In the early 1930’s a group of somewhat crusty professors spent their Tuesday mornings mulling about at an unassuming pub on St. Giles Street in Oxford, England. In addition to the inevitable beer and breakfast, this weekly meetup was held with the intent of discussing literature.
On its surface this was not unlike hundreds of other literary clubs popular at universities all over the world, except it had no rules, officers, agendas, or even formal mandate… Instead they met with one purpose in mind: produce better work.
The non-club, that would go on to cultivate two of the 20th century’s literary giants, was known simply as: The Inklings.
Although nearly two dozen notable writers, scholars, and poets passed through the oak doors of the Eagle and Child, it was the Inklings founders that would go on to re-create an entire literary genre from the fertile soil laid down in that pub.
Consciously or otherwise Tolkien and Lewis created what “Think and Grow Rich” author Napoleon Hill had called a Mastermind Group, which he defined as:
“The coordination of knowledge and effort of two or more people, who work toward a definite purpose, in the spirit of harmony.”
Once you start looking for these types of associations you find them again and again among some of the most successful people in history.
In 1727 Benjamin Franklin created the Leather Apron Club with 12 members devoted to self-improvement, and between 1916-1924 Thomas Edison invited several of the world’s greatest industrialists, along with a sitting President, on a series of summer camping trips as part of a group they called The Vagabonds.
These groups all have one thing in common: They provide good people with the support and challenges necessary to become great.
Where, I live in Canada, there are no great soccer players.
Why? Because there are no great soccer players to train against. It’s nearly impossible to become a top performer at anything unless you’re able to practice your game at that level.
Instead, Canada produces the world’s best hockey players, despite having a population less than that of California. Canadians grow up playing against the best players, under the most experienced coaches. There is a culture of winning, young players are held to incredibly high standards, and they compete with the best in the world.
This is what a Mastermind group does for its members: It acts as the stone on which you hone your skills.
What Does This Mean for the Resource Investor?
When I moved to Vancouver in 2015 my goal was to transition from working in engineering and project management to building and financing mining companies.
I had no grand plan as to how I should do this, I just tackled the problem in the most obvious way I could think of: I met as many people as I could building and financing mining companies and convinced them to teach me.
I did whatever I could to be useful. Some days that meant building complex financial models and conducting technical due diligence on acquisition targets… other days it meant making photocopies. At one point I volunteered to cut my salary so I could continue working with an excellent (albeit temporarily under financed) team that I felt was on the verge of doing something big. It turned out to be the right move.
Within two years we had turned that company from a small startup to a multi-asset developer worth over half a billion dollars.
The true value of this experience was in gaining a front row seat to the inner workings of some of the world’s best resource investors and entrepreneurs. One of the key lessons I took away from this experience is that there are rarely superstars acting in isolation. Instead there are excellent teams. Sure, one or two people typically get all the glory, but it takes a powerful ecosystem of talent behind them to make it work.
What I mean by “team” is not what you might typically think.
A truly great team is rarely one group of people all working for the same company. Instead, it’s often a closely knit network of colleagues, friends and sometimes rivals. It’s engineers, lawyers, geologists, investment bankers, accountants, prospectors and hustlers; people who have worked with, or around each other for decades, who trust each others judgment, and who push one another to do their jobs better.
In short: a Mastermind group.
And while they may not all have cool names like the Inklings, these groups are real and nowhere is the benefit of belonging to one more apparent than when it comes to getting access to investment opportunities.
One of the key ways that industry insiders leverage their relationships is through access to private placement deals.
During a private placement investors buy newly issued stock directly from a company. Investors are buying that stock before it becomes publicly traded, because of this the company can offer a discount to the publicly listed share price, or they can attach other perks to sweeten the deal. The best private placement deals provide companies with the capital required to create real value and provide investors access to opportunities that are not available on the market.
Most investors never have the opportunity to participate in private placements. In fact, many investors don’t even know they exist. Good private placement opportunities are exclusive. Industry insiders know that this is where the money is often made, and competition to get access to the best deals can be intense. Many deals are poorly advertised and “oversubscribed” (meaning that people want to invest more money then the company is willing to accept).
This can benefit the well-connected insiders that get access to these investments immensely.
So how does it work?
Perhaps a geologist you once worked with, who has made several discoveries, is doing a private round of financing to get his new company off the ground before the IPO. You know him, and you trust him. Maybe you put a few dollars in.
Your old accountant just signed on as the CFO of a promising turn-around project. You put a bit of money in during the initial recapitalization.
