Private Placements 101: An Overlooked Way to Invest in Mining Companies

Introduction

Mining companies are unloved in today's mainstream markets. Financial headlines for the past couple years have been caught up with the volatility of meme stocks, NFTs, and cryptocurrencies. Retail investors enjoyed an S&P run for the previous ten years, propelled in part by large growth in the tech sector, perhaps assisted by negative real interest rates, and loose monetary policy.

Today, that run has slowed as the Fed battles inflation by hiking rates, and retail investors are bracing for impact. But this may only be the beginning. When times are tough, people tend to pay more attention to the things that really matter, like food, water, and shelter—in other words, hard assets. For this reason and others, from our perspective, value stocks, and by default, metal producers, may be overdue for a reversion back to the mean, especially considering the looming supply deficits.1

Amid a U.S. dollar stronger than it's been in a generation2, recent hikes in interest rates, and a massive economic slowdown in China, demand for metals has plummeted. Gold dropped to its lowest point since 20203, while copper shed over 30 percent of its value in a few short months.4 This is all despite the fact that inflation has only slightly abated, and fears of a worldwide contraction still loom large in the public consciousness.5

Despite strong headwinds related to slowing economic activity,  we continue to believe the mining sector is ripe for a fresh influx of attention. Barring any existential threat to humanity, life is likely to go on. As long as it does, people may continue to need natural resources. While economic uncertainty has paralyzed many, now may be a good time for contrarian investors to get involved in resource equities.

And those with experience in the field believe that private placements are one overlooked option to gain exposure to these equities.

In our opinion, 2022 may be a good opportunity for some resource investors, particularly those that are resource-agnostic and opportunity-focused. Whether you're interested in gold, silver, uranium, copper, or battery metals, there may be a case to be made.

  1. "Waning stockpiles drive widespread global commodity crunch." Financial Times. 22 Feb. 2022. Link.
  2. U.S. Dollar Index (DXY), 15 Aug. 2022. Link.
  3. Gold price chart. Bullionvault. 15 Aug. 2022. Link.
  4. Copper price chart. Nasdaq. 15 Aug. 2022. Link.
  5. "Consumer prices rose 8.5% in July, less than expected as inflation pressures ease a bit." CNBC. 11 Aug. 2022. Link.
Gold price and Silver price

Source: Macro Trends. Accessed May 25, 2022.

Nickel price 10 year

Source: Trading Economics. Accessed Apr 1, 2022.

United states inflation rate

Source: Trading Economics. Accessed Apr 1, 2022.

Precious metals

Inflationary pressures remain staggeringly high, despite slowing a bit more than expected this summer.5 Government debt levels sit at record highs,6 and an uneven COVID-19 recovery continues to cause chaos in the markets.

Reigning uncertainty generally causes some savvy investors to flock to "safe haven" assets like gold which may act as a hedge against inflation—or, to be more specific, against the dollar, and against real interest rates. However, with the dollar stronger than it has been in a very long time, the ordinary safe haven pattern has been disrupted, and gold prices have dropped as a result. Silver, which is often one step behind gold, tells a similar story.

That said, gold's performance relative to most equities remains interesting, with the yellow metal down just 2.1 percent over the past month at the time of writing compared to Nasdaq's 4.3 percent loss in the same period.7,8 We continue to believe it is a reliable store of value, especially with inflation reaching highs not seen since the early 1980s. 

  1. "Navigating the debt legacy of the pandemic," Brookings. 20 Oct. 2021. Link.
  2. Gold price chart. Bullionvault. 30 Aug. 2022. Link.
  3. Nasdaq price chart. Nasdaq.com. 30 Aug. 2022. Link.

Copper

Copper has sharply declined in recent months, driven by falling demand from China, the world's largest buyer of copper.9 This comes after the metal reached an all-time high in early March, climbing to $4.94 a pound at the end of a week characterized by wide-reaching sanctions on Russia.

This follows last May, which saw the price of the base metal reach a previous all-time high10 of US$4.88/lb, driven by signs of economic recovery, growing interest in electric vehicles, and increased grid decarbonization. It peaked again in October, rising to $4.75/lb, before easing off as Omicron concerns loomed.

But regardless of what is going on in the markets, the blunt, basic thesis remains: if using current technologies, without copper, no green energy future is possible. 

