Equinox Partners, L.P. - Q1 2020 Letter

Kuroto Fund, L.P. - Q1 2026 Letter

Wed, 29 Apr 2026 19:14:01 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund was up +27%, net of all fees, in the first quarter of 2026. By comparison, the MSCI Emerging Markets index returned 0%, and the MSCI Frontier Markets index was down -1%.

Kuroto’s strong performance was principally driven by our oil-producing companies, which were up +78% in the quarter. Our Ghanaian and Nigerian non-resource investments were also up +48% and +18% respectively.

EXITING GEORGIA CAPITAL

In the first quarter, we sold the last of our Georgia Capital, exiting a successful long-term investment. Since we received Georgia Capital shares, which were spun out of the Bank of Georgia in 2018 at roughly £10 per share, the price has appreciated +260%.

In the years immediately following its spinout from the Bank of Georgia, Georgia Capital struggled. The company took on too much debt as they expanded in multiple industries simultaneously. This aggressive behavior stressed the balance sheet and the stock traded at as much as a 50% discount to the “sum of the parts” Net Asset Value (NAV).

To their credit, Georgia Capital’s management team realized their mistake and subsequently vowed to exit capital-heavy businesses while spending all available free cash flow (FCF) to pay down debt and buy back stock so long as the company’s shares traded at a meaningful discount to NAV. The execution of this plan combined with double digit organic growth at the underlying businesses allowed the company to compound NAV per share at over 20% for many years. From its peak share count, the company bought back 33% of its shares outstanding at an average price of roughly half of today’s stock price.

As the buybacks continued year after year, the market eventually caught on to the value that was being created through this financial arbitrage, and the discount to NAV has gradually shrunk. Absent the excessive holding company discount, the case for management to continue to allocate excess free cash to share buybacks becomes less compelling. We believe management will start to include acquisitions in their capital allocation decisions, which fundamentally changes our investment case. The underlying Georgia Capital portfolio should continue to grow double digits, but we are finding better risk-adjusted return opportunities elsewhere.

While we are pleased with the return, we will miss the uncorrelated returns that Georgia Capital provided. Additionally, we will miss the straightforward capital allocation policy adopted by the company’s founder and CEO, Irakli Gilauri. He pursued a disciplined strategy that few CEOs are willing to embrace. We think the market will reward him with a lower cost of capital in the years to come given the discipline he showed buying back the stock when the discount to NAV was larger. We were also very impressed with the talent he recruited to run his portfolio companies. The performance at several of them have turned around recently after initially struggling, and the Bank of Georgia especially has clearly displaced TBC as the best bank in Georgia.

THE IMPACT OF HIGHER OIL PRICES

The Kuroto Fund portfolio has been and always will be a collection of great businesses. That is, after all, why we chose the name Kuroto , which means connoisseur in Japanese. Our fund’s name is intended to emphasize our appreciation for the characteristics that make our companies exceptional.

Owning great businesses does not mean that we ignore macro factors. We have an active view of the macro paths of the countries in which our companies operate, and of the commodities that some of our exceptional companies produce. As we developed an increasingly constructive view on the long-term oil price, we shaped the portfolio to be resilient in a higher oil price environment, while still focusing our investment process on company-specific research and valuation.

To help distill the impact of higher oil prices on the Kuroto portfolio, it is useful to segment our portfolio into the following five groups:

1. Ghanaian equities

2. Nigerian equities

3. Brazilian equities

4. Central Asian equities

5. Oil-producing company equities

Given our macro analysis on oil prices, it is no coincidence that four of these five segments benefit from higher oil prices. With respect to our upstream oil companies, the connection is obvious. Our non-resource companies in Nigeria, Brazil, and Kazakhstan are also clear beneficiaries as all three countries are meaningful net exporters of crude oil. Higher oil prices improve the government budgets and current accounts in these countries. This leads to additional fiscal stimulus and strengthens the local currencies, both of which are good for our consumer-oriented businesses in these countries.

For our investments in Ghana, the impact of higher oil prices is more complicated. Ghana is resource-rich, but it is still an oil importer and higher oil prices are a negative for the country. Thus far, higher gold and cocoa bean prices have more than offset the impact of high oil prices. Given the nuanced commodity picture, we expect the reforms undertaken by Ghana’s Mahama administration to be more decisive than the oil price. For example, debt to GDP has now fallen to 50% as the country continues to deliver on its IMF program.

In contrast to the majority of our Kuroto portfolio (and as evidenced by our significant outperformance in Q1), most of the Emerging and Frontier indices are negatively impacted by high oil prices. The top four countries in the MSCI Emerging Markets index, namely China, Taiwan, India, and South Korea – which combined make up over 75% of the index, are all major oil importers. In fact, only about 15% of the index is made up of net oil exporting countries. The situation for the MSCI Frontier Markets index is similar as the index is dominated by oil importers including Vietnam, Morocco, Romania, Slovenia, Kenya and Bangladesh. Only approximately 15% of the index is in companies from net oil exporting countries.

Sincerely,

Sean Fieler & Brad Virbitsky

^[1] Please note that estimated performance has yet to be audited and is subject to revision. Performance figures constitute confidential information and must not be disclosed to third parties. An investor’s performance may differ based on timing of contributions, withdrawals and participation in new issues.

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.26, unless otherwise noted.

This document is not an offer to sell or the solicitation of an offer to buy interests in any product and is being provided for informational purposes only and should not be relied upon as legal, tax or investment advice. An offering of interests will be made only by means of a confidential private offering memorandum and only to qualified investors in jurisdictions where permitted by law.

An investment is speculative and involves a high degree of risk. There is no secondary market for the investor’s interests and none is expected to develop and there may be restrictions on transferring interests. The Investment Advisor has total trading authority. Performance results are net of fees and expenses and reflect the reinvestment of dividends, interest and other earnings.

Prior performance is not necessarily indicative of future results. Any investment in a fund involves the risk of loss. Performance can be volatile and an investor could lose all or a substantial portion of his or her investment.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Precious Metals Fund - Q1 2026 Letter

Wed, 29 Apr 2026 18:35:12 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +7.4% in the first quarter of 2026. Over the same period the price of gold rose +8% and the MVIS Junior Gold Mining Index rose +3.3%. Our portfolio of producing miners led the performance in the quarter returning +12%, while the earlier-stage, pre-production mining portfolio finished the quarter up +4%.

THE COMING GOLD MINING M&A CYCLE

With gold trading at $4,800 per ounce, the 28 largest Western gold miners are generating an enormous amount of cash. By our calculation, the 28 gold miners listed below will generate close to $60 billion of free cash flow in 2026. After dividends and buybacks, nearly $47 billion of that $60 billion will wind up on these companies’ balance sheets.

As a group, the above gold mining companies have no net debt. They also don’t currently have enough internal projects into which they can deploy their rapidly accumulating free cash flow. Accordingly, despite the stated desire of gold mining executives to avoid the excesses of the past, a new gold mining M&A cycle has begun.

On April 8th, G Mining Ventures announced that it would pay a 76% premium (and nearly $640 per reserve ounce) to acquire their neighbor in Guyana’s Cuyuni District: G2 Goldfields. G Mining had long argued that they were the only logical acquiror of G2 Goldfields and could be patient and opportunistic with this inevitable consolidation. However, a higher price environment began to change that calculation: G2 Goldfields began pursuing other paths to advance their project, forcing G Mining to step in with a premium bid.

On April 20th, Agnico Eagle Mines paid a 67% premium for Rupert Resources. As a 13.9% owner of Rupert, Agnico was long rumored to be the ultimate acquiror, but for years the two companies couldn’t agree on a price. The higher gold price improved Rupert’s bargaining position, which in turn resulted in the premium bid from Agnico. Rupert is part of Agnico’s consolidation of the Central Lapland Greenstone Belt in Finland, a logical strategic move for the long-term-focused management at Agnico. Agnico is paying for Rupert with shares trading at a significant premium to NAV, a smart capital allocation strategy, but one that does nothing to reduce the cash accumulating on Agnico’s balance sheet.

Given the scarcity of desirable gold mining target companies, we expect more premium bids in the near future. By our calculation, there are only 10 remaining advanced gold mining projects held by juniors that make obvious sense for large and medium-sized acquirers. Given this scarcity, we suspect likely acquirers will quickly turn from not wanting to overpay to not wanting to be left behind. A list of the most obvious targets, and the price per ounce at which they currently trade, is below:

While the shares of gold miners have risen dramatically over the last two years, most of the “likely acquisition target” companies still trade at sizable discounts to their NAV (Net Present Value at a 5% discount rate) at spot gold prices. We have maintained our exposure to a few of these target companies, and we are well positioned to be beneficiaries as acquirers pay up for these scarce assets.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.26, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q1 2026 Letter

Wed, 29 Apr 2026 17:31:18 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose +32.1% net of fees in the first quarter of 2026 while the S&P 500 index declined -4.3%. Equinox’s performance was primarily driven by the strength of our energy equity portfolio, but we also enjoyed positive contributions from our gold miners, non-resource companies in Emerging & Frontier markets and equity shorts.

TODAY’S FRAUGHT INVESTMENT LANDSCAPE

The 2020s have been an exceptional decade for Equinox Partners thus far. Our oil and gas companies, gold mining investments and emerging markets businesses have all performed well. As a result, our fund is up 530% since January 1, 2020. Despite this strong performance, our portfolio remains noticeably undervalued. Our nine producing gold miners have a weighted average IRR of 22% at spot gold prices. Our pre-revenue gold companies trade at just $122 per reserve ounce. Our E&P companies generate a 19% free cash flow yield in 2028 at $80 oil, and our non-resource companies trade at 7.8x 2026 earnings.

While we are confident in our specific investments, we believe that the overall investment environment is becoming more challenging. The euphoric mood in the stock market strikes us as ominous given the seriously negative geopolitical and economic developments. To be prepared to take advantage of increasingly likely market dislocations, we have increased our liquidity and meaningfully reduced our net equity exposure from 123% in January 2023 to 92% at the end of Q1 2026. The likely developments that are not being properly discounted by the stock or bond markets are as follows:

1. Wars in Iran and Ukraine remain unresolved

2. Democrats retake the House and launch a two-year investigation of the Trump administration

3. Inflation heads higher, not lower

4. Private credit losses kick off a credit cycle

5. U.S. fiscal deficits head higher, not lower

THE COMING GOLD MINING M&A CYCLE

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.26, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information and is subject to change in future periods without notice.

Precious Metals Fund - Q4 2025 Letter

Tue, 03 Feb 2026 21:33:11 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +18.8% in the fourth quarter, finishing 2025 up +126.1% net of all fees. By comparison, the Junior Gold Mining Index GDXJ rose +18.9% in the quarter and finished the year up +176.5%. Our portfolio of producing mining companies led the returns for the quarter, in particular our companies that had silver exposure as well as our largest producer, Solidcore Resources.

The spot gold price rose +12% in the quarter and finished the year up +64%. At the beginning of 2025, spot gold traded just north of $2,600 an ounce, and by the close of the year traded above $4,300 an ounce. The letter that follows discusses one of the key drivers of gold’s strong rally in 2025 and then delves into a thesis review for the fund’s largest positions at year-end.

Trump's War on the Status quo

It is no coincidence that our strong performance in 2025 corresponded with the first year of President Trump’s second term. Trump’s frontal assault on the international rules-based order ended decades of coordination between America and Europe, thereby liberating gold and silver from organized government price suppression. Looking ahead to the remainder of Trump’s second term, we expect additional long-dormant market forces to be unleashed as the Western coalition that maintained the post-war economic system breaks down. We also expect America’s unilateral market interventions (such as the current effort to suppress the oil price) to be less successful than the coordinated interventions that characterized the post-World War II era.

The uninterrupted rise in the gold price last year was in large part due to deteriorating relations between the US and Europe. In a break with eighty years of history, at no point did any Western government so much as feign interest in the gold price rally. Neither France, nor Italy, nor the IMF threatened to sell any of their substantial gold reserves. Instead, the gold price suppression scheme run by Western governments for decades simply vanished.

We don’t know if the Trump administration formally decided to abandon America’s policy of gold price management or if the fraught relationship between Europe and the US simply made continued coordination in the gold market impossible. Perhaps Western governments collectively concluded that a gold price suppression scheme had become untenable given the growing list of government gold buyers. Regardless of the cause, the Western government policy of gold price suppression appears to be over.

In a related break with the status quo, Western governments and their financial institutions also stopped managing the silver market. We sense that silver price suppression was never an end in and of itself. Rather, controlling the price of silver was necessary to credibly control the price of gold given the close correlation between the two metals. Accordingly, if the gold market isn’t managed, then neither does the silver market need to be.

While America’s next president may pursue a different policy posture towards Europe, America’s relationship with Europe is forever altered. This change will eventually be reflected institutionally and geopolitically, but its effect can already be seen in the markets. The rising gold price is just one of the first signs of this change. While America’s break up with Europe will at times be unsettling, we expect the resulting changes to be positive for our precious metals companies.

Investment Thesis Review for our Top 5 Positions by Weight

Thesis Gold: 10.2% Portfolio Weight

Thesis steadily advanced its Lawyers-Ranch project in British Columbia in 2025. Most notably, in December the company formally initiated the provincial and federal Environmental Assessment process, which starts the permitting clock. Typically, the permitting process would take 3 years, but the government of British Columbia has indicated they would like to complete this sooner.

Thesis Gold shares’ outperformance, up 325%, reflects not only their permitting progress, but also the growing possibility of a bidding war for the company. In May 2025, Centerra Gold took a 9.9% stake in Thesis. Given Centerra’s strong financial position (net cash balance sheet and substantial annual free cash flow) and the proximity of their Kemess project to Lawyers-Ranch, they are a likely bidder when their lockup expires in May of this year. That said, we believe with Lawyers-Ranch’s attractive size and location profile, the project should eventually attract offers from multiple intermediate producers.

Furthermore, with revaluation of the silver price, the project’s silver content has become increasingly valuable. At strip prices, over 30% of the project’s revenue would be attributable to silver. While Lawyers-Ranch won’t attract the premium of a pure-silver asset, the high silver weighting makes it appropriate for silver companies, thereby increasing the upside multiple.

Thesis is not dependent upon a bid to develop their project. They are fully financed through the expected completion of their Feasibility Study in 2027 and could easily finance the entire mine construction capex by selling a silver royalty. Once in production, Thesis should produce 200,000 ounces of gold equivalent per year for 15 years. With a $550 million market cap, we calculate this investment to be a 30%+ IRR assuming flat metals prices.

Solidcore Resources: 9.8% Portfolio Weight

In 2025, Solidcore made significant progress towards cutting its remaining ties to Russia. Notably, they bought back all the shares held in Russian depository and meaningfully advanced the construction of their new Kazakhstan-based POX plant.

With the completion of the Russian share buyback on December 19th, 2025, Solidcore ended a multi-year standoff with Euroclear and created a path to reinstating their dividend. With respect to the POX plant, Solidcore successfully transported their new 1,100-ton autoclave manufactured in Belgium to site in Ertis, Kazakhstan, which was a year-long, technically demanding logistics operation. It required night-time transportation, reinforced roads, and careful coordination to avoid disrupting city life. With the autoclave now in place, the project has begun to ramp full-scale POX construction.

We believe the new POX plant could be up and running by year-end 2027, at which point we would expect Solidcore to re-list their stock on the London Stock Exchange. CEO Vitaly Nesis is working to put in place a world-class board and, along with an LSE-listing, recapture the premium valuation that Polymetal garnered prior to the Russian invasion of Ukraine. It is not often that a CEO gets to build the same company twice, but we think that will be the case for Vitaly Nesis and Solidcore.

The scale of the revaluation opportunity for Solidcore remains mouthwatering. With a current market cap of $3.5 billion, net cash of $1 billion, and annual free cash flow of $1 billion, Solidcore trades at a 2.5x Enterprise Value to FCF (EV/FCF) multiple. Similarly sized peers typically trade at a 10x EV/FCF multiple or more. We think the dividend will be an initial catalyst for revaluation, and the ultimate revaluation will occur when the equity re-lists on the LSE.

Troilus Mining: 7.8% Portfolio Weight

Troilus changed their narrative from "if they" to "when they” go into construction by securing $700 million in project financing in March 2025, which they later upsized to a $1 billion package in November. The $1 billion debt financing covers more than 70% of the project’s $1.3 billion capex. Last December, Troilus raised an additional $175 million of equity, and we expect the $125 million balance of construction cost will be easily financed by selling a royalty on the mine’s by-product metals, such as silver.

On the regulatory and permitting front, in June, the company submitted their Environmental and Social Impact Assessment (ESIA) to the Government of Canada and Government of Quebec. Importantly, government officials have identified the Troilus project as one of the country’s 10 key natural resource developments of interest. Mark Carney even traveled to Berlin with Troilus to sign their offtake agreement, removing any doubt about government support for the project.