These are the companies that do not need to advertise for capital or pay banks outrageous commission fees; because they have people in their network lining up to write cheques.
Access to private placements is where many industry insiders make their money.
This is why high performing professionals give up massive salaries at investment banks. This is how they hedge their bets against running small high-risk companies.
They invest in their mastermind group.
This closely-knit network of CEOs, explorers, and financiers are constantly on the lookout for the best deals. When they find one, they call their trusted friends and colleagues to help build, staff, and finance the company. This is how insiders make their money.
Companies want investors they can trust. They want investors that understand the game plan and are willing to stick with the company through the inevitable ups and downs of a startup.
This is why they work with the people they know.
The reason great entrepreneurs and scientists set the bar high for the investors they invite into their deals is because there are perks to participating in private placements. To attract the best investors companies often offer a better deal then can be found in the markets.
This is primarily seen via three incentivizing mechanisms: discounts, warrants, and IPOs.
One of the perks commonly associated with private placements is the opportunity to purchase stock at a discount. The discount offered will depend on interest in the deal, perceived risks, and the rules of the exchange the company is traded on.
As an example, the TSX Venture Exchange, where many mining companies are listed, typically allows for common shares issued as part of an equity financing to be discounted at rates of 15-25% of the current share price.
This means that investors participating in a private placement can purchase their stock for up to 25% less than those buying it on the market.
The offering of warrants is another way that companies sweeten the deal for private placement investors.
First of all… What is a warrant?
“A warrant is a derivative that confers the right, but not the obligation, to buy or sell a security – normally an equity – at a certain price before expiration. The price at which the underlying security can be bought or sold is referred to as the exercise price or strike price. An American [or Canadian] warrant can be exercised at any time on or before the expiration date, while European warrants can only be exercised on the expiration date.” – Investopedia
While this sounds complex, it is actually fairly simple.
A warrant is a financial instrument that converts to stock at or above a given price. In a private placement investors generally purchase what is called a “unit”. A unit commonly consists of a combination of shares and warrants. The most typical arrangements being:
1 Unit = 1 Common Share + 1 Warrant
1 Unit = 1 Common Share + ½ Warrant
Warrants act as an added perk if the share price goes up. Above a certain “strike” price warrants can be converted to stock and help to sweeten the deal for both investors and the company.
Warrants and shares can be sold on the market at the same time or separately. This means that an investor can sell all of his or her shares and hold onto the warrants, or vice versa. A common tactic used by investors is to sell their shares shortly after the financing and hold on to the warrants in the event of a share price increase. This can allow them to reclaim all or a significant portion of their invested capital while still maintaining exposure to the upside of the company, significantly reducing their risk.
The greatest limitation to this strategy is that warrants have an expiration date, after which that can no longer be sold. The expiry date of warrants is set by the company and typically ranges between 1 and 5 years. This means that an investor must sell his warrants prior to the expiration date or they are no longer redeemable.
One of the most common scenarios in which an investor participates in an equity financing is when a company “goes public” or lists on an exchange. The most common route to “going public” is an initial public offering (IPO) or reverse takeover (RTO). Typically going public will coincide with an equity financing. In this situation, the advantage to early investors is that they are able to purchase stock in the company before it is trading on an exchange and commonly available.
If the deal is considered particularly “hot” and there is significant interest in owning the stock, private placement participants can obtain it before market trading drives up the price. Participation in an equity financing for a going public event can lend investors a first-movers advantage.
How the Pros Do It
Resource investing is a tough gig. Even the most promising projects, run by the best people, can go south quickly.
- Metal prices crash;
- Bad drill results collapse the share price;
- A change of government results in the loss of permits;
- or poor metallurgy puts an asset in question.
Exploration companies are, by design, looking for something that they do not know with certainty exists; and by the time they find out the money is usually gone. Mines are producing a product, the value of which is usually entirely outside of their control and subject to massive price swings. It’s not easy to make money in this sector, and many investors never do.
But you don’t make big wins by avoiding the difficulties.
You achieve success by learning how to overcome the obstacles that others fail to see.
And when it comes to resource investing, the solution to this obstacle is the same as it was for Henry Ford, Thomas Edison, the Inklings, and many of history’s most successful value creators.
To succeed investors need to start doing what the professionals have always done: build their own mastermind groups on which to hone their skills, sharpen their minds, and leverage access to the best opportunities.
For the next little while, we’re inviting readers can join this Mastermind at a steep discount.
Co-Founder, Resource Insider
Article by Capitalist Exploits