The same thinking applies to battery metals like lithium, nickel, and cobalt. While demand has gradually increased for these metals,11 sparse exploration over the last decade has resulted in a growing supply shortage12 due to the lack of almost any new major discoveries. 

  1. "What's driving prices down in the metals market?" NPR. 22 July 2022. Link.
  2. "Copper Just Smashed Past a Record. Here’s What You Need to Know,' Bloomberg. 7 May 2021. Link.
  3. "Visualizing America’s Electric Vehicle Future," Visual Capitalist. 20 Jan. 2022. Link.
  4. "Copper discovery cupboard bare," Mining.com. 4 Nov. 2021. Link.
Copper price

Source: Trading Economics. Accessed May 25, 2022.

Copper reached an all-time high in early March, reaching $4.94 a pound at the end of a week characterized by wide-reaching sanctions on Russia.

Uranium price

Source: Trading Economics. Accessed May 25, 2022.

Uranium jumped over 16% between January and mid-March

Uranium price graph

Calculated via data from the World Nuclear Association, accessed in Q1 2022.

Numerous nuclear plants are coming online across the globe, but at current prices, only around 65-70 million pounds of uranium production is economical, in comparison to the roughly 175 million pounds needed annually to keep reactors running.

Uranium

Uranium is still reeling from the Russia-Ukraine war. In 2020, Ukraine accounted13 for around 1.5 percent of mined uranium production, and Russia's two state-owned uranium ventures accounted for 15 percent of total production globally. 

Amid this backdrop, uranium jumped over 16 percent between January and mid-March, with the steepest gains since Russian troops invaded Ukraine. Cameco recently announced14 that it would be restarting production at its McArthur River mine in 2022. And 50 new nuclear plants are currently under construction across the world.15

Uranium price

Source: Trading Economics. Accessed May 25, 2022.

Uranium jumped over 16% between January and mid-March

Even in the midst of the climate crisis, the US Energy and Information Administration estimates17 that global electricity consumption will increase by 50% by 2050. Current energy infrastructure in North America and abroad is ill-equipped to supply this tremendous jump without heavy investment.

 On top of this comes a major policy shift from Japan, with the country planning to restart seven more idle reactors, increasing the total of operating reactors to 17 out of the 33 in operation pre-Fukushima.

Even in the midst of the climate crisis, the US Energy and Information Administration estimates that global electricity consumption will increase by 50% by 2050. Current energy infrastructure in North America and abroad is ill-equipped to supply this tremendous jump without heavy investment. 

At the same time, world governments are increasingly mandating clean energy benchmarks as they rush to meet climate targets. So, it is easy to imagine that a large portion of that 50% jump will come from renewable sources. But even as solar, wind, and hydroelectric outstrip coal, without nuclear power, such a colossal overhaul remains out of reach.

Which is why it's currently such an exciting time for uranium. Like copper and battery metals, uranium could form an essential part of a decarbonized future. Numerous nuclear plants are coming online across the globe, but at current prices, only around 65-70 million pounds of uranium production is economical, in comparison to the roughly 175 million pounds needed annually to keep reactors running. It's a simple story that has been unspooling over the past two decades.

We feel that resource markets go in cycles, and that 2022 is looking strong

With all of the points raised above and many more, in our opinion, resource extraction sectors are looking very attractive in 2022. 2021 saw an all-time peak in the price of copper, and a huge influx of uranium attention. 2020 drove gold prices to reach an all-time high. And while nobody can be certain of the future of these metals, we feel there is little reason to expect that 2022 will be much different than the past two years.

Now you understand why you may look to invest in the natural resource sectors, but how? This is where private placements come into the equation.

  1. "Cameco ‘watching closely’ world uranium prices amid war between Russia and Ukraine," PaNOW. 1 March 2022. Link.
  2.  "Cameco to restart production at McArthur River uranium mine," CKOM. 9 Feb. 2022. Link.
  3. "How the war in Ukraine and climate change are shaping the nuclear industry," CNBC. 5 March 2022. Link.
  4. "Japan's nuclear policy shift marks a turning point for uranium." Mining.com. 26 Aug. 2022. Link.
  5. "EIA projects nearly 50% increase in world energy usage by 2050, led by growth in Asia," US Energy Information Administration. 24 Sept. 2019. Link.

Private placements are one tool to invest in these trends

As has been the case for decades, private placements may be one way to invest in cyclical resource markets. This is true despite the fact that private placements are among the riskiest investment tools available. For some investors, the upside potential of private placements may outweigh the risks.