This de-risking, both operationally and financially, has positioned Troilus as one of a select few large-scale projects advancing towards construction in Canada. When in production, the Troilus mine will produce an average of 303,000 ounces annually for 22 years at an estimated All-In Sustaining Cost of $1,450 per ounce. When the gold price was $2,000, Troilus was a marginal project in a good jurisdiction. Now with gold trading north of $5,000, Troilus is a high return project in a good jurisdiction. Troilus shares re-rated aggressively in 2025, but the company still only trades at a market capitalization of $650 million, more than a 70% discount to the project’s Net Present Value (using a 5% discount rate and spot metals prices). The mine will be the 5th largest gold mine in Canada, and we anticipate that several large mining companies will have a close look at the project before Troilus makes a final investment decision in December 2026.

Hochschild Mining: 7.5% Portfolio Weight

Hochschild overcame early operational headwinds at their new Mara Rosa mine in Brazil to finish the year with significant momentum. Despite a summer production warning and subsequent leadership transition at the COO level, the company met its revised annual guidance of over 300,000 gold equivalent ounces.

Hochschild's portfolio is anchored by the high-margin Inmaculada mine in Peru which produced 5.6 million ounces of silver last year. Because of Inmaculada, ~40% of Hochschild's revenue is derived from silver at today’s spot prices. Such a high level of silver exposure is unusual and should result in a premium valuation. With a $4.8 billion market cap with no net debt and over $550 million of expected free cash flow in 2026, Hochschild’s valuation reflects no such premium.

Hochschild’s new COO Cassio Diedrich (formerly Global Head of Mining for Base Metals at Vale) brings the specific regional and technical expertise required to optimize the growing Brazilian portfolio. Furthermore, the addition of a Brazil Country Manager with a pedigree from Lundin Mining and Yamana Gold significantly de-risks the execution of the Monte do Carmo build. If Hochschild executes on their growth plan, the company could generate over $1 billion in annual free cash flow by 2028. They are now in a strong financial position to fund both growth capex and a meaningful dividend internally from free cash flow.

West African Resources: 7.2% Portfolio Weight

In 2025, West African Resources (WAF) brought their new Kiaka mine into production on time and on budget. Now with two large, low cost and long-lived mines, WAF is the largest and most profitable gold producer in Burkina Faso. We expect WAF to produce more than 470,000 oz per year through 2040.

Unfortunately, the company’s success has not gone unnoticed in cash-strapped Burkina Faso. In September, the government of Burkina Faso expressed their interest in acquiring an additional 35% of the newly completed Kiaka mine as was allowed by the country’s 2022 mining code. As the government does not have the cash to pay for an additional 35%, and the request appears to be an extra-legal attempt to increase the government’s free carry.

The uncertainty caused by the government’s effort to up their stake in the Kiaka mine created a cascade of problems for WAF. Most importantly, their shares were suspended on the Australian stock exchange while the uncertainty was sorted out. While the government of Burkina Faso seems to have lost its enthusiasm for a transaction, WAF still must deal with the overhang and optics of the approach. The result is a particularly cheap stock reflecting the political uncertainty of operating in Burkina Faso.

WAF has an equity market cap of $2.5 billion and will generate close to $1 billion in annual free cash flow. This exceptionally low valuation comes despite the long-lived and low-cost high-quality assets the company has put into production. The more recent Kiaka mine has a planned life until 2043 and the Sanbrado mine, which started production in 2020, has a modelled life through 2034 that will likely be extended by several years. The aggregate life of mine All-In Sustaining Costs (AISC) for WAF’s projects are just under $1,700 per ounce, putting WAF into the better half of the global gold mining cost curve.

We expect the uncertainty around the operating environment in Burkina Faso to clarify over the course of 2026 and 2027. The government, at every level, now understands that it receives the majority of the economics of WAF’s gold mines operated in Burkina Faso. Additionally, with gold mining as the chief economic engine for the country, the government’s interests are best served in both the short and long run by encouraging gold mining and extracting their majority share of the economics. Negotiating for more of the economics simply makes it impossible to attract companies to make incremental investments in the country.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q4 2025 Letter

Wed, 28 Jan 2026 19:52:44 GMT

Dear Partners and Friends,

PERFORMANCE

K uroto Fund, L.P. appreciated +8.5% in the fourth quarter and finished the year up +64.9%. By comparison, the broad MSCI Emerging Markets Index rose +4.8% in the quarter, finishing the year up +34.4%.

The positive contributors to Kuroto’s performance were broad-based, with 11 stocks contributing over $1 million of gains for the year and only 2 positions detracting more than $1 million. The biggest contributors to the performance were MTN Ghana, our Nigerian stocks, and Georgia Capital. The biggest detractors were Kosmos Energy and Gran Tierra.

Looking at our portfolio today, we are surprised at how attractive it still looks given our performance last year. Our portfolio’s price to earnings ratio is 5.9x for 2026, with a dividend yield of 6%, generating an ROE of 28%. While these are imperfect metrics, they don’t show a portfolio that’s expensive. We take a more nuanced look at the valuation of our top five positions below, which represent 61% of the portfolio today. Moreover, we are still finding attractive incremental investment opportunities. In this regard, Brazil stands out as a particularly attractive incremental market for us. With policy rates at 15%, local investors are happy to hold fixed income securities which has kept equity valuations depressed.

As concerns about US economic policy grow, risk capital should flow to emerging and frontier markets. US equities account for 47% of total equity value globally. Brazil, by contrast, accounts for just 0.6% of global equity value. Needless to say, a small shift from US equity markets to EM markets could result in a meaningful upward revaluation of emerging market stock markets such as Brazil’s.

A breakdown of Kuroto Fund exposures can be found here .

Investment Thesis Review for the Top Five Positions by Portfolio Weight

MTN Ghana: 20.5% Portfolio Weight

MTN Ghana continues to be our largest investment. Through the first nine months of 2025 (full year results are not yet released), the company’s revenue grew 36.2% and earnings were up 45.9%. It generated a ROE of over 50% and is on track to pay out 80% of earnings in dividends. The company continues to dominate the voice and data telecom services market, as well as money transfer and digital payments in the country.

The biggest growth driver of the business has been data. Our understanding is that latent demand for data is such that any investment MTN Ghana makes into its telecom infrastructure is immediately utilized. MTN has not been under-investing in infrastructure, but its competitors have been. The second largest competitor was Vodacom, but they sold out to Telecel in 2023. Since purchasing Vodacom Ghana, Telecel has underinvested in its network and has been losing market share. The third and fourth largest networks, Bharti Airtel and Tigo, merged their operations in 2017 to attempt to compete more effectively, but they did not invest enough to be competitive and ended up selling to the government in 2021 for $1. Since then, the government has absorbed the third player’s operating losses while not investing meaningfully in infrastructure. Currently, the government is considering both selling a stake to remove ongoing losses as well merging its Airtel-Tigo with Telecel to create a stronger competitor to MTN Ghana. Combining two under-invested networks will not fix the problem unless someone commits to spending a meaningful amount of capital to add to and upgrade telecom infrastructure. MTN Ghana has invested over $3 billion to make its network the dominant one in the country. It’s unlikely someone will come forward to write a check big enough to meaningfully alter that dynamic.

The second biggest growth driver, and potentially the most valuable piece of the business longer term is the mobile financial services business – MoMo. MTN continues to dominate money transfers and payments in the country with 90%+ market share. In early 2025, the government removed the e-levy tax on money transfer which spurred growth for the year. Now the service mix is shifting to higher value services like merchant payments and savings and lending products and away from pure person-to-person money transfer. The company recently separated its mobile financial services business from its telecom business internally, and going forward will report the financials of these businesses independently. The company is guiding that in 3-5 years they will list the mobile financial services business separately. It’s possible that this leads to a higher valuation for the group at some point, as these sorts of fintech businesses tend to trade at much higher multiples than telecom businesses.

In our estimates, we see the stock currently trading at 5.6x our estimate of 2026 earnings, earning a 55% ROE and paying out a 10.7% dividend yield. The company forecasts high-30s% revenue growth in the medium term, stable margins, and a continued 80%+ payout ratio.

Georgia Capital: 12.2% Portfolio Weight

Georgia Capital had a great year. From December 2024 to the end of Q3 2025, the company’s NAV per share increased 42%. And for the full year 2025, the company is forecasting a 46% increase in FCF per share. The share price outpaced the intrinsic value growth, and the discount to the sum of the parts that the stock trades at has come in from ~50% discount at year end 2024 to a ~25% discount today.

There were three big drivers of Georgia Capital’s performance in 2025. The first was the strong performance of its largest holding, Lion Finance Group (formerly known as the Bank of Georgia). Since 2019, when current CEO Archil Gachechiladze took over, Lion Finance Group has transformed from a good bank into a great one. The ROE expectation has increased from low-20s% to high 20s%, Net Promoter Score has increased from mid-30s to mid-70s, and 2025 EPS is forecast to be nearly 5x what it was in 2019. In 2025, the bank continued to perform strongly and is now getting recognized for it in the stock market. Listed in London, it is now a FTSE 100 stock, and having had traded around 1x book value for the past 5 years, is now at closer to 1.5x Price to Book Value. We think the bank will continue to grow revenues at a double-digit percentage, earn a high 20s% ROE, and support a 5%+ dividend yield. As such, we think Lion Finance Group stock still trades at a very reasonable valuation, and are comfortable with it as just over half of Georgia Capital’s NAV.

The second big driver for Georgia Capital in 2025 was its aggressive share repurchase program. Since merging with its healthcare subsidiary in August 2020, Georgia Capital has shrunk its share count from 47.9 million shares to 35.4 million at the end of Q3 2025. From Q1 through Q3 this year, they repurchased 10.4% of their beginning of 2025 shares outstanding and continued to buyback through Q4. They funded this aggressive buyback through a combination of operating cash flow, selling down some of the group’s stake in the bank, and disposing of some non-core assets. Repurchasing shares while trading at a substantial discount to NAV is a good recipe for NAV per share growth, and Georgia Capital did a lot of that this year. Now that the discount has closed to a ~25% discount, this is less attractive but still reasonable given that look-through valuation is still only a single digit P/E multiple.

The third key 2025 driver for Georgia Capital was the increase in value of the rest of Georgia Capital’s portfolio. The biggest pieces of the group after the bank are its pharmacy business, hospital business, and insurance company. Pharmacy and hospitals saw a 21.1% and 38.7% increase in operating cash flow respectively, and insurance saw a 23% increase in profit before tax. We expect continued double-digit profit growth in the medium term for these businesses, though not 20%+, which was helped by a cyclical margin recovery in 2025.

Currently, our look-through P/E multiple for the group is 7x, which is attractive for this combination of businesses that earn good returns on capital and grow earnings double digits. Going forward, we anticipate growth will be driven more by earnings growth and capital returns rather than a decrease in the holding company discount to the sum of the parts. As such, we’ve trimmed the position modestly.

Seplat Energy: 12.2% Portfolio Weight

Seplat acquired Exxon Mobil’s shallow water operating unit in December 2024, more than doubling the size of its production and reserves. As a result, 2025 was a year of asset integration. Thus far, the company has managed the much larger production base well. Production averaged 135,000 barrels of oil equivalent per day (boepd) in the first three quarters of 2025, up from less than 50,000 boepd prior to the acquisition. Seplat has maintained this level of production throughout the year without drilling any incremental wells into the former Exxon Mobil assets, only reactivating old, previously shut-in wells.

In fall of 2025, Seplat unveiled their 5-year plan for the newly combined portfolio. Encouragingly, Seplat was able to keep most of the Exxon Mobil in-country team, many of whom have 20+ years of experience with these assets and were trained to Exxon’s global standards. This makes the five-year plan to grow corporate production from 130,000 boepd to 200,000 boepd look very achievable.

Seplat is trading at a high single digit FCF yield at the current low-$60 oil price. Debt to cash flow is less than 1x. They plan to pay out 45% of FCF as dividends while also investing to grow production approximately 9% per year for the next 5 years. Assuming a $65 Brent oil price, Seplat is guiding for a cumulative $2 to $3 billion in FCF over the next 5 years, which compares to their equity market cap of $2.5 billion. By 2030, Seplat should be producing over 200,000 boepd, generating north of $500 million in FCF annually and still have a long growth runway ahead. That said, it is no longer as enormous of an outlier in terms of valuation relative to some other emerging market oil and gas ideas we have, two of which are trading at north of 20% free cash flow yield today or in the next six months.

Solidcore Resources: 11.8% Portfolio Weight

Guaranty Trust: 8.9% Portfolio Weight

Guaranty Trust performed well in 2025, posting a 31% ROE while growing their loan book by 16%. Earnings per share declined 6% YoY due to the normalization of their foreign currency earnings (rather than any deterioration in the business).

After a lost decade under the former President Buhari, Nigeria is now beginning to grow again. GDP grew at 4% in 2025 despite weak oil prices, and government foreign exchange reserves are again healthy. Where inflation ran at 25% a year ago, it dropped to 14.5% as of November 2025. We expect Nigerian interest rates to follow inflation lower, which should spur loan growth. For the first time we can remember, Nigerian businesses are borrowing and investing, the currency has been stable, and the locals we speak to are genuinely optimistic.

With a capital ratio of over 40% and a loan-to-deposit ratio of only 27%, Guaranty Trust remains Nigeria’s most conservative bank. With a cost of funding of only 3% and a cost to income ratio of sub-30%, Guaranty Trust doesn’t have to take much credit risk to generate spectacular returns on equity. Not surprisingly, simply owning government bonds is their preferred strategy in the current rate environment.

Today, Guaranty Trust trades at 3.3x forward earnings and just less than book value. We expect the company to continue earning at least a high-20s% ROE, which should support both a 10%+ dividend yield and strong loan growth.

Sincerely,

Sean Fieler & Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q4 2025 Letter

Wed, 28 Jan 2026 17:38:27 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose +17.3% net of fees in the fourth quarter, finishing the calendar year 2025 up +80.9%. By comparison, the S&P 500 index rose +2.7% in the fourth quarter and +17.9% for the year.

Our precious metal miners accounted for the vast majority of our gains last year. Our relatively small exposure to non-commodity Operating Companies in Frontier & Emerging markets also performed extremely well. Our energy equities declined modestly, and our equity shorts were roughly P&L neutral for the year.

Trump's War on the Status Quo

It’s unfortunate that Trump has paired his liberation of gold and silver with the enthusiastic suppression of the oil price. This, too, is a break with the status quo. We are aware that for most of the post-war period, America has worked with a coalition of Western oil consuming countries to ensure the long-term availability of oil at reasonable prices. But Trump’s policy of targeting an uneconomic oil price is unprecedented.

Should Trump achieve his stated goal of $50 oil, such a low price will prove unsustainable. With oil averaging $60 over the past year, there has been no increase in US production and non-OPEC supply increases have been muted. Perhaps direct government subsidies can spur a supply increase from Venezuela, but that remains to be seen. Absent new government subsidies, oil production growth will prove a challenge at $60, let alone $50. Harold Hamm, a close Trump confidant, has conveyed this message to Trump. Presumably, Trump realizes his policy of oil price suppression is unsustainable. We certainly do.

Investment Thesis Review for our Top 5 Long Positions By portfolio Weight

Solidcore Resources: 11.8% Portfolio Weight

Troilus Mining: 10.9% Portfolio Weight

Silver Futures: 9.0% Portfolio Weight

Despite the more than three-fold increase in the silver price since January 2024, the supply and demand deficit for the metal hasn’t improved much. Beginning with supply, we expect a de minimis year over year increase in mine supply in 2026 and a 30-million-ounce uptick in recycling. Taken together, we forecast total silver supply will increase 4% in 2026. It’s worth noting that an uptick in recycling is likely a one-time phenomenon, and going forward silver supply growth will depend solely on mine supply. On this point, despite the high silver price, we expect very little mine supply growth again in 2027. Sustained increases in silver mine supply require a more permissive permitting regime in countries such as Mexico, Guatemala, Peru and Chile.

Even at $100 an ounce, we expect industrial demand for silver to remain basically flat. Silver is used in industrial applications because of the unique attributes of its valence electrons, and there is no good substitute in most cases. Absent government restrictions on silver use, we don’t foresee much of a decline in industrial silver demand. The one area of possible demand destruction is in Indian silverware purchases.

Given the inelasticity of both silver supply and demand, we foresee only a modest increase in the metal available for investment to 150 million ounces. (See supply and demand table below) Importantly, a sizable fraction of these 150 million ounces will be consumed by mints producing silver coins. Most incremental investment demand will have to be met by existing owners of metal and the physical silver market will remain tight. We remain bullish, but we’ve trimmed 80% of our silver ounces given the price move.

West African Resources: 7.2% Portfolio Weight

Unfortunately, the company’s success has not gone unnoticed in cash-strappe d Burkina Faso. In September, the government of Burkina Faso expressed their interest in acquiring an additional 35% of the newly completed Kiaka mine as was allowed by the country’s 2022 mining code. As the government does not have the cash to pay for an additional 35%, and the request appears to be an extra-legal attempt to increase the government’s free carry.

