It’s funny really.
My kids always get a kick when I tell them for the first 24 years of my life I lived in the same bedroom in the same house!
My first real night living out, believe it or not, was after I got married!
Then, to make up for lost time … I proceeded to reside on 4 continents … Africa, Europe, Australia and North America in 9 different dwellings.
Leaving your family as a young man is an adventure, exciting and full of promise.
20 something years later it’s a very different thing.
You lose touch with friends & family and the names of streets you grew up on fade into memory.
But worst of all, the people you are closest to, whom you love the most, get visibly older and frail.
And you’re not there to see it gradually, only in increments with time lapses in-between.
Hence I visit South Africa at least once a year.
It’s a brutal flight from Atlanta … 18 hours non-stop in a metal tube. If the time difference doesn’t kill you, the recycled air plays havoc on your sinuses.
But once you’re there in Old Africa -
Well then it’s an entirely different story.
To begin with, the food is TASTY, very tasty and wholesome.
And it’s cheap. Years of mismanagement have seen the once mighty Rand lose maybe 10x its value.
And I always make a point of looking up old friends … however few remain.
One in particular is Jacob McHendry -
The smartest chess player I ever came up against in Elementary school.
And he clearly knows a thing or two about business. He is now a highly successful C-suite exec. in the financial services industry.
Jake and I sit in his luxurious Sandton offices sipping tea and eating cookies (a cookie is a biscuit in Africa!).
We talk about booms and busts.
Both of which we have seen our fair share of during our short sojourns on this earth.
When it comes to Africa, resources play a huge role in the boom/bust landscape. So the convo invariably turns there… our last chat was in April of 2017 where we both, incidentally, felt like the resource market had turned the corner and an emerging elephant bull would follow.
I won’t rehash the macro thesis here because I’ve written about it substantially elsewhere in these articles:
From my article Why Gratitude Leads Down the Road to Riches -- the pic below shows what I like to call the Road to Riches …. A Commodity Belt running through Southern Africa.
And some other articles:
In general agreement, I asked Jakie, a savvy investor, what he was doing to play this upcoming BULL.
He didn’t skip a beat.
Ukubona means Vision in Zulu.
And as I came to learn the boys and girls at Ukubona Investments had both vision and imagination in Spades.
Which is what you need when dealing in the mining and exploration business.
The Mineral Mavens
Gert Joubert went to the prestigious University of Cape Town (UCT) where he studied to become a qualified Chartered Accountant (same as me) and obtained a Masters in Chemical Engineering (not the same as me).
In 1998 he and a few UCT friends started a mining and minerals consulting practice. Their clients were large utilities, investment banks, strategy firms and private equity shops.
Gert was 27.
Bear in mind that at that time South Africa had emerged as a new democracy and Black Employment Empowerment (“BEE”) was forefront. Hence Ukubono Consulting had 51% black ownership which allowed it to consult on large corporate transactions where blocks of stock were being moved into BEE hands e.g. Harmony Gold and De Beers divesting of properties.
The talented team thrived and by 2000 they had a corporate finance firm charging a retainer and success fee. They also opened a Canadian office – Canada being the home of many junior miners.
By 2003 with valuations bordering on ‘crazy’ Ukubona decided to enter the fray as principal. Their first deal ended up being a BONANZA.
Gencro was divesting a fluorspar deposit north of Pretoria as part of a Black Empowerment deal, a farm in deal for R100,000 ($10,000) and 90% of economics. Fluorspar is a strategic mineral used in the production of steel and electrolyte for lithium batteries.
Admittedly this was a deal bought right. Having the right demographic board makeup and a talented geologist on staff the underwriting and timing was perfect.
The same asset was sold into a Listed group call Sebuku in 2011 for R15,000,000 ($1.5m) cash and shares in Sebuku ‘s unlisted fluorspar business.
A 15x return and 41% IRR cemented Ukubona’s aptitude in a) macro top-down - identifying the right commodity to be playing in b) identify valuable deposits to execute on and c) deal structuring.
Disciplines they have maintained till today.
And just to prove that wasn’t luck, the team ended up executing other successful projects:
- MBNA – Canadian deal – Nickel ended up finding diamonds, didn’t put up much cash sold 50% JV.