But for those not in the know, what is a private placement?

A private placement is a transaction that takes place directly between an investor and an issuer, whether that's a public company looking to raise funds or a private company aiming to bring in a select few buyers. These deals take place outside of the open retail market, providing investors with an equity or debt position in a restricted security. Past performance is not indicative of future returns.

what is a privateplacement

If qualified private placements are arranged by companies seeking capital, often ones from industries seen currently as less favorable by traditional retail investors, like mining. These offerings allow investors to sidestep the retail equity marketplace, providing them with a few key benefits:

Warrants

Because private placements are high-risk investments, in some situations companies will incentivize your participation by attaching purchase warrants to each unit issued in the deal. Each full warrant gives the holder the right to purchase an additional share, portion of a share, or subscription receipt of the company at a locked, specified price at any time prior to the warrants' expiration date. Warrants are the most attractive quality of private placements, though there are certainly many offerings that do not include warrants as part of the deal structure. It's also worth noting that warrants carry their own risks. It's certainly possible for a warrant to expire out of the money and end up worthless.

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Shares at a discount

Companies may offer private placements at a better price than on the retail market—sometimes a far better price. Therefore, any uptick in the stock price may result in greater upside for the investor. Of course, the stock can tick down as well, and you could lose your entire investment.

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Large Positions

Private placements often give investors the opportunity to take large positions in companies both up-and-coming and well-established. This is especially true in low-volume companies and those some investors may consider overlooked within resource sectors. However, again, these lesser-known companies carry their own substantial measure of risk.

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who should consider investing in PP

Who should consider investing in private placements?

Private placements are a high-risk proposition. They are not recommended for all investors. In fact, in the U.S., these financings are legally only available to "accredited investors."

There are a few circumstances that can qualify you as an accredited investor in the U.S. The term is defined in Regulation D of the U.S. Securities and Exchange Commission.18

Most accredited investors in America are required to fulfill one of these requirements:

  1. You have gross income exceeding $200,000 in each of the two most recent years, or joint income exceeding $300,000 for those two years with your spouse or partner, and can reasonably expect to make the same amount in the current year.
  2. Your net worth, or the joint net worth of you and your partner, exceeds $1 million, excluding your primary residence.

These regulations bar the majority of retail investors from participating in private placements. However, for those of you who qualify as accredited investors, private placements can be an investment option if you meet the following further three criteria:

  1. You're comfortable with a large measure of risk in your portfolio.
  2. You either have the time to conduct comprehensive research on the sectors in which you're interested, especially in regards to specific issuers and the deals they are offering; OR you have access to financial professionals who can assist you in making a decision on where, when, and what to invest in.
  3. You're comfortable making long-term investment plays in sectors that may not get much mainstream attention.

 

  1. "§ 230.501 Definitions and terms used in Regulation D," eCFR.gov. Link.

Private placements have long been a useful tool for resource extraction companies

Most junior "mining" stocks will never actually mine anything. The vast majority spend their life simply looking for mineral deposits that they can one day mine out of the ground. Even looking for minerals is an expensive endeavor, and any potential cash flows are far off in the future. Since these "juniors" don’t have any assets from which they can borrow against, the only way they can raise capital to fund their exploration activities is through share issuances, otherwise known as private placements.

To compensate investors for the high-risk nature of this capital, oftentimes companies issue shares with an array of "sweeteners" attached. In other words, these companies have to work harder to woo investors, which may result in additional upside potential for savvy and risk-tolerant shareholders.

Finding and de-risking a new ore body requires a massive amount of capital. Every step a mining or oil company undertakes in the process of bringing a mine or well into production comes with a raft of massive expenses: exploration drilling, environmental permitting, construction, maintenance, and beyond. These companies regularly require large injections of capital to continue operating and growing, capital these companies may only be able to secure through private placements.

In addition, experienced investors know that the mineral extraction industries are deeply time-intensive. It's common for an ore body to take between 8-10 years to go from discovery to production. Often the process takes much longer.

Lastly, and most importantly, mineral commodity markets can be wildly cyclical. But as the price of gold or copper climbs to a new peak or plummets to an unforeseen trough, the ore body itself doesn't change. In fact, as projects advance and we see further and further capital spent on them, this investment setup may become less risky over time. This may reward not only the contrarian investor, but the patient investor, two qualities that can be beneficial when investing in private placements.