The uncertainty caused by the government’s effort to up their stake in the Kiaka mine created a ca scade of problems for WAF. Most importantly, their shares were suspended on the Australian stock exchange while the uncertainty was sorted out. While the government of Burkina Faso seems to have lost its enthusiasm for a transaction, WAF still must deal with the overhang and optics of the approach. The result is a particularly cheap stock reflecting the political uncertainty of operating in Burkina Faso.

WAF has an equity market cap of $2.5 billion and will generate close to $1 billion in annual free cash flow. This exceptionally low valuation comes in spite of the long-lived and low-cost high-quality assets the company has put into production. The more recent Kiaka mine has a planned life until 2043 and the Sanbrado mine, which started production in 2020, has a modelled life through 2034 that will likely be extended by several years. The aggregate life of mine All-In Sustaining Costs (AISC) for WAF’s projects are just under $1,700 per ounce, putting WAF into the better half of the global gold mining cost curve.

Tourmaline Oil: 6.3% Portfolio Weight

We fully exited Tourmaline in January 2026. We have a deep admiration for the executive team that runs Tourmaline, and we agree with the company’s long-term strategy. That said, given the uneven valuation of E&P companies, we believe there are more attractive investments in the sector at this time.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information and is subject to change in future periods without notice.

Value Investor Insight Interview October 2025 Issue with Sean and Brad

Tue, 11 Nov 2025 15:09:20 GMT

Value Investor Insight Profile with Sean Fieler and Brad Virbitsky

Sean and Brad were interviewed for the feature profile in the October 31, 2025 issue of Value Investor Insight.

A PDF copy of the reprint of the interview can be found via button above.

To see the full issue of Value Investor Insight, please check out their website: Value Investor Insight

Precious Metals Fund - Q3 2025 Letter

Fri, 31 Oct 2025 19:45:04 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +36.2% in the third quarter of 2025 and is up +90.2% for the year-to-date 2025. By comparison, the Junior Gold Mining Index GDXJ rose +46.6% in the quarter and is up +132.7% for the year-to-date. Exploration stage companies were the best performing segment of the portfolio, appreciating +55.0% in the quarter.

The spot gold price rose +18% in the quarter and is up +47% for the year-to-date. The letter that follows provides our thoughts on the outlook for the gold price and implications for the portfolio holdings.

gold

The gold bull market, initially driven by central bank buying, has evolved into an investor-driven dollar debasement trade. This second phase of the gold bull market is more explosive than the first because it draws on the approximately $470 trillion of the world’s wealth as opposed to the roughly $35 trillion of central bank balance sheets. If President Trump fans the dollar debasement fire by forcing a politicized Fed to cut rates, gold could rapidly displace the dollar as the world’s reserve currency. However, if President Trump takes a more nuanced approach to the Fed, gold should still displace the dollar as the world’s reserve currency over time with the competition between gold and the dollar taking longer to play out.

Gold investors warning about fiat currency debasement is nothing new. That, after all, is why gold investors own gold in the first place. There’s also nothing new about most American investors ignoring these warnings. The dollar’s relative stability has long made concerns about dollar debasement appear quixotic. Since the early 1980’s, American inflation has been largely tolerable, the dollar has outperformed almost all other fiat currencies, and U.S. government bonds have been the safest asset to own in an economic downturn.

The dollar has sloughed off so much criticism for so long that Janet Yellen likely did not imagine the chain of events that freezing Russia’s foreign exchange reserves would set into motion. With confidence in the dollar’s inertia and a bit of hubris, in our opinion, Secretary Yellen engineered the freezing of $300 billion of Russia’s foreign exchange reserves and put the world’s central banks on notice that their use of dollar reserves depends upon the tacit approval of the U.S. Treasury. Foreign governments, shocked by this policy change, sought to reduce their dependence on the U.S. Treasury and doubled their gold purchases to roughly $60-80 billion per year (potentially $100 billion in 2025).

This increase in central bank gold demand drove the gold price up over +50% from March 2022 to March 2025. This bull market, in turn, gave gold the additional scale necessary to function as a more viable alternative to the dollar and damaged the dollar’s air of invulnerability. This two-fold outcome is problematic because inertia and a lack of alternatives were fundamental to the dollar’s stability.

On the back of gold’s appreciation, long-ignored arguments of gold investors began sounding more plausible. Financial professionals accustomed to deriding gold investors and referring to them as insects began to worry that gold’s price action is telling them something important. Jamie Dimon aptly summed up the change of heart: “This is one of those times where it is semi-rational to own gold.” His comment captures both his continued distaste for gold and his willingness to own it.

Despite the broadening acceptance of gold as an investment, markets remain skeptical of the underlying dollar-devaluation narrative. Inflation, a broad measure of the dollar’s strength, is just 2.8%. The 10-year U.S. Treasury yields 4.0%, indicating the bond market’s indifference to the dollar debasement narrative. Furthermore, the decline in the trade weighted dollar has partially reversed since early July. At this moment, the dollar debasement trade appears to be waiting for additional macroeconomic and geopolitical events to play out. Of these, none looms larger than President Trump’s effort to bend the Federal Reserve to his will. In January, the Supreme Court will likely allow President Trump to remove Federal Reserve Board Governor Lisa Cook, making the selection of the next Fed Chair even more important.

If Trump nominates a loyalist like Kevin Hassett who appears more committed to pleasing the President than price stability, we could see broadening concern about the dollar’s store of value and a growing asset allocation into gold. In this hyper-politicized Fed scenario, gold could quickly become a $100 trillion dollar asset and displace the dollar as the world’s reserve currency. However, if Trump nominates an institutionalist like Chris Waller, the dollar debasement trade will likely remain in limbo for a while as markets suss out how much control Trump really has over the Fed.

Either way, the U.S. bond market will not be allowed to freely adjudicate the outcome at the Fed. We expect both Treasury and Fed to proactively manage the yield curve during the particularly politically sensitive period when the Fed is cutting rates while inflation is above their stated 2% target. Treasury will keep longer-dated bond issuance to a minimum while coercing banks to keep the Treasury market well bid. JP Morgan increased its holdings of Treasuries by $80 billion in the first half of this year, and we expect other banks to follow suit. The Fed, for its part, has announced an end to quantitative tightening and its intention to shift its balance sheet from mortgage-backed securities to Treasuries. Given the likely extent of the coordinated intervention of the Treasury and Fed, the bond market will not be a good indicator of the market’s confidence in Trump’s economic policies. Gold will be.

To the extent that investors sense that the bond market is not providing a reliable price signal, they will begin paying more attention to gold. And, should the gold price becomes the accepted indicator of U.S. financial health, the Trump administration will take action to influence it. At the very least, this will entail the Trump administration encouraging other central banks to stop buying gold or even sell gold. But the anti-gold policy options are limitless. Needless to say, the U.S. government pushback on gold will not solve the dollar’s long-term structural problems. Nor will it mark the end of gold’s challenge to the dollar. It will simply mark the next phase of financial repression.

Our Gold Mines

The second phase of the bull market in gold has been broadly positive for our portfolio, as a portion of the investor money flowing into gold has bid up gold mining equities as well. Where central banks buy the physical gold bullion, private wealth investors allocating to gold will also buy gold mining stocks. The GDXJ Junior Mining Index is up +132.7% for the year-to-date through September 30. Even with this year’s rapid rise in the gold mining portfolio, valuations remain cheap at spot gold prices. Our in-production portfolio trades at a 24.0% IRR as compared to a 23.4% IRR on March 31.

The most dramatic mis-valuation among our gold miners continues to be in the pre-production companies. While these equities have appreciated more rapidly than our producing companies for the year-to-date 2025, they began from such a low valuation that even at twice or three times their January price, they are still undervalued. Troilus Gold, a junior gold mining company with an 11.2 million ounces gold-equivalent resource in Quebec, Canada, is a case in point.

Troilus Gold shares have more than tripled in 2025, rising from C$0.31 to C$1.35 per share. The company still trades at an IRR of 30%, 0.2x price-to-NAV (using a 10% discount rate), and a price per ounce of recoverable gold of $63. When Troilus goes into commercial production in 2029, we expect it will generate annual net income roughly equal to its current market cap.

Troilus historically traded at an extremely low valuation because the market did not believe that the company could finance the project's upfront capital expenditure of $1.3 billion. Throughout 2025, Troilus began addressing these financing concerns by signing an offtake agreement with a European smelter and a related letter of intent for $700 million of debt financing on attractive terms. If Troilus Gold raises the necessary equity and signs a streaming arrangement to fully fund the mine’s construction, we believe the stock will trade much closer to its NAV (using a 10% discount rate and the spot gold price) of $2.5 billion.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q3 2025 Letter

Thu, 30 Oct 2025 22:13:38 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose +24.5% net of fees in the third quarter and is up +54.4% for the year-to-date 2025. By comparison, the S&P 500 index rose +8.1% in the third quarter and is now up +14.8% for the year-to-date 2025.

Our quarterly performance has been almost exclusively driven by our gold and silver miners. In the third quarter, the spot gold price rose +18%, and the fund’s mining portfolio returned +40%. As of this writing, 78% of Equinox Partners’ capital is invested in the gold and silver sector. The letter that follows provides our thoughts on the gold price and our gold mining holdings.

Gold

The gold bull market, which was initiated by central bank buying, has evolved into an investor-driven dollar debasement trade. This second phase of the gold bull market is more explosive than the first because it draws on the approximately $470 trillion of the world’s wealth as opposed to the roughly $35 trillion of central bank balance sheets. If President Trump fans the dollar debasement fire by forcing a politicized Fed to cut rates, gold could rapidly displace the dollar as the world’s reserve currency. However, if President Trump takes a more nuanced approach to the Fed, gold should still displace the dollar as the world’s reserve currency over time with the competition between gold and the dollar taking longer to play out.

The dollar has sloughed off so much criticism for so long that Janet Yellen likely did not imagine the chain of events that freezing Russia’s foreign exchange reserves would set into motion. With confidence in the dollar’s inertia and a bit of hubris in our opinion, Secretary Yellen engineered the freezing of $300 billion of Russia’s foreign exchange reserves and put the world’s central banks on notice that their use of dollar reserves depends upon the tacit approval of the U.S. Treasury. Foreign governments shocked by this policy change sought to reduce their dependence on the U.S. Treasury and doubled their gold purchases to roughly $60-80 billion per year (potentially $100 billion in 2025).

This increase in central bank gold demand drove the gold price up over +50% from March 2022 to March 2025. This bull market in turn gave gold the additional scale necessary to function as a more viable alternative to the dollar and damaged the dollar’s air of invulnerability. This two-fold outcome is problematic because inertia and a lack of alternatives were fundamental to the dollar’s stability.

Our Gold Mines

The second phase of the bull market in gold has been broadly positive for our portfolio, as a portion of the investor money flowing into gold has bid up gold mining equities as well. Where central banks buy the physical gold bullion, private wealth investors allocating to gold will also buy gold mining stocks. The GDXJ Junior Mining Index is up +131% for the year-to-date through September 30. Even with this year’s rapid rise in the gold mining portfolio, valuations remain cheap at spot gold prices. Our in-production portfolio trades at a 24% IRR as compared to a 25% IRR on March 31.

Troilus Gold shares have more than tripled in 2025, rising from C$0.31 to C$1.35 per share. The company still trades at an IRR of 30%, 0.2X its NAV (using a 10% discount rate), and a price per ounce of recoverable gold of $63. When Troilus goes into commercial production in 2029, we expect it will generate annual net income roughly equal to its current market cap.

New Board Seat at Gran Tierra Energy

On September 30, portfolio company Gran Tierra Energy announced that Brad Virbitsky has joined the board on behalf of Equinox Partners. While it is a relatively modest-sized position in the fund, we believe there is significant value to unlock, and we can help realize that value through our participation in the boardroom.

Sincerely,

Equinox Partners Investment Management

[2] UBS Global Wealth Report 2025 ( https://www.ubs.com/us/en/wealth-management/insights/global-wealth-report.html )

[3] Pozsar, Zoltan. “J.P. Morgan Chase & Co. Treasury Book as of June 30 ^th , 2025”. https://exunoplurales.hu.

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information and is subject to change in future periods without notice.

Kuroto Fund Wins 2025 HFM US Global Equity Award

Thu, 30 Oct 2025 15:34:51 GMT

Kuroto Fund Wins HFM 2025 US Performance Award

Kuroto Fund was named winner of the 2025 HFM U.S. Performance Award in Global Equity (up to $1 billion) this year.

Brad and Kieran attended the awards dinner at Guastavino's in New York on October 14th, 2025 and accepted the award on behalf of the entire team at Equinox.

Full press release of the award can be found here:

Equinox Partners’ Kuroto Fund Wins HFM U.S. Performance Award in Global Equity (Up to $1 Billion) Category

Kuroto Fund, L.P. - Q3 2025 Letter

Thu, 30 Oct 2025 15:07:34 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. appreciated +16.6% in the third quarter and is up +51.6% year-to-date 2025. By comparison, the broad MSCI Emerging Markets Index rose +11.0% in the third quarter and is up +28.2% for the year-to-date. Performance in the quarter was driven primarily by our investments in Nigeria, with additional strong contribution from our largest position, MTN Ghana.

A breakdown of Kuroto Fund exposures can be found here .

Portfolio Changes

During the third quarter, we initiated a position in Solidcore Resources, a company described in our February webinar . Solidcore is similar to the oil companies we profiled in our Q2 2025 letter in that it is a competitively advantaged commodity producer. The company’s main asset is a long-lived and low-cost mine, the management team is among the best in the region, and the infrastructure they are building will make them a natural consolidator of regional assets. Given the subsequent increase in commodity prices, we ended up purchasing the bulk of our position at a 40%+ free cash flow yield. Solidcore is now a top 5 position in the fund.

We funded our purchase of Solidcore by reducing our Georgia Capital position weighting from 17% to 11% and by selling our stake in a Greek consumer-focused business. In the case of Georgia Capital, while the discount to the sum of the parts value decreased from 50% to a more reasonable 30%, we still see it as a compelling investment opportunity. Georgia Capital’s portfolio of oligopolistic businesses is growing earnings double digits, buying back stock, and trading at a single digit, look-through price-to-earnings multiple. The sale of our Greek investment was driven by stock appreciation combined with a management change that led us to re-underwrite our investment.

GHANAIAN AND NIGERIAN MACRO

Over the past decade, Nigeria and Ghana have endured a seemingly unending series of self-inflicted macro problems. Inflation increased to over 30% in both countries, and the currencies depreciated 64% and 79%, respectively. Ghana defaulted on its domestic and foreign debt in 2023, and Nigeria imposed onerous capital controls for multiple years. However, 2025 has been a turning point for both countries. For the first time in over a decade, investors in these markets are experiencing macroeconomic tailwinds.

In Ghana, since the beginning of the year, the currency has appreciated 43% vs. the U.S. dollar, GDP growth averaged over 6%, the budget has been in primary surplus, inflation declined from 24% to 9%, and debt to GDP declined from 62% to 43%. Ghana’s macro environment has improved due to three factors: One, Ghana’s debt restructuring is mostly finished, and the country now has a much smaller interest expense burden, which should decline further as the central bank lowers rates to be more in line with the decline in inflation. Two, the new government which assumed power in January has cut spending 14% in real terms. Three, the country has been helped by the large increase in the gold price, which is both the country’s largest export and a significant component of Ghanaian central bank reserves. Ghana now has 4.8 months of import cover, half of which is held in gold bullion. Whether Ghana can maintain this strong start to the year is an open question, but the fundamentals are certainly in a better place than they have been in the past decade.

In Nigeria, President Tinubu’s bold reforms upon taking office are finally starting to have some effect. In 2023, Tinubu eliminated the local fuel subsidy which consumed about 40% of the government’s annual revenues, floated the currency which resulted in a 68% depreciation, forced a recapitalization of the banking sector, and removed the board of the notoriously corrupt national oil company and replaced them with technocrats who formerly worked at companies like Exxon and Shell. While not perfect, the scale of the reforms is impressive by any standard.

A year later, inflation has fallen from over 30% to the high teens and is expected to fall to single digits next year. Economic growth has increased from less than 3% to over 4%. Oil production is up more than 10% and oil theft is down 90%. Importantly, the exchange rate has been stable for a year and anecdotally, we are hearing that conditions on the ground are night and day different, businesses are looking to invest, and banks are willing to lend.

We initially invested in Ghana and Nigeria in 2018 with the expectation that both countries would eventually adopt a sane set of macroeconomic policies. While it took longer than we expected, sane policy is gaining traction in both countries, and our superior companies are getting re-rated to more sensible, albeit still very cheap, valuations.