- Lesotho - platinum entered into JV in 2005 from political pressure on big mining companies. Partial sale in 2008/09 .… 111% IRR.
By mid-2008 the portfolio of assets plus cash in pocket was worth ~$200m.
Then the Game changed
After 2008 the private to public premium became much less appealing. Firstly there just wasn’t enough money going into new mining projects. Secondly and to borrow a quote from Oil man T.Boone Pickens, it became cheaper to prospect on the floor of the (Toronto) Stock Exchange than in the ground.
That opportunity still exists today, as the above chart shows metals and mining equity indices are STILL barely above their Lehman crisis lows.
To provide a sense of what the boom/bust cycle can look like in commodity space, take Nickel for example. When Xstrata bought Falconbridge in 2007, it valued Araguaia at > $760m within that transaction. Glencore sold it to Horizonte in 2015 for $8m! (of which $5m is only payable on first commercial production).
Nuts and Bolts
We are fond of saying it’s better to be in a good neighborhood (strategy) than with a great manager (but it’s better to be with both).
Because as the old saying goes, a bull market floats all boats.
Hence Ukubona has a combination tops down and bottoms up approach.
Tops Down - Their approach to forecasting long term commodity prices is to consider:
- The marginal cost of production;
- The “incentive price”– price that “incentivizes” others to bring new capacity online
- Supply and demand fundamentals – how soon will the commodity move from over to undersupply?
- Other factors – stocks, potential supply/demand disruptions, new technologies, etc.
This approach focuses on buying commodities that are at or near the bottom of their cycle – usually indicated by prices below the marginal cost of production – and to sell commodities that are at or near the top of their cycle – usually indicated by trading above the “incentive price.”
While that may not sound particularly controversial, in practice it is a contrarian approach that requires buying (selling) commodities that are currently oversupplied (undersupplied) but have a catalyst that will change the equilibrium.
That’s the Tops Down.
The Bottoms Up (trying saying that fast 3 times):
“You Never Know What’s Going on Inside a Man’s Skin” – Gert Joubert
Execution is a key component of any business and especially so with large capital projects in mining. To “get it right” requires having the right team with depth and breadth of domain expertise and experience.
The Ukubona team spans the former British Empire with members in London, Australia, South Africa, Canada and the USA.
A PhD Geologist on staff and an operating mining team in South Africa.
As V – Head PM and Partner – likes to say, “… it’s good to be able to back channel and find the true history and story behind a property.”
That’s what a global network provides.
Figure 1 - Ukubono Team Geographical Coverage
Gert expanded the business into Oil and Gas circa. 2008 - leading to his relocation to Houston and the acquisition of numerous properties predominantly in Nat. Gas in Michigan.
Junior mining companies can be spectacular on both the profit and loss side. Risk Management is a key component of any such portfolio.
Ukubona observes a number of limits to help protect the portfolio:
- Exposure limit range from 70% net long to 20% net short in Target Assets, gross exposure limited to 130% of net asset value – a true hedge fund in our opinion;
- Liquidity risk: maximum 20% in unlisted equities, other holdings subject to liquidity risk monitoring
- Concentration risk: maximum 40% exposure to any single commodity, 30% to any single country, 12.5% to any single company;
- Holding period on core long positions between 1 and 3 years;
- An initial 1yr lock-up, then the fund offers quarterly liquidity (on 60 days’ notice)
Similar season / window coming
Back to sipping Tea with my friend Jake in Johannesburg:
If indeed a similar commodity window was coming, Ukubona would be the team we would execute through.
We decided to invest some of our discretionary funds in what essentially amounted to a Seed Arrangement.
Now we monitor and wait.
As the legendary investor Larry Livermore said in the classic Reminiscences of a Stock operator:
“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”
FYI - Based on a true story name, dates and places have been changed
Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.
Greg Silberman is the Chief Investment Officer of Atlanta Capital Group Investment Management [ACGIM]. Atlanta Capital Group Investment Management specializes in creating custom private market solutions for RIA/Family Office clients.
Advisory Services offered through Atlanta Capital Group Investment Management.
Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.