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. 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.
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