In Ghana, our main investment has been in MTN Ghana, which has compounded at approximately 25% in U.S. dollar terms since 2018 despite all the on-the-ground challenges. The stock’s historical return understates our investment performance because we increased our weighting at opportune times. The total contribution to our P&L has been +$17.7 million over that time frame, resulting in a +24.9% cumulative contribution to fund returns.

Our Nigerian investment results have also been strong. While our initial entry was poorly timed, we added counter-cyclically, and as a result have generated +$9 million of P&L, contributing a cumulative +15.0% to the fund’s return. Our experience in both markets underscores the importance of our investment strategy of looking at out-of-favor markets to find competitively advantaged, well-run businesses at unusually cheap valuations.

NEW BOARD SEAT AT GRAN TIERRA ENERGY

On September 30th, portfolio company Gran Tierra Energy announced that Brad Virbitsky has joined its board on our behalf. While it’s a relatively modest position size in the fund, we believe there is significant value to unlock and we can contribute to that process through our participation in the boardroom.

Sincerely,

Sean Fieler & Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Precious Metals Fund - Q2 2025 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Fri, 01 Aug 2025 15:30:57 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +13.2% in the second quarter of 2025 and is up +39.7% for the first half of 2025. By comparison, the Junior Gold Mining Index GDXJ rose +18.7% in the quarter and is up +58.7% for the first half of the year. Our meaningful year-to-date underperformance relative to the GDXJ reflects the continued discount at which our companies trade compared to peers. Specifically, our portfolio of producing companies trades at an average internal rate of return (IRR) of 24%, roughly double the 11.5% IRR of the broad universe of gold miners that BMO covers.

the gold mining bull market is young

The skepticism that characterizes the gold mining sector stands in sharp contrast to the enthusiasm in the broader stock market. The animal spirits that have propelled popular stocks like Wingstop and Robinhood to an average of nearly 80 times 2025 earnings remain totally absent among gold mining investors. One indication of the sober mood that dominates the gold mining sector is the use of gold price assumptions below spot in net asset value (NAV) calculations. Looking at four important sell-side houses for the sector, their models include an average long-term price assumption of $2,400 per ounce, representing a 28% discount to the quarter-end spot price.

(Sell-side long term gold price assumptions as of June 30, 2025)

Another sign of skepticism is the persistence of low- or no-premium M&A. With acquirers reluctant to pay a fair price based on spot gold, and sellers unable to justify selling out at a discount to spot, low- and no-premium mergers of equals became popular. Barrick and Randgold kicked off the low-premium merger trend in late 2018 with a zero-premium deal, and several of the larger deals in the industry followed with a similar structure. But perhaps the era of zero premium mergers has finally run its course. In February 2025, Equinox Gold announced a $1.8 billion all-share merger with Calibre Mining. The zero-premium offer, while approved by both boards, needed to be increased by 10% to satisfy the Calibre shareholders.

To the extent that equity markets have embraced gold mining deals with sizable premiums, the deals have involved the consolidation of an asset or had clear operational synergy. The Gold Fields acquisition of Osisko Mining last fall which unified ownership of the Windfall project within the prolific Greenstone belt in Quebec is a good example of such a deal. Gold Fields paid $1.6 billion in cash ($3.57/share), representing a 55% premium to Osisko Mining’s 20-day volume-weighted average trading price. The premium was sizable, but the deal entailed zero technical risk.

Paying a large premium for early-stage assets without any strategic logic has remained taboo ever since Kinross’s 2021 acquisition of Great Bear in Red Lake. Kinross was punished not only with a sharp decline in their share price but also with an activist investor in its share registry. On the back of the deal, the always persuasive Elliott Management forced Kinross’ board to announce an about-face to prioritize capital return as penance for their premium-priced acquisition of Great Bear.

Given the potential punishment, deals in the mold of Kinross-Great Bear have remained scarce. Even the apparent exceptions have typically involved extenuating circumstances. B2Gold’s 2023 acquisition of Sabina is a case in point. It is true that B2Gold paid a 45% premium to buy Sabina Gold & Silver, but that premium reflected both how discounted Sabina’s shares were trading at the time as well as B2Gold’s burning desire to diversify out of Mali. B2Gold’s concerns about Mali proved prescient but the jury is still out on its decision to acquire Sabina.

Despite the collective reluctance of gold mining companies to pay up for acquisitions in new jurisdictions, the cash building up on gold miners’ balance sheets will likely force a change soon. As the next M&A cycle heats up, we believe that we are particularly well positioned. We own several high-quality pre-production companies that merit substantial premiums. And while we are beginning to see more reasonable prices for producing mines, the transaction multiples for pre-production projects remain well below historical averages, even before factoring in today’s higher gold price.

Our review of 141 gold mining deals over the last 21 years shows that the price-to-NAV transaction multiples for assets in production are now comparable to what those multiples were in 2009. By contrast, the multiples on pre-production deals remain depressed, as pre-production gold mines today trade at 0.2x to 0.3x price-to-NAV.

Using enterprise value per gold ounce of resource (EV/oz) is another method to arrive at the same conclusion. As shown in the graph below, the average price per ounce over time has been $111/oz. By comparison, our portfolio of pre-production assets is trading closer to $50/oz.

As investors who have allocated capital through multiple cycles in the sector, we are patient owners of discounted companies with strong fundamentals. We look forward to the forthcoming upward readjustment in the prices of our portfolio companies as the market incorporates the $3,000+ gold price environment into the valuation of high-quality, early-stage gold mining projects.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q2 2025 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Thu, 24 Jul 2025 16:56:21 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose Equinox Partners, L.P. rose +11.6% net of fees in the second quarter and is up +24.1% for the year-to-date 2025. By comparison, the S&P 500 index rebounded +10.9% in the second quarter and is now up +6.2% for the year-to-date 2025.

Our portfolio has performed well across the board this year, with our gold miners, oil and gas producers, and emerging market businesses all appreciating. We were particularly gratified by the long-overdue outperformance of several of our earlier stage gold companies in the first half of this year.

With markets and complacency on the rise, we think it prudent to address the non-negligible risk of an economic downturn.

Beware the Next Recession

The America n economy has been growing without manifesting several of the traditional signs of economic health. As a result, for the third time in three years, The Conference Board Leading Economic Index (LEI) has turned negative, an event that has occurred before every U.S. recession since the 1970s. While The Conference Board gave up on its recession call last year, investors dismissing the persistent weakness in the leading economic indicators do so at their own peril as there is substantial downside risk to markets if the U.S. economy does turn over.

Critics of the LEI argue that the index is outdated. One of the oft-cited problems with the index is its over-reliance on manufacturing and underemphasis on services. 4 of the 10 leading economic indicators are specific to manufacturing, while services, which constitute a majority of the U.S. economic activity, are only indirectly represented. We acknowledge this criticism, but the persistent weakness of American manufacturing is worrisome, especially given the massive manufacturing subsidies in the Inflation Reduction Act and protection that the sector is receiving from Trump’s tariff policies.

We expect American manufacturing will pick up as Trump’s tariffs take effect, but that improvement will be a double-edged sword as higher tariffs will also be a drag on overall economic activity. While there’s not a recent historical analogue for Trump’s massive tariff increases, the Smoot-Hawley tariffs of 1930 which increased America’s tariff rate from 10% to 17% certainly didn’t work out well. America’s current tariff increase, from 2.5% to approximately 20%, is a larger increase at a time when imports as a percentage of GDP are roughly twice what they were in 1930. It will take time for the first- and second-order economic impacts of tariff increases to flow through to broad indicators, but it seems possible to us that massive tariff increases tip an already weakening U.S. economy into recession.

Given the policy backdrop, we were surprised by the Wall Street Journal’s recent survey of economists which placed a 33% probability of a U.S. recession in the next 12 months. This strikes us as borderline Pollyannaish. That said, even if a recession is only a 33% probability, investors should still be prepared for this scenario given the damage a recession would cause. Recessions are punishing affairs for equity investors and anyone using too much leverage. Given today’s lofty valuations and tight credit spreads, the next recession could be much worse than average.

Today’s frothy stock market calls to mind the stupidity of the late 1990s tech bubble which ultimately ended in a 49% decline in the S&P 500. Equity investors are lapping up the hype of a "golden age of margin expansion" due to AI-driven productivity improvements and overpaying for junky meme stocks. The credit market, which is less obviously frothy, is equally scary. The non-investment grade bond index currently trades at a 2.8% spread to U.S. Treasuries despite cyclically weak covenants on new issuance. The lack of caution in the credit market reminds us of the complacency that preceded the 2008 global financial crisis.

The next downturn has the potential not just to be much worse than average, but to be qualitatively different than the last four American recessions, i.e. 2020, 2008, 2001, and 1990. Not only are stocks overpriced and credit risk underpriced, but the dollar’s reserve currency status will be in play in the next downturn. If U.S. treasuries do not benefit from the flight to safety that has characterized the last four American recessions, the policy options will be bad for capital. Specifically, we would expect the federal government to impose meaningful negative real rates, such that even if investors manage to keep their dollars, they will be worth less in real terms. With the U.S. dollar posting its weakest first half return in years, the market appears to already have sussed out this possibility.

Source: The US dollar is on track for its worst year in modern history | Semafor

As we game out the possible paths of escalating financial repression in the United States, it is important to make clear why we believe our federal government would pursue such a policy in a downturn. The answer is straightforward: a dysfunctional U.S. government bond market is a red line for policymakers. The overwhelming consensus view in Washington, D.C. is that a disorderly bond market poses a threat to the smooth functioning of government and would impair America’s ability to defend itself. Accordingly, a sizable bipartisan majority of federal officials believe themselves to be morally justified in doing whatever it takes to quell disorder in the government bond market.

When speculating about incremental financial repression, it is worth noting that America has yet to fully exit the soft financial repression that followed the 2008 global financial crisis. The Fed’s balance sheet remains seven times larger than in 2007, and Secretary Yellen aggressively termed-in new U.S. debt issuance as the Fed balance sheet began to contract. As a result, America’s government bond market today is structurally more fragile than it was just five years ago. Combining rollover and net new debt, U.S. annual gross issuance is nearly $11 trillion this year. By comparison when Trump left office in 2021 during the COVID crisis, that figure was $7 trillion.

The Trump administration is acutely aware of the risks posed by our fragile government bond market, as they demonstrated in their reaction to this April’s sell-off. Bessent, Hassett et al. understand that a five handle on the 10-year treasury would derail Trump’s second term, and they are busily working to prevent that from happening. Their plan is as follows: get the Fed Funds rate down, create a U.S. dollar-backed stablecoin ecosystem to absorb U.S. Treasuries, grow the banking system’s balance sheet, and negotiate foreign investment into U.S. dollar assets. Absent a recession, these measures will likely generate sufficient demand for U.S. Treasuries. In the event of a recession, however, the few trillion dollars of incremental treasury demand they are ginning up will likely prove insufficient.

Recessions are characterized by a simultaneous decline in tax revenues and an increase in spending via fiscal stimulus. In the post-war period, this combination has increased America’s fiscal deficit by 5% of GDP on average. This 5% increase has historically proved manageable because the average starting point of the fiscal deficit during past American economic expansions has been less than 3% of GDP. The problem with the next recession is that America would be starting from a deficit of more than 6% of GDP. The typical 5% fiscal response would put deficits at over 10% of GDP. A 10% fiscal deficit coupled with negative GDP growth would quickly push the national debt to 130% of GDP, an obviously unsustainable fiscal trajectory. This unsustainable path raises the specter of rising, rather than falling, 10-year bond yields in the next recession. If such a scenario unfolded and the U.S. government bond market traded like an emerging market bond market, the U.S. dollar’s reserve currency status would be over.

For our part, we do not intend to be among the victims of the next U.S. economic downturn. Accordingly, we have increased our gross short equity exposure to 10% of partners’ capital to partially offset the initial declines in markets that have historically corresponded to an onset of a recession. Our long equity positions remain concentrated in sectors that we believe will be largely immune to financial repression, namely gold miners, oil and gas producers and high return on capital “Better Businesses” in emerging and frontier markets further detailed below:

Gold Miners: Gold has been the principal beneficiary of the market’s effort to find an alternative to the U.S. dollar. This effect should accelerate in the next recession. Our portfolio of gold miners is well-positioned for rising gold prices and weak economic activity.

Oil and Gas Producers: Oil is an economically sensitive sector that has historically been hard hit in recessions. However, given their low starting point, we believe oil prices will prove resilient in the next recession. The sector has demonstrated good capital discipline in recent years, and our companies need only $65 oil to generate strong returns on capital.

Emerging Market Equities: After 15 years of underperformance, emerging and frontier markets are poised for their moment as a viable alternative to overpriced U.S. growth stocks. If the dollar does decline in the next recession, emerging markets should outperform.

Since the market trough of the GFC in March 2009, investors in the S&P 500 have compounded their wealth at roughly 16% per annum, a significant premium to the long-term American stock market average of 10% per annum. As a result, investors and asset owners have accumulated pools of wealth of an unprecedented size and scale. Given this accumulation, it would be imprudent for stewards of capital to not at least prepare for a recession scenario. In that preparation, there is considerable risk in being exclusively exposed to U.S. dollar denominated strategies, as many investors are. Accordingly, investors should ensure they have adequate exposure to assets that will generate attractive real returns and provide a portfolio ballast in the scenario U.S. financial repression worsens.

Beware the Next Recession

We are pleased to announce the addition of Rafael Mendoza Grendi to our team as our Director of Research.

Rafa brings over 20 years of experience as a seasoned fundamental stock picker and leader of investment research teams focused on Latin America and smaller-cap companies across Emerging Markets. His prior roles include senior investment positions at Vinci Partners (formerly Compass Group), PineBridge Investments, Bice Inversiones and Moneda Asset Management.

Rafa was born and raised in Chile and now lives with his wife and family in Stamford, Connecticut. We look forward to introducing him to many of you in the coming months.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q2 2025 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Wed, 23 Jul 2025 14:17:16 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. appreciated +21.3% in the second quarter and is up +30.1% for the first half of 2025. By comparison, the broad MSCI Emerging Markets Index rose +12% in the second quarter and is up +15.3% for the first half of 2025. Key performance drivers for the fund have been our large position in MTN Ghana, as well as the strong returns from our holdings in Nigeria and the Republic of Georgia.

A breakdown of Kuroto Fund exposures can be found here .

Despite Kuroto Fund’s outperformance in the first half of the year, our portfolio remains very attractively valued. Given the diversity of business models we own, it is difficult to find metrics that provide an accurate picture of the value and quality of our portfolio in the aggregate. In the absence of an alternative, our portfolio’s weighted average price-to-earnings multiple of 7.3x 2025 earnings, dividend yield of 5.2% and ROE of 24.7% will have to do.

Looking “under the hood” at five large holdings, which together account for approximately 65% of Kuroto:

MTN Ghana is trading at 5.3x 2025 earnings and 3.9x our forecast for 2026 earnings.
Georgia Capital is trading at 63% of our sum of the parts valuation and continues to grow top- and bottom-line double digits, while aggressively buying back stock at accretive discounts.
Guaranty Trust in Nigeria is trading at book value and 3.8x 2025 earnings.
Our two largest oil producer positions should achieve 30% free cash flow yields during 2026 assuming a $65 average oil price.

While our portfolio obviously remains attractively valued, we also want to emphasize the quality of our portfolio companies and the superior economics they enjoy. In this quarter’s letter, we detail the exceptional quality of our oil & gas companies.

Exceptional Oil & GAS Businesses

In our first quarterly letter in April 1999, we explained the term Kuroto: “We have chosen the Japanese word ‘Kuroto’, translated as ‘connoisseur’ or ‘expert’, as our namesake, in order to focus attention on our investment goal: To own only truly exceptional businesses in Asia with superior managements. This self-imposed limitation places us in good company and leverages our combined years of experience identifying excellent businesses in the West.”

While our initial charge was to take advantage of bargain prices following the Asian Financial Crisis, our goal was never just to get exposure to those markets. From the outset, we made clear our intention to own truly exceptional businesses with superior management and aligned boards. Over the subsequent decades and our expansion to emerging markets outside of Asia, we have kept this focus. Regardless of sector or country, we aim to own businesses that are competitively advantaged relative to peers, evidenced through their ability to generate superior returns on capital.

Normalizing for country-specific risk factors, we would consider an average business to be one that generates around 10% return on capital. We aim to own businesses that can generate 20%+ returns on capital. Our reason for this preference is simple, over the long-term, stock price returns tend to correlate with returns on capital.

Given our commitment to owning exceptional businesses, it’s reasonable to ask what we’re doing investing in oil and gas companies. In an obvious sense, oil and gas companies are commodity businesses, both in that they sell commodities, and in that they have no control over the price of the commodity that they sell. However, a closer look at the industry will show you that oil and gas companies are far from uniform. In oil and gas, like in all industries, there are better and worse businesses. And the truly exceptional oil and gas businesses have been able to generate truly superior returns.