Life of mining project

But why doesn't everybody invest in private placements?

There are a number of important caveats to consider before you run out and start investing in private placements on your own. There are good reasons why most people neglect these instruments in their portfolio.

Chief among these reasons is the simple fact that resource extraction industries are littered with subpar companies.

Another reason is equally as simple: there is a high learning curve associated with private placements investing.

Then there are the risks that come part and parcel with investing in any precious metals company: volatility caused by commodity price sensitivity, high exploration and execution risks, the risk of future dilution of your shares, and the social and environmental risks and delays that come with any large-scale project with multiple stakeholders and competing interests.

But why doesn't everybody invest in private placements?

But when it comes to private placements, there are a number of more specific concerns you should be aware of. Here are a few of the biggest barriers to investing in private placements as an individual:

You need to be accredited

In order to invest in private placements, you need to be an accredited investor as defined in Regulation D of the Securities and Exchange Commission. See above for more information.

It's impossible to get a full understanding of the entire metals sector

No matter how you're choosing to track the markets, as an individual it's almost impossible to fully understand the ins and outs of any securities market, let alone the metals sector. Even with their cyclical nature, no newsletter or YouTube channel can fully prepare you to invest in resource private placements.

There are too many companies to consider

There are hundreds of mining companies in the U.S. alone. There are even more in resource-focused markets like Canada, and further companies operating in attractive districts like Australia. And in our opinion, the number of companies worth your time is vanishingly small.

It's incredibly challenging to separate the contenders from the pretenders

To find deals to focus on, you need to have the time, patience, and expertise to comb through hundreds of subpar offerings before you find an investment you wish to pursue. If this is not your full-time job, this process is extremely difficult. If you're a regular investor just now getting into the space on your own, all we can say is "good luck."

It's even more difficult to find the diamonds in the rough

Even if you're able to track down attractive deals, it's often the small-cap, low-volume issuers that may provide a return on your investment. These are the kinds of companies that only long-term industry insiders and true experts—and the lucky—are able to track down.

There are barriers to accessing many offerings

So, assuming you have the expertise, time, and resources to hunt down the best deals available, there is one more barrier that can trip you up: access. Private placements are by nature private offerings, and while some non-brokered deals will be available to you, many offerings are gated to select communities and insiders.

The process involves lots of paperwork and administration fees

Private placements investing is draped in bureaucracy, legal red tape, and many regulatory forms. If you have the time and expertise, it can definitely be worth it, but the process can be hair-pulling to say the least.

You may not be able to determine the right moment to sell

The final obstacle to private placements investing is one of timing. You can invest in a truly transformative deal and either sell too early or too late. It's a classic mistake in all of investing, and it remains true when you're dealing with private placements in a volatile, complex market.

Each of the these concerns applies to each individual private placement you choose to invest in. Multiply that by five, 10, or 15 deals, and your head may be spinning trying to keep track of it all.

 

The Sprott Red PP

sprott red lp

Sprott's new Resource Exploration and Development Private Placement Limited Partnership (RED PP).

As we previously stated, any individual may have a difficult time making money from private placements. And even if they do, they're likely to be doing so suboptimally, missing out on several deals, selling at the wrong time, or failing to get the best terms possible.

Now, there is a new private fund that addresses most of the above concerns, while providing investors with exposure to resource extraction private placements: Sprott Asset Management, USA, Inc. (Sprott)'s new Resource Exploration and Development Private Placement Limited Partnership (RED PP Fund).

If you haven’t heard of it, that’s not surprising. Sprott isn't big on marketing, and the fund has limited slots available, favoring their existing clients before opening it to the public. We were fortunate enough to have found out about it.

Why the RED PP Fund is one possible way to overcome the challenges of private placements investing

 RED PP is one possible way

The fund aims to level the playing field and provide a greater number of investors with the opportunity to invest in resource private placements.

The difficulties of individually investing in private placements mean that, for many investors, seeking help from those with experience is an attractive prospect. As an organization with decades investing in resource extraction industries, Sprott is one option.

Investors seeking to invest in private placements while addressing many of the concerns outlined above may consider Sprott's new Resource Exploration and Development Private Placement, LP, or the RED PP Fund. The fund aims to level the playing field and provide a greater number of investors with the opportunity to invest in resource private placements.

