the wave of a kind of a cat raising cycle for Genia Mining
is the more quality names are coming to market 1st or, and, or
you're getting better terms on the, the things that do get to
market. And so it is really important to
make sure you're on top of that and, and, and really able to
participate, You know, if you've got the spare capacity and, and
if you've got a good understanding of the
fundamentals of, of particular companies.
But what happens is that then builds, you know, the
aftermarkets get better, you know, the FOMO trade starts to
kick in and then you start to see worse terms on, on, on the
equity raisings and probably poorer companies being able to
get to market. And that's where you really need
to keep your wits about you and and say no even even more than
you had been before. The sort of timing there is is
super fascinating. How do you think also as it ties
in with positioning yourself in a company?
I know there's certain funds obviously is very size
dependent, but they will wait for the the raisings because it
gives them an opportunity as opposed to being on the market
and buying day after day. Does that play into your
thinking a lot it. Definitely does.
I mean mining companies are, are always raising equity.
I mean, and, and you just have to be aware of that if you're
investing in mining. I mean, if they're an explorer,
they don't have any revenue and and they need to raise equity in
order to explore. And it's very hard and and
probably not recommended to take on any debt at that point in
time for developers. Maybe they've got a more
established project, maybe they're able to raise more
money, but it is almost always like still quite high proportion
of equity. And then, you know, you look at
some Barbara today raising $100 million, their producer and you
know, they need to raise equity as well.
And that can be expansion CapEx, it can be covenant issues, it,
you know, it can be acquiring another company.
So there's always lots of reasons for minors to raise
equity in order for us to enter a position.
We will. One of the first things we'll
look at is the cash balance and the cash burn.
And so we need to see how much of A runway this company has
before it does need to raise equity.
And if that's an uncomfortable runway, then it doesn't matter
how much we love the commodity, the project, the team, you know,
etcetera. You're probably going to be more
so waiting for the equity raising to come around.
And then what you've got to take the view on is that, that
management team is a type of management team that can add
value with that capital so that the next time they need to raise
equity, it's it's at a high price and and you're not seeing
dilution for shareholders. Will you guys ever encourage a
company that you've already invested in to you know, go to
the market, you know, now you know, this week you'd say for
for gold companies it's a good time that there seems to be
demand. Obviously every every case is
kind of different, but how do you think about that?
There's there's certainly an element of if this going's good,
you know, grab some capital while you can, because those
that hold out, you know, for high prices or catalysts or what
have you, things can go against them.
And and maybe you, you get more dilution than than you were
expecting or hoping for or maybe have to hold on for longer and
not able to do all the capital works that you're after.
So we certainly ask a lot of questions and, and, and get
involved with companies with respect to their capital
requirements. And, you know, coming from a
mining finance background, you know, we do have some
understanding of that and so hopefully can provide some, you
know, I don't know, informative discussions with with mining
companies on that. So yeah, we absolutely keep in
touch with companies on it and yeah, try to lend a hand when we
can. Couple last ones to to wrap up
guys, what are you most excited about looking out the the market
right now, I think. The money miners will be happy
to hear that it is junior mining.
We're really excited about junior to hear it.
Yeah, exactly. So, I mean, we're seeing some
green shoots in gold, silver, antimony.
I had to look up how to look up how to pronounce that today.
Yeah, but what what we've really seen is a long time in the
wilderness for a lot of these junior mining companies.
We know where we need to get to with a bunch of these
commodities from a down demand supply perspective.
There's lots of interesting projects out there.
You know, something's got to give and and we will have a
really good time in junior mining hopefully in the not too
distant future. I can't say exactly when that
will be, but we're, we're certainly very excited by that.
You know, we're exposed to it. And yeah, we're, we're always
there watching and. Knock on wood.
And lastly, any sort of contrarian picks, you've you've
got going against the grain a bit, yeah.
We thought we'd, we thought we'd go with mining on this front as
well. So rare earths, such a tough
one, right? I mean, you've got all the
different mineralisation types, you've got the market seemingly
changing it's views on which mineralisation style will win,
you know, on a weekly basis. But there's one the way like
called Veritas Mining. So they're a Brazilian rarest,
you know, hopeful developer, hopeful producer.
They're in the same region as Meteoric.
So they've got the caldera project.
Veritas has the Colossus project.
As far as we can see, the Veritas project is rather
analogous to Meteorics project. Veritas has got a slightly
smaller resource at this point in time with you know two 200
odd million tonnes at at a similar grade which is around
that 2600 parts per million TREO.
And then they've actually got quite a high proportion of
magnetic rare earths at about 26%.
So you compare those two side by side, Meteoric probably, you
know, anywhere between 3:00 to 12:00 months ahead.
You know, some would argue longer than that, some would
argue shorter. They've released a scoping
study. They're a 220 mil market cap and
you've got Veritas at at a 35 mil market cap.
So it's, it's something like a Meteoric is trading at 7 times
what Veritas is. So there's a bit of buffer there
that we think is quite interesting just in terms of how
similar their projects are, but also just we recognise the
risks. You know, people are worried
about the processing of these ionic clays that hasn't hasn't
been done at scale, you know, in this area.
And so, you know, there's always going to be risks in in the ramp
up the metallurgy. While they have done a lot of,
you know, testing on that, it still hasn't been done at, you
know, at great scale. And then, you know, Brazil is
still somewhat of an uncertain jurisdiction for some.
But on the flip side of that at the current, you know, market
cap with the resource that they have and, and A and a great
management team in place and, and pretty strong capital
markets following, we actually see Brazil as quite a positive
jurisdiction. They're, they're permitting is,
is almost world leading now in, in terms of electrification
minerals. You certainly saw what happened
with Sigma. Yeah, exactly.
Latin resources were really confident on on how quick their
permitting is going to be. There's been some focus on
meteoric and and various with the respect to permitting.
These are huge resources. They're high grade by, you know,
clay and ionic clay standards. And we believe just the, you
know, the kind of the risk is, is, is in the favour of, of this
company at at this point in time.
And that, you know, just to give you a sound by we believe this
could be, you know, the Pilbara of Rarest where they are in
Brazil. And I'm saying it's definitely
going to happen. But as as far as you know,
having a plan on Rarest goes, we we believe Rudis is a really
good exposure. Yeah, awesome.
The the clays are a fascinating 1 to watch and the the rarest
market is is so complex and opaque, but fascinating at the
same time. Will and Braden, thanks for
making the time. It's been awesome to chat and
learn about Bazaar. Thank you.
Yeah. Cheers, JD.
Thanks. Thanks, JD.
Thank you. John, it's Benedict Dawling and
the bloody lads from Bazaar capital.
That was sensational. Bloody.
That's a good night. He's.
A. He's a.
Such an Aussie sounding fund
manager name isn't it? I don't think you could get a A.
European or an American Baza, right?
I'm gonna start. Sharon Capital.
Sharon. I got some.
More more names. I like guys mineral mining
services. I like grounded cross boundary
energy sands at ground support CRE insurance K.
Drill dates that go Australia go.
Australia Australia The information contained in this
episode of Money of Mine is of general nature only and does not
take into account the objectives, financial situation
or needs of any particular person.
Before making any investment decision, you should consult
with your financial advisor and consider how appropriate the
advice is to your objectives, financial situation and needs.