Oil and gas production is an old business. While the technology has evolved tremendously, the core parts of the oil business – finding, drilling, extracting, refining, and transporting – are unchanged since the first oil boom in rural Pennsylvania in the 1860’s. Standard Oil, the company US antitrust law was created to fight, dominated not from their oil and gas production edge, but by monopolizing the refining and pipelines the producers needed to get their oil to market. Since the 1911 break-up of Standard Oil, regulation has prevented another company from dominating the industry. Instead, Standard’s descendants and copycats look to employ a similar strategy on a smaller scale, in other words, they aim for local basin dominance, or in business parlance, local economies of scale.

Upon achieving high market share in a specific basin, companies can lower their operating and transportation costs and generate higher returns on capital over time. There are multiple aspects of this strategy: Companies can benefit from shared infrastructure – pipelines, roads, processing facilities, storage tanks, offshore vessels, etc. Maintenance crews, drilling rigs, and services can be deployed more quickly and cost-effectively, leading to fewer delays and less downtime. There is also bargaining power with local suppliers and service providers. Teams can become experts in specific geology and regulatory environments. Having this local scale also provides a barrier to entry or can force smaller local competitors to sell at attractive prices. Canadian Natural Resources efforts to consolidate heavy oil basins in Canada and ExxonMobil’s efforts to consolidate the Midland Basin and offshore Guyana are examples of this strategy in action today.

Canadian Natural Resources is a case study for the type of elevated returns an outstanding oil and gas business can generate. Recapitalized by Murry Edwards in the late 1980s, Canadian Natural Resources grew from a penny stock into Canada’s largest oil and gas company, producing over 1.5 million barrels of oil equivalent per day and an equity market cap of over $60 billion USD. They have achieved this success, despite being 50 to 100 years younger than most competitors, in large part due to the basin consolidation strategy mentioned above (combined with early entry, strong management, and countercyclical acquisitions). As a result, they generate 20%+ return on capital relative to international oil company peers who generally return around a low teens rate. Furthermore, Canadian Natural Resources’ stock has delivered a compounded annualized return since inception of 16%, which is comparable to that of some of the top S&P 500 companies.

An oil company consolidating a basin can be a high-return, low-risk investment opportunity. While such dominant positions are more obvious in North America and valuation differentials often reflect that, sometimes investors can buy the obvious winner in a less followed basin at bargain prices. We highlight two portfolio examples below.

PRIO, our newest and second largest oil company investment, exemplifies this strategy. Since 2015, when new ownership took over, PRIO has gradually consolidated the northern area of the Campos Basin. Starting with a relatively small field and under-utilized infrastructure, PRIO was able to buy stranded nearby assets, hook them together, increase utilization and take out costs. Producing 100k barrels per day currently, they plan to grow to 200k barrels per day by the end of next year. Despite buying assets with $20+ per barrel in operating costs, they’ve been able to get their corporate cost to below $10 per barrel through the cost synergies that come with basin consolidation. The next field they plan to bring online, called Wahoo, will be an incremental 40k barrels per day of production at an incremental operating cost of just $1 per barrel because it will be tied into an existing PRIO floating production storage and offloading facility (FPSO). Further, they recently purchased the neighboring Peregrino field from the Norwegian oil company Equinor, and because of their local economies of scale PRIO faced no other serious bidders for the asset, according to reports. Once PRIO has Wahoo online and Peregrino fully integrated, we expect them to generate returns on capital north of 20%, and far above industry peers. Brava Energia, for example, is a comparable listed company in Brazil with assets spread across multiple onshore and offshore basins and struggles to earn a positive return.

Seplat Energy, our largest oil company investment, is another example of an oil company that has achieved local economies of scale via a basin consolidation strategy. In the case of Seplat, the company didn’t consolidate the plays themselves, instead they purchased already advantaged assets first from Shell and more recently from Exxon. Seplat is the combination of two local Nigerian companies that combined to acquire a large Shell asset package in 2010. Since then, Seplat established itself as the most competent local oil and gas company and cultivated a good reputation with both its government partners and communities. This put Seplat in prime position as the preferred bidder when Exxon sought to divest their shallow water offshore assets in Nigeria. With this asset, Seplat has inherited serious economies of scale. They now control two of the country’s three largest export terminals – Qua Iboe and Bonny River – in addition to several storage, offloading, gas processing, and natural gas liquids recovery plants. They are also now integrated across upstream and midstream, giving them greater export control and they should enjoy scale advantages as a result. We expect the company’s return on capital to double from the 10% level to closer to 20% as they grow into Exxon’s asset base.

While basin consolidation and local economies of scale aren’t the only way to generate above average returns in oil and gas, it’s a proven model especially when paired with a strong management team and a shareholder-aligned board. Yet generalist investors continue to underappreciate these points of differentiation and advantaged economics, lumping all commodity producers into the “bad business model” basket, and offering discerning investors the opportunity to invest at highly attractive valuations.

organizational Update

We are pleased to announce the addition of Rafael Mendoza Grendi to our team as our Director of Research.

Rafa was born and raised in Chile and now lives with his wife and family in Stamford, Connecticut. We look forward to introducing him to many of you in the coming months.

Sincerely,

Sean Fieler & Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Precious Metals Fund - Q1 2025 Letter

dan@dan-donohue.com (Dan Donohue) — Thu, 01 May 2025 20:32:13 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +23.4% in the first quarter of 2025. Over the same period the price of gold rose +18.9%. The fund’s performance was driven by strong returns from both the producing and exploration stage companies as gold crossed $3,000 per ounce.

Trump's New Economic Policy

Trump’s New Economic Policy has roiled markets and bolstered investor gold buying globally. While the violent market gyrations remain a focus for our team, we have also been thinking through the long-term effects of Trump’s policies. In this latter endeavor, Nixon’s 1971 New Economic Policy has proven an invaluable guide.

The policy similarities between Nixon’s first term and Trump’s second are striking. Both presidents declared emergencies, raised tariffs, cut spending, reduced foreign aid, blamed foreigners, devalued the dollar , proposed tax cuts, attacked the Federal Reserve chair, and directly managed consumer prices. There are, of course, also meaningful differences. Most notably, Trump has raised tariffs more, devalued the dollar less, and has not imposed formal wage and price controls. Nevertheless, the policy resonance is striking.

The parallels between 1971 and 2025 are no coincidence. They stem from Nixon’s and Trump’s shared preference for strong, decisive action. Both presidents declared national emergencies during an economic expansion with low unemployment and low inflation to secure the legal authority to implement their agenda. Both recognized that their preferred combination of loose fiscal and monetary policy risked higher inflation. And both opted for price controls or price targeting to mitigate this side effect of their policies.

If America needs stable prices to secure popular buy-in for an economic restructuring, why beat around the bush? Get oil prices down by pressuring OPEC to produce more. Get egg prices down by extending one billion dollars of subsidies to the poultry industry . And, if domestic manufacturers threaten to increase prices in response to tariffs, pick up the phone and call them just as Trump threatened to do to any US auto manufacturer that raises prices on the back of the tariff increases. While Trump has not embraced price controls per se, he is not showing much deference to market forces.

Price targeting is not a viable long-term strategy, but it can work temporarily. It is often forgotten how popular Nixon’s 1971 price controls were. When they were relaxed after 90 days, inflation remained subdued, interest rates came down and Nixon won a historic victory in November of 1972, carrying 49 states. Of course, economic history didn’t stop on election day in 1972. Following the election, prices began to rise and by June of 1973 price controls were reimposed. This second round of price controls resulted in shortages, forcing Nixon to reverse course and lift them. Inflation predictably spiked, and America struggled economically for the balance of the decade.

Trump’s price targeting policies will also fail, but when they do, we do not expect a replay of the 1970s. The result of price targeting in 2025 will likely be more profound. Despite the serious economic problems of the 1970s, America’s balance sheet was fundamentally sound. When inflation spiked over 12% in 1974 , America rode out the shock without bankrupting the federal government or destroying our banking system. America’s debt to GDP at the time was just 31% . The country was well enough capitalized that Nixon could step back and let the market sort things out, which is exactly what he did. George Shultz cast Nixon’s policy reversal in the best possible light, telling the President, "At least we have now convinced everyone else of the rightness of our original position that wage-price controls are not the answer."

With America’s current debt to GDP of 124%, Trump will have no such luxury of stepping back and allowing the bond market to adjust when inflation picks up. While the prices of consumer goods will have to adjust to avoid shortages, Trump cannot allow bond yields to spike up as Nixon did in 1973 and 1974. Nor can Trump afford a recession that causes wider fiscal deficits and makes the US fiscal path obviously unsustainable. Instead, Trump will have to exert more control over the bond market. The Trump administration is already laying the groundwork for this eventuality. The relevant policy proposals include expanding Treasury-led buybacks of US debt , amending the Basel III supplementary leverage ratio calculation to enable American banks to hold more US Treasuries, promoting stablecoins that own US Treasuries, and replacing Jay Powell with a more pliant Federal Reserve chair.

The bond market senses that America is on a new economic trajectory. Beginning with the April 7th trading session, US government bonds and stocks traded together for several days as they commonly do in emerging markets. Gold has also continued to methodically move higher even as US markets have calmed down. This price action is signaling that our level of concern is not an outlier. The status quo has been disrupted. We are on a new path.

TRUMP’S NEW ECONOMIC POLICY AND THE PRECIOUS METAL MINING PORTFOLIO

Since the November 2024 election, the gold price is up over $500 per ounce. After peaking in January of this year, the trade weighted dollar has now fallen -9.5%. While Trump has not officially devalued the dollar against gold, his policies are encouraging America’s trading partners to recycle their trade surpluses into non-dollar assets. Gold, a $22 trillion dollar asset that is no one’s liability, is one of the few markets capable of absorbing these global trade surpluses.

The benefits of Trump’s policies for our portfolio extend well beyond a rising gold price. They have delivered a surprising amount of regulatory change abroad, and our mining investments in Canada and Mexico have been early beneficiaries. Exploration permits that have been stalled for years in both countries are moving forward as both Canada and Mexico seek to reduce their reliance on America.

In Mexico the change has been stark. President Claudia Sheinbaum took office last fall as her predecessor, Andres Manuel Lopez Obrador (AMLO), was trying to force through a constitutional ban on open pit mining as a capstone to his six-year Presidency. Not only did she stop the ban, but she has replaced ALMO’s anti-mining activists with technically competent bureaucrats. President Sheinbaum understands that Mexico needs economic alternatives to exporting manufactured products to the US, and domestic mining fits the bill. We expect her to reverse a slew of the regulations that strangled the mining industry during AMLO’s presidency and ultimately begin to permit open pit mines in Mexico again.

Canada’s reaction to Trump’s New Economic Policy has also been broadly positive for our investments there. Trump saved Trudeau’s liberal government from certain defeat. Mark Carney, Canada’s new Prime Minister, is eager to reduce Canada’s dependence on America. This will entail a federal fast track for mining permitting which would bring positive direct and indirect consequences for our pre-production portfolio of quality mining projects across the country.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q1 2025 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Wed, 30 Apr 2025 14:44:57 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. appreciated +7.3% in the first quarter of 2025, while the broad MSCI Emerging Markets index rose +3.0%. Kuroto performance for the quarter was driven primarily by the strong performance of our operating companies in Georgia and Ghana.

A breakdown of Kuroto Fund exposures can be found here .

Returning to Brazil

Though the Kuroto Fund didn’t invest outside of Asia until 2014, as a firm we began investing in Brazil in the late 1990s and made our first sizable investment there in 2004. We have followed the market ever since.

Given our love for the country of Brazil and admiration for many of the companies there, it has been challenging for us to remain mostly absent from Brazilian capital markets for the past decade. We stayed away for a variety of reasons, but primarily because we didn’t like the valuations on offer. So it is with more than a bit of enthusiasm that we were able to make two substantial investments in Brazil this January, taking our portfolio weighting in the country from 0% to 10%.

Brazil remains a macroeconomic and political adventure, but today’s valuations are incredibly attractive. The Brazilian stock market is down over 40% in US dollars over the past 14 years.

Chart of BOVESPA USD Total Return 2011 - Present

This decline has been driven both by a de-rating of the earnings multiples of Brazilian equities and the depreciation of the Brazilian Real relative to the USD. Brazil’s BOVESPA index, which traded at 11 times earnings in 2011 and then as high as 18 times earnings in 2017, now trades at just 8 times earnings. On the currency side, in 2011 the Real traded at 1.5 to the USD, while today the Real trades at 5.7.

As the Brazilian Real weakened last year, we began refreshing our analysis on our favorite Brazilian companies in earnest. Over the past fifteen months, we have spoken to several dozen management teams and done deep dive research projects into about a half dozen industries in Brazil. We visited the country last month in March and will be returning this upcoming June. We have identified several interesting investment opportunities in addition to the two new positions we initiated.

What we have always liked the most about Brazil remains true: the best Brazilian companies have wholeheartedly adopted Western corporate governance standards, and the best Brazilian executives are world class. We are never surprised to see Brazilians running some of the world’s largest companies, such as AB InBev and Kraft Heinz.

The sheer size of Brazil allows talented entrepreneurs and managers to go to scale within their domestic market. Unlike smaller Latin American markets where companies quickly run out of room for growth, Brazil offers its local businesses a country of over 210 million people to grow into. We have seen many instances of domestically dominant Brazilian companies growing into world-class businesses.

In our experience, the problem with investing in Brazil has never been the companies or the management teams, it’s been the macroeconomy, and more specifically the economic policies championed by the country’s political leaders. The best that can be said of the current situation is that Brazil has been down macroeconomically destructive paths so many times before that the politicians and markets know the drill.

Brazil’s federal fiscal deficit was 8.4% of GDP in 2024 and is projected to be approx. 9% again in 2025. Government debt to GDP was 76% last year and is forecast to grow to 81% by the end of 2025. This weak fiscal discipline has been the main driver of the currency weakness we saw in 2024 and ultimately forced the central bank to raise policy rates 375 bps to 14.25%. In an environment with inflation at 5.5%, the government is offering debtholders a sizeable 8.5% real rate, indicative of the market’s views on Brazil’s creditworthiness outlook.

President Lula’s own Minister of Planning and Budget, Simone Tebet, recently confided to GloboNews that the country is on an obviously unsustainable path: "In 2027, whoever is president will not be able to govern under this fiscal framework without fueling inflation, increasing public debt, and derailing the economy". We appreciate Simone’s honesty and political realism as she went on to say, “Congress is unlikely to approve any fiscal adjustment measures before the 2026 general election, as lawmakers will be focused on their re-election prospects.”

Regardless of the outcome of next year’s election, Brazil’s next President will have to end the profligate spending that has characterized Lula’s second term. As in past cycles, Brazil will likely pull back from the brink. The question is: Can Brazil do better than simply avoiding default this time? On this point we are increasingly optimistic.

Brazil’s two main export industries – oil and gas and agriculture – will be the biggest drivers of economic growth over the next decade, and the fundamentals of both appear solid. Brazil produces over 4 million barrels of oil equivalent per day from world-class offshore fields, and it is the world’s largest and lowest cost producer of soybean, sugar, and coffee. Both oil and gas and agriculture in Brazil have grown significantly in the last decade and that trend is likely to continue given the high quality of the country’s natural resources.

Furthermore, as the US reshuffles its economy and foreign allies, there is no more natural ally for America than Brazil. Brazil, like the rest of Latin America, has been largely spared from Trump’s tariff war. This is reflective of the current balance of trade between America and Brazil. If a political alignment between the two countries were to occur, we could see a mutually beneficial deepening economic and trade relationship. Brazil, for example, is the most realistic incremental source of rare earths for the United States. Brazil is already home to a large mining industry and is the second largest producer of iron ore, but its rare earth potential is largely untapped. Brazilian rare earth projects are far more feasible than the currently discussed proposals for projects in Greenland, the Ukraine, or the DRC.

Of the two Brazilian investments we made thus far, one is an exporter whose business is unaffected by the deteriorating Brazilian macro but whose stock has sold off anyway due to forced liquidations by local Brazilian equity funds. The second is a business services company that is mostly geared towards servicing exporters. Investing in consumer-focused companies is a higher hurdle for us given the large fiscal adjustment the country needs, but at current valuations a large part of that is already priced in.

Sincerely,

Sean Fieler & Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q1 2025 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Tue, 29 Apr 2025 22:30:22 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose +11.0% net of fees in the first quarter of 2025. Over the same period, the S&P 500 index declined -4.3%. Equinox’s performance was driven by the strength of our gold mining equity portfolio, most notably by our earlier stage exploration companies that rose dramatically as gold crossed $3,000 per ounce.

Trump's new economic Policy

As Trump’s New Economic Policy roiled markets, we selectively harvested short positions and increased our ownership in oil and gas companies at deeply discounted prices. Violent market gyrations remain a focus, but we have also been thinking through the long-term effects of Trump’s policies. In this latter endeavor, Nixon’s 1971 New Economic Policy has proven an invaluable guide.