The organization has a wide reach within the mining sector. So when the company announces a new, innovative fund to bring more investors into the private placements market, it's news you may want to follow.

What is the Sprott RED PP Fund?

The RED PP Fund is a limited partnership offering that distills Sprott's global research efforts and private placement origination capabilities into a single investment vehicle. The primary focus of the fund is to secure private placements in publicly-traded companies.

The callable nature of the fund means that while limited partners of the fund are required to commit an amount of capital that they are ultimately willingly able to have called upon as deals and transactions are identified. In some past partnerships, all capital had to be provided on day one, meaning that partners had to be patient while the capital was then fully invested, while quality deals may only come across a handful of times in any given year. This means that, with the RED PP Fund, limited partners aren't required to liquidate other investments and then watch as their money sits idle while the fund hunts down good deals in which to invest. The fund will only charge a management fee on capital that is called, not on capital that is merely committed.

Sprott RED PP Management

Justine Tolman

Justine Tolman

Managing Director, Sprott Inc; Portfolio Manager and Economic Geologist, Sprott Asset Management USA
23 Years of Experience

The fund is managed by Sprott's investment committee based in Carlsbad, California, each of whom have dedicated their careers to following the mining industry. The investment committee includes four senior brokers and the company's in-house economic geologist, Justin Tolman.

The fund is managed by Sprott's investment committee based in Carlsbad, California, each of whom have dedicated their careers to following the mining industry. The investment committee includes four senior brokers and the company's in-house economic geologist, Justin Tolman.

This is an organization with a wealth of experience investing in the mining sector, with networks that stretch into every corner of the field. The group is supported by Sprott's entire research apparatus, and the array of experienced specialists housed within the industry-leading organization. Each member of the team brings something matchless and complementary to the table.

 collective approach empowers the fund

The RED PP won't just grant investors exposure to deals in the U.S. Its reach extends to Canada and Australia, too, eliminating the need for you to track thousands of deals across the globe, while giving you leverage in some of the best resource markets in the world.

What's more, the investment committee has a large stake in the fund, putting significant amounts of their own personal capital into the venture. For the same reason you wouldn't invest in a mining company whose management team lacks skin in the game, the Carlsbad team's participation in the RED PP Fund is deeply encouraging.

The Carlsbad Investment Committee meets regularly to discuss and analyze investment opportunities, voting on those they believe worthy of the funds' capital. The bulk of orders subject to their scrutiny fail to pass the strict standards they require to move forward with the investment, as they're weeded out due to lacking factors like those listed above.

The fund is focused only on long-term investments, and primarily targets public companies, only investing in private companies if there is a reasonable expectation that the company will go public in the near-term. The quality of each company's management team, its resource projects, and a probability-weighted risk/reward analysis drives the fund team's extensive decision-making process.

By pooling client capital under a disciplined investment rationale, the fund aims to provide participants with exposure to the resource and development sectors.

This collective approach empowers the fund to dictate better terms on deals, which means there may be better returns for its partners. What's more, the RED PP Fund can act quickly and decisively when potentially lucrative offerings become available, allowing them to capitalize on macro and micro trends. Even if the RED PP Fund isn't the first to approach a particular private placement, it at least stands a much better chance than an individual investor to get access to the deal.

The RED PP Fund won't just grant investors exposure to deals in the U.S. Its reach extends to Canada and Australia, too, eliminating the need for you to track thousands of deals across the globe, while giving you leverage in some of the best resource markets in the world.

Lastly, by participating in the RED PP Fund, you can avoid the piles of paperwork associated with each individual private placement, the headaches that come with hunting the best deals down, and the struggles individuals have in getting access to smaller, less well-known deals.

For further details on Sprott's Resource Exploration and Development Private Placement Limited Partnership (RED PP Fund):

Past performance is no guarantee of future returns.

An investment in a private placement involves a high degree of risk and is not suitable for all investors. Private placements are highly speculative including the complete loss of principal and lack of liquidity.

The intended use of this material is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The investments discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Past performance is no guarantee of future returns. Sprott Asset Management USA Inc., affiliates, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients and may sell the same at any time.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East, a pandemic or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Private funds may have limited liquidity and you may not be able to exit a private fund investment when you wish, dependent on the limited partnership agreement. In some cases, the fund may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether a fund trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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