Precious Metal Fund
The Precious Metal Fund invests in the shares of companies engaged in mining and processing precious metals – primarily gold, but also platinum, palladium, silver and diamonds - around the world.
With extensive experience and expertise in both the technical and financial aspects of the industry, the fund managers seek to identify companies trading significantly below fair value but offering attractive resource and production growth; and the catalysts likely to unlock the potential of these underlying assets.
The fund's investment horizon is longer term. Mining takes time; the rewards can be substantial, but so too the timeframe to reap them. The Precious Metals Fund has thus one clear objective: strong capital growth over the medium to longer term.
Rooted in the future of gold
The fund is ultimately rooted in the potential of precious metals’ value appreciation – gold in particular - on which it capitalises via equity investments.
As the status of paper money becomes ever more fragile, given increasing sovereign-indebtedness and a ballooning pensions overhang, gold is set to assume an ever more important role in global finance over the next 10-20 years. Other factors, such as the increasing assets of the wealthiest and the popularity of gold among so many - particularly in emerging economies – play a contributory role. But it is the tenuous status of the western economic model, besieged by demographic trends, that assures the future of gold - and that of quality companies rooted in it.
The fund invests in companies operating in this sector: in exploration, mining and processing. Particular opportunities arise when such companies’ share prices diverge strongly from the market value of the underlying commodities from which their fortunes are ultimately derived. Over time, such anomalies face marked correction but in the meantime, opportunities arise.
A variety of capabilities is required to identify good companies with which to capitalise on these market trends: on the one hand, technical, financial and commercial aspects - to understand the companies; and, on the other, geopolitical and historical insight – to assess the context within which they operate. We call it bottom-up and top-down analysis.
Like mining itself, the challenge is to locate the rich vein in the midst of the aggregate - to filter out the most appealing assets. Once a prospect is identified, we apply models which incorporate and embody a wealth of expertise and experience accumulated over the years.
A balanced team applies rigorous analysis
Top-down: Is this a sector with good prospects over the time-frame we like to engage? Is this a country in which we want to be invested? What are the chances of a coup, nationalisation, or even just changes in the tax regime that fundamentally alter the underlying economics?
Bottom-up: What is the true value? What, ultimately, will be the margin? What is the likelihood that the margin will be realised and the value unlocked. You need expertise in mining to answer such questions; metallurgy - to assess the company’s proposals for extraction and to gauge the quality of the reserves; geology – to estimate the extent of the assets. You need to undertake regular site visits, to achieve and maintain a clear and accurate picture of what’s actually happening on the ground. You need business expertise - commercial and managerial. Who’s leading the company and what’s their track record? What’s the management like – do they have the necessary skills to extract value efficiently and effectively? And do the numbers add up? Does the company have or will it be able to access the financial resources to bring its plans to fruition?
Each individual handles specific aspects of the analysis, according to his/her particular blend of experience and expertise. Extensive discussions take place throughout the assessment, building on overlapping expertise; open minds in open-plan offices generate the most insightful and comprehensive analyses. Finally, the team gets together to discuss and assess the outcome, working together with the fund manager who makes the final decision whether or not to recommend investment.
Of the 400 or so companies ‘on our radar’ at any given time, we will be actively monitoring around 250 and modelling over 100, with a view to recommending investing in 30 to 40. Craton Capital is founded on the premise that over time it is quality, not quantity, which optimises the risk/reward profile.
Long term vision; exceptional returns
Once we recommend investing in a stock, the aim is for it to be held by the fund for an extended time period. Mining is not an overnight business; returns are seldom achieved rapidly. Nor would we pretend to be able to guarantee continuous and unbroken share price appreciation. Shares go down as well as up and investors must be prepared to think in terms of years, rather than ‘quick hit’ returns. The rewards, over the longer term, can be exceptional.
Charts: Precious metal indicators