The policy similarities between Nixon’s first term and Trump’s second are striking. Both presidents declared emergencies, raised tariffs, cut spending, reduced foreign aid, blamed foreigners, devalued the dollar, proposed tax cuts, attacked the Federal Reserve chair, and directly managed consumer prices. There are, of course, also meaningful differences. Most notably, Trump has raised tariffs more, devalued the dollar less, and has not imposed formal wage and price controls. Nevertheless, the policy resonance is striking.

The parallels between 1971 and 2025 are no coincidence. They stem from Nixon’s and Trump’s shared preference for strong, decisive action. Both presidents declared national emergencies ( 1971 & 2025 ) during an economic expansion with low unemployment and low inflation to secure the legal authority to implement their agenda. Both recognized that their preferred combination of loose fiscal and monetary policy risked higher inflation. And both opted for price controls or price targeting to mitigate this side effect of their policies.

If America needs stable prices to secure popular buy-in for an economic restructuring, why beat around the bush? Get oil prices down by pressuring OPEC to produce more. Get egg prices down by extending one billion dollars of subsidies to the poultry industry , And, if domestic manufacturers threaten to increase prices in response to tariffs, pick up the phone and call them just as Trump threatened to do to any US auto manufacturer that raises prices on the back of the tariff increases. While Trump has not embraced price controls per se, he is not showing much deference to market forces.

With America’s current debt to GDP of 124%, Trump will have no such luxury of stepping back and allowing the bond market to adjust when inflation picks up. While the prices of consumer goods will have to adjust to avoid shortages, Trump cannot allow bond yields to spike up as Nixon did in 1973 and 1974. Nor can Trump afford a recession that causes wider fiscal deficits and makes the US fiscal path obviously unsustainable. Instead, Trump will have to exert more control over the bond market. The Trump administration is already laying the groundwork for this eventuality. The relevant policy proposals include e xpanding Treasury-led buybacks of US debt , amending the Basel III supplementary leverage ratio calculation to enable American banks to hold more US Treasuries, promoting stablecoins that own US Treasuries, and replacing Jay Powell with a more pliant Federal Reserve chair.

Trump's new economic Policy and the Equinox PArtners Portfolio

Canada’s reaction to Trump’s New Economic Policy has also been broadly positive for our investments there. Trump saved Trudeau’s liberal government from certain defeat. Mark Carney, Canada’s new Prime Minister, is eager to reduce Canada’s dependence on America. This will entail a federal fast track for mining permitting as well as greenlighting the pipelines necessary to export more Canadian oil and gas to Asia.

The negative of Trump’s New Economic policy for our portfolio has been his aggressive price targeting of oil. We remain long oil exploration and production companies and remain confident that Trump will not be able to control the oil price for long. That said, the extent of Trump’s influence and OPEC’s impotence have surprised us. Even so, absent a recession, we do not think that today’s low oil prices can be sustained. Longer-term, we expect the positive fundamentals of the nearly $2.5 trillion-dollar global oil market to reassert themselves and push the oil price higher.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.25, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Case Study: Solidcore Resources - Webinar Replay

Tue, 08 Apr 2025 15:37:27 GMT

Solidcore Resources: Case Study Presentation

Content by minute:

3:27 - Investment Thesis 4 Key Points
6:35 - Reasons for Discount & Mis-valuation
8:38 - Valuation Comps
11:30 - Kazakhstan Macro & Mining Jurisdiction Overview
16:33 - Management/CEO & Corporate Governance Analysis
18:21 - Capital Allocation Expectations
21:30 - Resolving Capital Markets Discount
24:14 - Free Cash Flow Forecasts from Equinox Model
25:02 - Risks
25:49 - Conclusion / Summary
26:57 - Q&A from Audience

Overview:

CIO Sean Fieler leads a presentation of Equinox's investment thesis and underwriting analysis for Solidcore Resources, a mid-tier producing gold mining company with assets located in Kazakhstan which trades at a deep discount to peers.

Payne Points of Wealth Podcast Interview

kbrennan@equinoxpartners.com (Kieran Brennan) — Wed, 26 Feb 2025 20:48:40 GMT

Payne Points of Wealth Podcast - "The revenge of Inflation and Kazakhstan"

Our CIO Sean Fieler sat down for a conversation with Ryan, Bob, Chris and Courtney from the Payne Capital Management team in February 2025 to discuss Equinox's approach to value investing globally, in particular in less followed Emerging & Frontier Markets, as well as industries such as energy and metals & mining.

Precious Metals Fund - Q4 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Sat, 18 Jan 2025 00:01:50 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. fell -12.9% in the fourth quarter, finishing the year down – 2.9%. The fund’s performance reflects the lackluster performance of the gold mining sector as well as the underperformance of the companies we own. While there were some clear themes, such as producing companies outperforming exploration companies, our 2024 results are most accurately captured through a description of our six best and six worst performing investments during the year. These twelve companies capture every investment that contributed at least 1%, positive or negative, to our 2024 fund performance.

A Challenging Year

In 2024, the gold price finished up +27.4%. The GDXJ ETF which tracks the index of junior gold mining producers was up +15.7%. Our portfolio of miners in this fund was down -2.9%.

The underperformance of the gold miners as compared to gold largely reflects government participation in the gold market. In 2024, governments bought gold, not gold miners. The poor performance of the gold miners also reflects the sector’s continued subpar returns on capital. The S&P TSX Global Gold universe, a group of large, mature gold miners, only generated an 11% ROE in 2024 and a 5.4% free cash flow yield according to RBC.

Despite their inadequate returns on capital, producing miners handily outperformed most exploration and development companies. There remains almost no market for most gold mining companies that are years away from first production. As value investors with contrarian instincts, we have found the increasingly irrational valuations of the pre-revenue companies of particular interest. Often as a project advances, the equity market value of the company declines. These share price declines in turn create a self-reinforcing dynamic in which the small, cash-starved companies underperform because they don’t have access to the capital necessary to move their projects forward. At this point, the downward spiral of pre-revenue gold miners is very extended and nearing a floor in our opinion. Not only are the valuations of these companies incredibly low, but these companies have become increasingly attractive acquisition targets.

Although exploration companies are the most severely discounted sector, 54% of our fund remains invested in producing companies. In general, our producing companies trade at a discount to the sector because they are executing on significant capex plans and lack free cash flow. During construction periods, the market can become excessively skeptical. This skepticism, in turn, can present an opportunity to buy high quality assets run by good management teams at attractive valuations. We believe that this is clearly the case at Eldorado Gold, K92 Mining, West African Resources and Adriatic Metals.

Overall, our miners are incredibly cheap. Assuming a flat gold price, we estimate our producers will generate a 23.5% IRR. Our companies that do not yet generate any cash flow are cheaper still. Ascot, Thesis, Troilus and Goldquest, for example, have an average IRR of over 30% at current metals prices.

Six Winners and Six Losers in 2024

Note: Below IRR is our Equinox internally calculated IRR based on 2024 year-end market prices and forecasted future FCF per share to equity.

Borealis Mining: 2024 Performance +29%, IRR 48%

Borealis was founded by Kelly Malcolm in 2023 to leverage a large heap leach facility in Nevada by acquiring nearby low-grade heap leach assets. We invested in a pre-IPO round at a $30M post-money valuation. At the time, Borealis had approx. $5M worth of crushed stockpiles, a fully permitted heap leach facility, ~60,000oz of reserves ready to be processed with limited capex and substantial exploration potential at depth.

In late 2024, Borealis began to acquire nearby deposits. Borealis purchased Bull Run for $6M in cash. This translates to $14 per ounce for ~500,000oz of already defined resources, and confirms managements intuition that there are small, stranded assets for sale in Nevada. We expect Borealis to continue this acquisition strategy and ramp to become a ~75,000 oz per year producer.

K92 Mining: 2024 Performance +22%, IRR 17%

K92 controls the world-class Kainantu mine in the highlands of Papua New Guinea. This mine is a high-grade, low-cost asset with a 3 million oz resource at 7g/t. K92 produced 120,000 oz last year, and we expect the company’s Phase 3 expansion will take annual production to over 150,000 oz (gold equivalent) in 2025. While K92 has often struggled to meet its ambitious growth targets, the company has strung together two consecutive quarters of meaningfully higher production with higher than reserve grades.

K92 recently expanded the milling capacity which had been a meaningful bottleneck for years. If the company can reach Phase 4, the Kainantu mine’s production will produce ~400,000 oz at a bottom quartile cash cost of <$1000/oz while maintaining a clean balance sheet with minimal leverage.

West African Resources: 2024 Performance +38%, IRR 31%

In 2024, West African Resources (WAF) remained on-time and on budget in the build of the company’s second mine in Burkina Faso, called Kiaka. Once Kiaka is commissioned in Q3 2025, WAF will be a ~450,000 oz annual producer for the next 10 years.

While the construction has proceeded as expected, WAF was adversely impacted by the local content language in Burkina Faso’s new mining code. Rather than pay the resulting mark up in their rental of local equipment, WAF elected to purchase their mining fleet outright. This decision added $150 million to the company’s capital budget and resulted in a July equity raise of the same amount. While we were disappointed with the need for more equity capital, ultimately the raise will accelerate WAF’s buy-back and dividend plans. If the company continues to trade at the current valuation, we expect the board will announce a sizable share repurchase as soon as the company’s debt is repaid.

Hochschild Mining: 2024 Performance +96%, IRR 18%

Hochschild Mining (HOC) is a proven mine builder with the strategy of reinvesting free cash flow into new projects to grow production. In 2024, we visited their newly commissioned mine in Brazil, called Mara Rosa, which was successfully built on time and on budget. Mara Rosa will deliver a 20%+ project level IRR and highlights HOC's competence in executing medium-size projects in Latin America. We expect the company will be able to repeat this success with another mine in Brazil, the Monte Do Carmo project in the neighboring state of Tocantins.

Big picture, HOC is a family-owned business with a goal of producing 500,000 ounces of gold per year by 2030. While we would prefer a return on capital goal rather than a growth target, we appreciate the straight-forward way the company organizes its operations, and we believe the company will not undertake projects with less than a 20% cash on cash IRR. Moreover, unlike many growth miners, when the company reaches their targeted 500,000 ounces of annual production – anticipated for 2030 - we expect HOC to transition to return free cash flow to shareholders.

Galiano Gold: 2024 Performance +35%, IRR 29%

Galiano has been busily working on a new mine plan which will be released on January 28th. We expect the company’s production guidance will increase as Galiano elects to move forward with the redevelopment of their higher grade Nkran pit. We also expect increased exploration spending in 2025 as the company ramps up work on their newly consolidated land package.

We are expecting Galiano to guide to a production target of approx. 250,000 ounces per year by 2027. Even at this higher rate of production, we anticipate the company will be able to more than replace reserves given the prospectivity of the Asankrangwa gold belt in which they operate. While Galiano will have to reinvest the vast majority of its cash flow in growth in 2025 and 2026, the company should become a substantial free cash flow generator beginning in 2027.

Solidcore Resources: 2024 Performance +22%, IRR 21%

Solidcore, a spin-out from Polymetal, is a new position in our fund. Solidcore is run by CEO Vitaly Nesis, and controlled by Oman’s sovereign wealth fund. The company operates two long-lived mines in Kazakhstan and produces 480,000 ounces of gold annually at a competitive All-In Sustaining Cost (AISC) of $1,300/oz. With an EV/EBITDA multiple of 2.2x, Solidcore trades at an almost 50% discount to its peers. This undervaluation is largely due to the company’s sole listing on the Astana International Exchange in Kazakhstan.

We expect Solidcore to generate roughly $400 million in free cash flow per year at current gold prices. In 2025 and 2026, this free cash flow will be invested in a new pressure oxidation autoclave. Beginning in 2027, we anticipate that $100 million USD of the company’s free cash flow will be distributed to shareholders. This prospective dividend along with the company’s plan to re-list on the London Stock Exchange offers two catalysts that should drive a significant re-rating.

Orezone Gold: 2024 Performance -30%, IRR 27%

While Orezone completed its initial build on time and on budget, the company failed to generate the free cash flow necessary to internally finance the expansion of its operations in Burkina Faso. The company’s reliance on high-cost diesel generators and an unreliable power grid proved particularly problematic. Largely due to higher-than-expected power costs, the midpoint of their AISC guidance increased by $100/oz from last year’s projection of $1,338/oz.

Despite the elevated power costs, Orezone successfully closed their financing for the hard rock processing plant in December 2024. This financing will enable Orezone to increase annual production from approx. 120,000 oz in 2024 to ~180,000 oz in 2026. We expect 2025 to be a pivotal year for the company as they will begin to generate sufficient cash to pay down debt and continue building towards their 250,000 oz/year target. We are also encouraged by the company’s ongoing exploration program which has the potential to increase the Bombore’s mine life at higher grades.

C3 Metals: 2024 Performance -62%

C3 stock declined significantly in 2024 even as the company made significant progress advancing their projects in both Jamaica and Peru. With respect to their Jamaican asset, C3 Metals signed a joint venture agreement with the Stewart family, one of the wealthiest families on the island. C3 is now well-positioned to do a JV deal with a larger international mining company that can finance the costly deep holes necessary to test the porphyry copper deposit’s potential.

In Peru, C3 Metals received a permit to access one of its land packages located just 40 kilometers east of MMG’s Las Bambas mine. This permit, which took years to secure, opens the door for further exploration in a proven copper-rich region. With the permit in hand, C3 Metals should be able to bring in a larger partner to drill out the asset.

Troilus Gold: 2024 Performance -45%, IRR 35%

In May 2024, Troilus submitted its feasibility study to the Canadian government. This new study detailed their plan to develop a 22-year open pit mine that would produce approx. 300,000 oz of gold per year. With current gold prices north of $2,600 and copper hovering around $4, the project will likely move forward. The company has received financial support from a handful of export credit agencies interested in its 10% copper production. Troilus is also in the final stages of submitting the Environmental and Social Impact Assessment (“ESIA”), another key milestone as they advance towards construction.

Located 300 kilometers north of Chibougamau, Quebec, the Troilus project is a brownfield site in a favorable mining jurisdiction with the potential to become a Top 10 copper gold project in Canada. We are fans of CEO Justin Reid and believe in his ability to permit the project and advance it towards becoming a premier North American copper-gold producer. At a $4/oz equity market cap to gold equivalent ounces in ground ratio, we believe Troilus is one of Canada’s best leveraged investments to rising gold and copper prices.

Ascot Resources: 2024 Performance -23%, IRR 38%

Ascot Resources put its Premier gold project on care & maintenance in September of 2024. At the time, the company didn’t have enough ore coming from the underground mine to profitably operate the 2,500 tonnes per day mill. To rectify the lack of available ore, the company raised $43 million, extended the term of their debt, and decided to invest in an additional 2,500 meters of development before commissioning the mill. The board then made a change at CEO and brought in Jim Currie for his extensive underground mining experience and added our own Coille Van Alphen to the board.

Underground development is currently underway, and we expect the mill to restart in Q2 2025. One more injection of capital will likely be required to ensure the company has a sufficient working capital buffer as they restart the mill. When the mine reaches commercial production, it will be able to generate a sustainable ~$100m of FCF per year which should translate into a stock price of at least $1 CAD per share.

Great Pacific Gold: 2024 Performance -47%

Great Pacific owns two highly prospective gold exploration projects in Papua New Guinea (PNG). Over the course of 2024, the company refined its exploration targets and drilled 5000m at its Kesar project in the highlands of PNG. The Kesar project looks to be an extension of nearby K92’s mine, and as such may be sold to K92. Great Pacific will begin drilling exploration targets at its second PNG property in Q2 of 2025. This property is a brownfield site with past production at a grade of more than 10 g/t. Great Pacific has a third asset in Australia, which we believe could be sold to fund the company’s exploration activities in PNG.

Great Pacific is led by an excellent CEO in Greg McCunn. We got to know Greg through a previous investment in West Africa. As CEO, he brings the necessary vision, discipline, and accountability to an exploration company. We believe the company will deliver exploration success at their two PNG assets and ultimately enable Greg to create shareholder value in a variety of ways.

GoGold Resources: 2024 Performance -24%, IRR 30%

GoGold has been waiting two years for its permit in Mexico. The delay was caused by the previous Mexican President Andres Manual Lopez Obrador’s (AMLO) staunch opposition to new mining development. In the end, while neither of AMLO’s major proposed changes to the mining code passed, few mining permits of any kind were issued during his time in office.

GoGold’s large cash buffer and existing heap leach operation enabled the company to wait out AMLO without needing to raise additional equity capital. We think their patience will soon be rewarded as the new administration of President Claudia Sheinbaum plans to process permit applications on their technical merits. In GoGold’s case, the technical merits of their Los Ricos South project are exceptionally strong with over 100 million oz of silver at an average grade of 276 g/t.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q4 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Fri, 17 Jan 2025 23:11:29 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. declined -6.5% in the fourth quarter of 2024, finishing the calendar year 2024 up +17.7% net of all fees. Our poor performance in the fourth quarter was driven by a sharp selloff in gold and silver miners despite a flat gold price during the period.

2024 Year in Review

Crew Energy accounted for 100% of our fund’s performance in 2024. We offered a fulsome write-up of Crew in our third quarter letter and need not repeat the details of the acquisition by Tourmaline here, other than to note that the 72% premium resulted in an ~18% contribution to the fund’s total return.

While there was significant movement among our other investments, their aggregate contribution was close to zero. This is a disappointing result given the significant progress many of our companies made last year. The market was not impressed by Paramount Resources’ sale of its core asset to Ovintiv for $3.3bn CAD. Nor did the market seem to care that Kosmos energy finally brought its flagship Tortue asset online in December. Thesis Gold’s positive feasibility study elicited an initial positive reaction, which was quickly reversed. Elsewhere, the market remains totally indifferent to the rapid progress that West African Resources is making at their Kiaka asset. While we understand that our sectors are out of favor, we would hope to see at least some of the value they are creating reflected in their stock prices in 2025.

We’ve been busy over the past six months, establishing several sizable, new positions. We sold half of the Tourmaline shares we received in consideration for our Crew shares and used funds to make the following investments: an 11% portfolio weight in Solidcore Resources, an 8% position in Kosmos Energy, a 5% weighting in Ensign Energy, and a 5% weight in Gran Tierra Energy. Solidcore and Kosmos are both top five positions and receive a full writeup in the letter that follows. Ensign Energy is a North American energy service company, and Gran Tierra Energy is an E&P company with assets in Latin America and Canada. Both Ensign and Gran Tierra trade at particularly compelling valuations.

investment Thesis Review for our top 5 Long Positions by Weight

Silver: 14% Portfolio Weight

Silver is an atypical investment for us because we own the commodity directly. Our logic is as follows: First, we expect to generate a 20%+ annual return by owning the metal directly. Second, pure play silver mining companies trade at a significant premium to NAV. While we owned four attractively valued silver miners at year end, each of these companies is imperfect as a leveraged investment in silver. Adriatic Metals and Hochschild Mining are excellent companies, but more than half of their revenues derive from metals other than silver. Vizsla Silver and GoGold Resources control attractive silver deposits, but both companies face a challenging permitting environment in Mexico. Accordingly, we have elected to increase our silver exposure through the ownership of both the physical metal and silver futures.

Our bullishness on the metal is predicated on a supply-demand imbalance with no apparent fix. Last year, the annual silver deficit exceeded 200 million ounces.

In most commodity markets, higher prices would help bring the market back into balance. However, in the case of the silver market, it is not at all obvious to us that a higher silver price will be able to resolve the supply-demand imbalance. Even significant increases in the silver price would likely do little to increase the amount silver being mined or reduce silver demand.

On the supply side, the past decade of silver mine supply is instructive. Silver mine supply has remained range bound at roughly 850 million ounces per year, even as the silver price has more than doubled. This reflects the serious impediments to increasing silver mine supply. First, silver mining projects take more than a decade to progress from discovery to production. Second, 50% of the world’s silver production comes from challenging Latin American jurisdictions, e.g. Mexico, Chile, Peru and Bolivia. Third, 72% of silver mine supply comes as a biproduct from the mines of other primary metals. That production has even less elasticity to a rising silver price.

Sil ver demand is also largely indifferent to movements in the silver price. Silver is approx. 100 times more expensive than copper, an electricity conductor substitute that is 95% as good as silver. This vast price difference reflects the reality that copper remains an unworkable substitute for silver in many more technically demanding industrial applications. One notable problem with copper as a silver substitute that has yet to be economically solved is the effect of oxidization. Whereas oxidized silver remains highly conductive, the oxidized outer layer of copper acts as an insulator rather than a conductor. Because of this and other unique attributes of silver, industrial demand for silver has grown at a 5% compound annual growth rate over the past decade as shown below:

If silver mine supply continues to flatline and industrial demand for silver continues to increase even modestly, the only way to bridge the supply and demand back into balance is to eliminate net silver investment demand. This will also be a challenge as over 200 million ounces per year are consistently accumulated by silver coin and bar investors. Rather than reduce investment demand, we suspect higher silver prices would likely increase investment demand. Silver investors understand the supply demand imbalance in the silver market, and many believe that much higher silver prices, i.e. $100+ are just a question of time.

Tourmaline Oil: 21% Portfolio Weight

Tourmaline Oil Corporation is Canada’s largest natural gas producer and the fourth largest in North America, behind only Expand, EQT, and Exxon. Tourmaline differentiates from peers through its long reserve life, superior returns on capital, and founder-led culture. Tourmaline has 75 years of inventory while peers have a fraction of that. This depth of inventory allows management to focus on organic growth and avoid unattractive acquisitions. Tourmaline has generated a return on capital employed in the mid-high teens vs. an industry average in the low teens.

From 2010 to 2023, Tourmaline grew average annual production from 17k boepd to 520k boepd. Revenue per share and cash flow per share grew 1137% and 997% respectively. This compares to a peer group who, on average, grew those two metrics 44% and 22% respectively over the same period.

Tourmaline’s founder and CEO, Mike Rose, personally owns $1bn worth of stock in the company. Under Mike’s leadership, Tourmaline has focused on controlling its own infrastructure, acquiring countercyclically, and being the low-cost producer in the Western Canadian Sedimentary Basin. Three metrics that stand out pertain to their performance per employee relative to industry peers. Tourmaline generates $11.5m in CF / employee vs peers at $1.6m. Additionally, Tourmaline has 13.1m boe of reserves per employee vs peers at 2.1m, and Tourmaline has 13.6 100 boepd of production vs. peers averaging just 3.2. This is evidence of the type of cost-focused culture Mike has created at Tourmaline.

Tourmaline is Mike’s third company. He sold his previous company, Duvernay Oil, to Shell for $5.9bn CAD in 2008. He bought back essentially the same asset from them in 2016 for $1.4bn CAD. When energy prices cratered in 2020, Tourmaline went on a buying spree purchasing over 10 companies and doubling corporate production at generationally low prices. With Tourmaline you get the full package: a long-lived asset base, industry leading operators, superior returns on capital, and a best-in-class management team.

Paramount Resources: 13% Portfolio Weight

Early last year Paramount bid for Chevron’s Duvernay asset package. That asset and similar deals ended up going for significantly higher prices than Paramount was willing to pay. Through their failed bid, Paramount recognized that they could add more value by selling rather than buying producing assets and began soliciting bids on their mature Karr/Wapiti Montney package. In December, they announced the sale of these assets to Ovintiv for $3.3bn CAD. The company plans to pay out $2bn of this as a tax-friendly capital return and will invest the remainder to accelerate the growth of their oil-focused Duvernay package. Post deal, Paramount will be producing around 30k bpd with plans to grow to over 60k bpd in the next two years.

Concurrent to the Karr/Wapiti Montney sale, Paramount’s management team aggressively accumulated acreage in several other gas plays. They bought a large land package in the Sinclair Montney that they are currently testing. They think this is prospective for dry gas and if successful they can add between 0.5 - 1 bcf/d of dry gas from this land at what they hope is a basin-leading cost structure. In addition, they consolidated their position in the Horn River and the Liard Basin for next to nothing. This is an enormous gas resource that is commonly seen as uneconomic at current prices. There is infrastructure already in place and gas shut in. They are planning to test new well techniques to see if they can make this competitive, and if not, they are prepared to hold the acreage until such time as gas prices are supportive of development.

Solidcore Resources: 11% Portfolio Weight

Solidcore, a spin-out from Polymetal, is a new position in our fund. Solidcore is run by CEO Vitaly Nesis and controlled by Oman’s sovereign wealth fund which is a large minority shareholder. The company operates two long-lived mines in Kazakhstan and produces 480,000 ounces of gold annually at a competitive All-In Sustaining Cost (AISC) of $1,300/oz. With an EV/EBITDA multiple of 2.2x, Solidcore trades at an almost 50% discount to its peers. This undervaluation is largely due to the company’s sole listing on the Astana International Exchange in Kazakhstan.

We expect Solidcore to generate roughly $400 million in free cash flow per year at current gold prices. In 2025 and 2026, this free cash flow will be invested in a new pressure oxidation autoclave. Beginning in 2027, we anticipate that $100 million USD of the company’s free cash flow will be distributed to shareholders. This prospective dividend along with the company’s plan to re-list on the London Stock Exchange offer two catalysts that should drive a significant re-rating.

Kosmos Energy: 8% Portfolio Weight

Kosmos was our worst performing energy stock for the year, down -49%. This sizable decline was driven by repeated delays in the startup of its Greater Tortue Ahmeyim LNG Project, the underperformance of the Jubilee field offshore Ghana, and the shocked market reactions to a merger discussion with Tullow Oil. These three factors in combination with weak oil prices and a high debt load caused a significant decline in the company’s share price. While 2024 was a painful year to own Kosmos, we believe that the company has turned the corner.

The long-delayed Tortue field announced first gas in early January, and the company will begin shipping cargos and recognizing revenue this month or next. Kosmos’ Jubilee field in Ghana has seen production stabilize. Lastly, the merger talks with Tullow have been called off. Kosmos was only interested in merging with Tullow if the combined balance sheet of the two companies could be meaningfully de-leveraged.

Kosmos stock currently trades at over a 20% 2025 FCF yield assuming $75 Brent oil prices. The company has a multi-decade resource life with numerous existing discoveries they can develop to grow production further. Kosmos will reduce CapEx in 2025 to de-lever the balance sheet so that come 2026 they can begin returning capital to shareholders. Kosmos management has said on earnings calls that they are considering selling down part of their LNG project ownership to further accelerate plans to de-lever and return capital.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q4 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Fri, 17 Jan 2025 20:44:27 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. appreciated +6.5% in the fourth quarter of 2024 and finished the year up +11.1%. Performance for the quarter was driven primarily by the positive performance our operating company holdings in Nigeria, Ghana, and Georgia.

A breakdown of Kuroto Fund exposures can be found here .

2024 Year in Review

Kuroto’s top five investments made large strides last year. Seplat completed its ExxonMobil Nigeria acquisition, more than doubling its production, cash flow and reserves. Georgia Capital successfully sold a non-core asset and is in a good position to buy back a lot of stock this year. MTN Ghana saw strong operational performance while Ghana’s economy and currency stabilized. Guaranty Trust Bank completed a government-mandated equity raise, and Nigeria made steps towards stabilizing its economy. Lastly, Kosmos brought on its long-delayed Tortue LNG project. In each case, we believe the market has not adequately factored in the progress our companies have made, and we anticipate a more fulsome rerating of our top holdings in 2025.

investment Theses review for the top 5 positions

Seplat Energy

In December 2024, Seplat announced the closing of its long-delayed acquisition of Exxon’s shallow-water Nigeria business. This acquisition more than doubled the size of the company without increasing the company’s leverage profile or requiring additional equity. In addition to buying existing production and cash flow cheaply, Seplat can grow the acquired assets meaningfully and quickly. The assets they bought has over 600 completed wells, but only ~200 of these wells are producing today. Exxon had starved the asset of capital, with only $7 million dollars of cap ex being spent in 2023 on an asset that produced over 27 million barrels of oil and gas equivalent that year. Many of the ~400 shut in wells can be brought on quickly and easily, with inexpensive debottlenecking. Local news outlets have reported that Seplat hopes to double production from the assets in six months, but official guidance has yet to be released.

Recently, the market has been concerned about the effective tax rate Seplat will pay on cash flow from this new asset. Because Exxon had not been investing, the tax rate on the divested asset reverted to the statutory 85%. Seplat’s corporate tax rate, on the other hand, has been in the 20-30% range. When Seplat purchased its initial asset from Shell, that asset had a ~85% tax rate. With investment, Seplat was able to bring this rate down below 30%. Seplat’s management plans to do the same with the Exxon assets, and we believe they will be mostly successful in this regard.

Despite the strong performance of Seplat’s shares last year, Seplat’s stock remains very cheap. With the Exxon deal compete, Seplat is trading at less than 3x cash flow, and less than $2/boe of reserves. We look forward to the company showing the market its plans for the Exxon asset, specifically bringing production up and the tax rate down. We expect the amount of free cash flow that the company is generating will allow management to substantially increase the dividend in the near term.

MTN Ghana

In the first 9 months of 2024, (full year is not yet released) MTN Ghana grew revenue and earnings over 30%, generated a 50% return on equity, and paid a double-digit dividend yield. The company has been moving from strength to strength as they continue to dominate voice and data telecom services, as well as money transfer and digital payment in the country. We expect more of the same in 2025. The stock is trading at 4.6x our estimate of 2025 earnings, which is a 53% ROE, and 13% dividend yield on the year end 2024 stock price.

The biggest headwind to MTN Ghana has been the Ghanian government. In December, Ghana had a Presidential election which resulted in a transfer of power to the opposition. The new President – John Mahama – was the President from 2012 to 2017. We do not expect great things from his economic team, but encouragingly he has spoken out against both policies which had been most detrimental to MTN Ghana – the money transfer levy, and the government-owned 5G company. In addition, President Mahama’s team has indicated plans to continue working with the IMF on their bailout package. The reality is that Ghana does not have a lot of room to negotiate given the extent to which the country is indebted to the IMF. The status quo is fine for MTN Ghana, which will continue to grow its business despite local headwinds.

Georgia Capital

We detailed our view of Georgian politics in our Q3 letter. Politics remain the main risk to our Georgian investments. The October elections resulted in large protests which have mostly died down at this point. Despite the political calm, the US and EU have continued to sanction numerous politicians associated with Georgia Dream’s ruling coalition. There were even rumors that the CEO of Georgia Capital would be sanctioned by the US. Despite the obvious headline risk associated with these targeted sanctions, we remain confident that Georgia, the country, will not be redlined by the incoming Trump administration.

In December, Georgia Capital finalized the disposition of its beer business at a premium to CGAP’s self-reported NAV and immediately announced a further buyback of shares. Georgia Capital’s stock continues to trade at ~50% discount to a conservative valuation of the sum of its parts. As such, continuing to sell assets at a premium to NAV and using proceeds to buy back stock is very accretive for shareholders. In 2025, we expect stock buybacks to remain the main use of cash flow for the company. In addition, early this year the company will have the ability to exercise a put option to sell a minority stake in a water utility business. We expect them to exercise that and use the proceeds to buy back stock. Those proceeds plus buybacks from internal cash flow could see the company buy back over 20% of its stock in 2025.

Guaranty Trust

Guaranty Trust had a frustrating but profitable 2024. Through the first 3 quarters of the year (Q4 is yet to be released), the stock grew earnings 194% in local currency terms, and generated an annualized 55% ROE. At its current stock price, we estimate that it is trading at just over 2x earnings and 0.6x book for 2025, with a 19% dividend yield.

The biggest frustration for GT last year was the government’s mandatory recapitalization of the banking sector. GT did not need capital and if anything was overcapitalized. However, the government compelled the entire banking sector to raise capital, ignoring retained earnings when calculating the new capital ratios. This policy resulted in GTCO raising 209 billion naira, which represented a high-teens equity dilution.

Like MTN Ghana, Guaranty Trust’s business is strong and growing despite a challenging political and macro environment. Encouragingly, Nigeria seems to have stabilized for the time being. President Tinubu is in year two of his four-year term. After a large initial devaluation of the currency, the naira has been stable for over six months and has recently appreciated slightly. The fuel price subsidy which has dominated the fiscal expenditures of the country has become less significant. Encouragingly, Nigeria has had some success increasing the country’s oil production and we foresee more growth to come following a series of supermajor dispositions from Nigeria’s shallow offshore oil fields.

Kosmos Energy

Kosmos stock currently trades at over a 20% 2025 FCF yield assuming $75 Brent oil prices. The company has a multi-decade resource life with numerous existing discoveries they can develop to grow production further. With Kosmos spending minimally in 2025 to de-leverage the balance sheet, as we look ahead to 2026, we believe Kosmos will begin returning capital to shareholders. In addition, Kosmos management has said on earnings calls that they are considering selling down part of their LNG project ownership to accelerate de-leveraging and capital returns.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Precious Metals Fund - Q3 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Fri, 01 Nov 2024 18:50:40 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +3.1% in the third quarter and is up +11.0% through the end of September 2024. Performance for the quarter was driven primarily by our group of explorers, with additional positive contribution coming from the producing segment of the portfolio. These gains were partially offset by the decline of one of our development stage companies which has experienced delays and raised additional capital.

As our gold miners have lagged the indices, a substantial valuation gap has opened between the largest gold miners in the industry and the producing companies we own. At spot pricing, consensus sell-side models have Agnico, Barrick, Kinross and Newmont delivering an IRR of just 3%. Our portfolio of producers, on the other hand, models out to an IRR of 20% using the same metals price assumptions. There's substantial value in the gold mining sector, but the largest companies are not the ones to own.

Source: Equinox Internal Analysis

*Note on IRR calculation here – we use the current market cap of the company and then future free cash flow to equity.

A breakdown of Equinox Partners Precious Metals Fund's exposures can be found here .

the Benefits of Gold's Macroeconomic Irrelevance

For more than a century, the gold price was an explicit objective of US monetary policy. Even after Nixon ended the link between the dollar and gold, rising gold prices were seen as a sign of loose monetary policy and a predictor of future inflation. This relationship between gold and inflation was well enough established that Paul Volker expressed regret in his 2018 memoir for not doing more to contain the price of gold during his tenure as Federal Reserve chair. His successor, Alan Greenspan, did not make the same mistake. Greenspan promised Congress that central banks would help manage the price of gold if it rose too quickly, a promise that central banks delivered on in 1999 when the gold price spiked following the announcement of the Washington Accord.

Despite this deeply rooted historical correlation between gold and inflationary expectations, there is no direct or necessary link between gold and inflation or any other US macroeconomic indicator for that matter. Gold is not in the CPI; goods are not priced in terms of gold; and, the currencies of America’s trading partners are not tied to gold. Accordingly, if the market were to treat the gold price as irrelevant from a macroeconomic perspective, then it could be, which is exactly what has happened since February of 2022.

When Secretary Yellen seizure of $300 billion dollars’ worth of Russian FX reserves on February 28 ^th , 2022 ^[ ^1] , she broke the longstanding relationship between gold and inflationary expectations. Prior to that, financial investors buying gold for its financial characteristics dominated the gold market. Since then, central banks buying gold for its insurance and security characteristics have dominated the gold market. The 2022 breakdown in the correlation between inflationary expectations and the gold price can be shown by mapping inverted real rates against the gold price (below). The new dominance of central banker demand can be shown by the more than doubling of annual central bank gold purchases since 2022.

Source: Goldman Sachs Research

Source: Crisis Investing; Metals Focus, Refinitiv GFMS, World Gold Council

The freezing of Russia's foreign exchange reserves did more than break the long-standing correlation. It led to an unprecedented situation in which the Federal Reserve’s credibility as gold prices rose together. Beginning with a 25bps rate increase in the Fed Funds rate on March 16 ^th , 2022, the Fed began tightening monetary policy. Over the ensuing two and a half years, the fed fund’s rate rose 525 bps, the Fed contracted its balance sheet by $1 trillion dollars and inflation fell from a peak of 9% to 2.7%. Over that same period, the price of gold rose from $1,900 to $2,700 per ounce.

Source: FRED

If gold could rise ~$800 an ounce as inflation declined and real rates increased, then perhaps gold could rise to $3000 or $4000 an ounce without having a meaningful impact on inflationary expectations or real rates. While most Western investors viewed the breakdown in correlations between gold and real rates as worrisome, the change has been an unmitigated positive thus far. The reason is simple: So long as gold remains broadly disconnected from US macroeconomic indicators, US policy makers no longer have any interest in keeping the gold price contained.

Western investors worried that the historical relationship between gold and real rates will reassert itself have largely missed the recent rally in gold. This lack of Western participation can be seen in the outflows of 15 million ounces from the gold ETFs, and the weak performance of junior gold mining companies. The GDXJ ETF is up only as much as the gold price, and smaller gold mining companies have fared worse. The value of undeveloped gold assets continues to trade at near all-time lows.

Source: RBC Research

The decoupling of gold from US macroeconomic indicators which has made gold more rewarding for investors has also made gold a much more interesting tool for policy makers. Prior to 2022, the revaluation of gold higher would have damaged policy makers’, especially the Fed’s, credibility. But there has not been even a hint of this historic relationship between gold and real rates of late. The macroeconomic irrelevance of gold means that this precious metal, a $19 trillion dollar asset class, can creatively be employed to absorb the massive capital flows created by today’s extreme trade and fiscal imbalances. In fact, gold is the only asset that could plausible be used to absorb the world’s trade surplus without triggering painful macroeconomic consequences.

While the exact contours of how central banks plan to reintroduce gold into the international monetary system is unclear, the probability of a reintroduction is growing. Central banks are spending hundreds of billions of dollars buying gold because they have a use in mind. And, while we don’t know how central banks intend to use the gold they are acquiring, all the more plausible use cases will be a massive positive for this asset that has been pushed to the margin of the world’s financial system over the past half century.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q3 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Thu, 31 Oct 2024 20:36:08 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. declined -0.8% in the third quarter of 2024 and is up +4.2% for the year through September 30 ^th . Performance for the quarter was driven by a pullback in our energy holdings, which more than offset the gains in MTN Ghana and several of our financials.

A breakdown of Kuroto Fund exposures can be found here .

Kuroto Fund's Energy Investments Since SUmmer of 2020

Kuroto Fund began adding oil producers to the portfolio in August 2020. Today, we own four oil companies. Cumulatively, our portfolio of oil companies have added $5mn to our P&L, but more than all of this performance has come from one company, Seplat. By our calculation Seplat will be generating a free cash flow yield of ~28% once it consummates the acquisition of Exxon Mobil Nigeria early next year.

While our remaining portfolio of oil companies, in aggregate, have yet to contribute positively to our returns, they are executing and delivering strong fundamental progress. One of these portfolio companies we expect will complete an acquisition this month that should increase production by 60%. Two others should bring on long-delayed fields before year-end and we expect all three to release meaningful exploration results over the next six months.

The Importance of Oil Prices (Adapted from Sean's 10/1/2024 Grant's SpeecH)

The threat posed by rising oil prices to the US economy and financial asset values is nothing new. Policy makers and market participants have long understood that rising oil prices tax the American consumer, increase inflation, and force the Fed to raise rates to keep long-term inflationary expectations anchored. Yet this general understanding misses how extraordinarily tight the correlation between oil prices and inflationary expectations has become in recent years. If this tight correlation holds in a rising oil price environment, inflationary expectations will immediately spike which in turn will have a negative impact on stock and bond valuations.

Source: Daily Shot, @TheTerminal - Bloomberg Finance, LP

While most investors are not sufficiently concerned about the threat posed to their portfolios by higher oil prices, American policy makers have honed-in on the potential risk. As the US Treasury market has become more illiquid and fragile, American policy makers have adopted a series of policies to forestall disruptive spikes in the oil price. The Biden administration, for instance, released ~270 million barrels from the strategic petroleum reserve and eased sanctions on Iran which in turn allowed Iranian oil exports to grow by more than 1 million barrels per day over the last three and half years. America has also sought to hem in OPEC’s power by stoking rumors about production increases and punishing American oil executives supporting OPEC’s policies. The targeting of Scott Sheffield and John Hess by Lina Kahn’s FTC sent a clear message to American oil executives to steer clear of OPEC and any talk of higher oil prices.

Regardless of who wins the Presidential election next week, America’s policy of oil price suppression will continue in the short-term. Vice President Harris will almost certainly maintain the oil policies of Biden, while Trump will pursue the same ends through different means. The proposed policy mix is different, but both Harris and Trump are clear proponents of lower oil prices as a means of anchoring American inflationary expectations. That said, regardless of who wins the election, we believe that the next President will have a hard time maintaining the pre-election intensity of the Biden oil price suppression scheme.

Over the balance of this decade, oil prices should succumb to supply and demand fundamentals. With respect to oil production, there is broad agreement. Both OPEC and the IEA estimate the global daily production capacity will grow to roughly ~114 million barrels by 2030. Their disagreement is over demand. IEA believes that world oil demand will grow less than 2 million barrels per day over the next six years and that the world will be awash in oil by 2030. OPEC forecasts almost 7 million barrels of growth over the same period and an oil market in balance.

Source: IEA Oil 2024, OPEC World Oil Outlook

At the risk of saying something positive about OPEC, we think OPEC’s demand expectations are far more reasonable than the IEA’s estimate. OPEC estimates strike us as measured, rather than overly optimistic, anticipating a gradual reduction in OECD demand coupled with continued growth from emerging markets. The IEA figures on the other hand, reflect the agency’s historic pattern of strategically underestimating global demand. As the graph below shows, the IEA’s estimates have been about ¾ of a million barrels light for years.

Source: IEA Oil 2021, IEA Oil 2024

If US oil production eventually flattens out and declines, OPEC+ will take market share. In our estimation, increases in OPEC’s market share coupled with an inability of the US to respond by growing production, would translate into significantly higher oil prices. To this end, it is worth noting that US production has been flat for trailing 12 months as of the writing of this letter.

Source: TD Cowen

In the long run, we are confident that the current US policy of oil price suppression will not overwhelm oil market fundamentals. We do not even believe that oil price suppression is a logical long-term policy object of the U.S. Federal government. America is, after all, the largest producer of oil and gas in the world, and a net exporter of both. And, our near peer competitor, China, is the world’s largest oil importer, posting an 8.6 million barrels of oil per day deficit at last count.

Organizational Update

In October, Jeremy Nierman replaced Arthur Melkonian as our Chief Operating Officer. Arthur, our long-serving and highly competent COO will be building out of a family office in NYC. We wish him well and will miss his collegial presence in the office. Jeremy, our incoming COO, has served in a senior operational role at Pequot Capital and as COO of Hudson Executive Capital. We are confident that Jeremy and the rest of our non-investment team will continue to deliver the operational excellence which our partners expect.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q3 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Thu, 31 Oct 2024 19:30:56 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose +16.4% in the third quarter of 2024 and is up +25.9% for the year through September 30th. The positive performance for the quarter was driven by the revaluation of our largest position, Crew Energy, which was up +70% in the quarter on the news it would be acquired by Tourmaline Oil.

A breakdown of Equinox Partners exposures can be found here .

Crew Energy Investment Post-Mortem

On October 1st, Tourmaline Oil acquired Crew Energy bringing a decade-long Equinox Partners’ investment to a successful conclusion. Crew transacted for $1.15 billion USD, which included $960MM USD in Tourmaline shares and $190MM USD of assumed debt. The 72% premium Tourmaline paid resulted in an 11.6% IRR on our investment. This IRR, however, understates the positive impact Crew has had on our performance in recent years. Since we upsized our investment in Crew in the spring of 2020, Crew has been the most significant driver of our fund’s returns. Over the entire life of the investment, Crew contributed a cumulative +139% to our fund’s performance. Accordingly, we felt an investment review is in order.

Attracted by Crew Energy’s low-cost and long-lived natural gas reserves in British Columbia, we first invested in December of 2014. At the time of our initial purchase, the Canadian natural gas strip averaged CAD $3.75. If strip prices held, Crew would be able to grow its production at 20%+ per year for a decade with internally generated cash flow.

While our thesis about the quality of Crew’s assets was accurate, our assumptions about natural gas prices in North America proved too optimistic. The North American natural benchmark, Henry Hub, averaged just USD $3.09 over the past decade, and the Western Canada benchmark, AECO, fared even worse averaging CAD $2.59.

Source: TD Cowen

At the time of our initial investment, we understood that Western Canadian gas production would grow, but we failed to appreciate the extent to which Western Canada’s prolific Montney natural gas resource would overwhelm both Western Canadian demand and takeaway capacity. While Western Canadian demand and takeaway capacity both grew rapidly over the past decade, they never caught up with the even faster growth in Western Canadian natural gas supply. The result has been a decade of generally depressed natural gas prices in British Columbia and Alberta.

In this low gas price environment, Crew elected to take on debt to finance its ambitious growth plans. This proved ill-advised as continued weakness in gas prices gradually eroded Crew’s financial position. By the spring of 2020, Crew was poorly positioned for the COVID crisis which abruptly reduced the prices of natural gas and oil. At the lows in March of 2020, Crew traded at a market cap of just $15 million USD.

The collapse in Crew’s stock price was painful for us, but we continued to believe in the strategic value of Crew’s unique land package. Accordingly, we added to our position in March and April of 2020, increasing our ownership of the company from 8% of the shares outstanding to over 15%. As the market panicked, we calculated that the company’s stretched debt ratios were temporary, and that Crew would not face a liquidity problem given the principal on their debt was not due until 2024.

As expected, the COVID crisis receded, oil and gas prices rebounded sharply from their spring 2020 lows, and Crew’s financial ratios improved. But, despite the rebound in spot gas prices, a CAD $3 strip AECO price was still insufficient for Crew to internally finance the development of its massive land package in British Columbia. Crew, nevertheless, boldly published a four-year plan outlining a $1.5 billion CAD Capex strategy. This plan, while appropriate for a larger company, was not a strategy that Crew could prudently execute. Disappointed with the company’s inability to move forward, we joined Crew’s board with management's support at the 2023 annual meeting to seek an alternative path forward for the company.

Once on the board, we were pleased to find fellow board members with a deep knowledge of the business and strong shareholder alignment. It did not take long for Crew’s board to realize that the company's strategic assets and tax losses might prove attractive for a larger E&P company operating in Canada’s Western Sedimentary basin even in a weak natural gas environment. In clear confirmation of this assessment, despite paying a 72% premium, the Crew acquisition will be accretive to Tourmaline in year one.

While an 11.6% IRR is not an adequate return for Equinox Partners, it is not bad considering the price of natural gas fell by 74% during the decade in which we were invested. The ultimately positive outcome was possible as a result of two factors:

1) We invested in a high-quality asset

2) We added to our position at the right time

Upon closing of the all-stock transaction on October 1 ^st , Tourmaline became our largest position. In our opinion, Tourmaline is the best natural gas company in North America and perfectly positioned to capture any upturn in natural gas prices looking into 2025 and beyond. Accordingly, we intend to hold a sizable position in Tourmaline for the foreseeable future.

The Importance of Oil Prices (Adapted from Sean's 10/1/2024 Grant's SpeecH)

Source: Daily Shot, @TheTerminal - Bloomberg Finance, LP

Source: IEA Oil 2024, OPEC World Oil Outlook

Source: IEA Oil 2021, IEA Oil 2024

Source: TD Cowen

Organizational Update

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners Precious Metals Fund, L.P. - Q2 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Wed, 24 Jul 2024 20:40:32 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +2.1% in the second quarter, and is up +7.7% for the 2024 year-to-date through the end of June. Our portfolio of producing gold companies have been the primary drivers of contribution to return, while the early stage explorers and developers have traded down despite the rising metals price.

A breakdown of Equinox Partners Precious Metals Fund's exposures can be found here .

Gold Miners vs. Gold

Source: Koyfin; 2024 YTD Total Returns as of July 19th, 2024

After decades of underperformance, gold mining shares are finally showing signs of life. Gold mining indices are up 21% for the year to date as of July 19th, 2024, outperforming gold by 5%. This is a welcome change; it is also barely noticeable in the long-term graph of gold miners to gold.

Source: Bloomberg; Bloomberg Gold Mining Index relative to Physical Gold Price, December 1983 to Present

The long-term underperformance of the gold miners is not only a long-term technical trend, but also a reflection of the failure of gold mining companies to generate meaningful additional free cash flow in a rising gold price environment.

This failure can be visualized in the tight correlation between the gold price and the costs of mining gold. Since 2011 there has been a 93% correlation between AISC (All-In Sustaining Costs) and the price of gold. ^[1] Put differently, for more than a decade, any expansions of gold mining margins have been quickly eroded by the rising cost of gold mining.

^[1] Equinox Internal Analysis of Mining AISC

Source: Scotiabank Gold Monthly Statistics Report. Data as of June 30, 2024

While some positive correlation between the gold price and AISC is to be expected, there is no fundamental reason for the correlation between the price of gold and the cost of mining gold to be as tight as it has been over the last thirteen years. After all, the vast majority of gold mining costs are tied to inflation, not the price of gold. Important costs such as labor, consumables, G&A, mine closure, new exploration and sustaining capital expenditure are not intrinsically linked to the price of gold.

Given the tight correlation between the gold price and gold mining costs over the most recent thirteen-year period, it is worth revisiting the periods where the price of gold and the cost of mining it meaningfully diverged. In the 1930s, the price of gold rose 69% and the price level fell 19%. In the 1970’s, the price of gold rose 14-fold, as the price level only doubled. Lastly, in the first decade of this century, the price of gold rose 6-fold as the price level increased merely 29%.

Each of these periods was particularly rewarding for gold mining investors, and each of these three episodes was very different. The 1930s divergence between the gold price and gold mining costs occurred during a deflation. The 1970s divergence occurred during a period of high inflation, and the 2000s divergence occurred during a period of low inflation. One notable common thread among the three periods is that the US government kicked off each gold bull market. In 1933, FDR revalued gold upwards from $20.67 to $35 the ounce. In 1971, Nixon unpegged the dollar from gold. In August of 1999, the United States hosted the Washington Agreement to limit central bank selling of gold.

Given the United States’ current unsustainable fiscal path and rapidly deteriorating geopolitical position, we suspect another divergence of historic proportions between the gold price and AISC is in the offing. When this turn arrives, it should be particularly rewarding for the gold miners. At the margin, there are signs that this long-awaited turn is already underway. For one, smaller cap gold miners are starting to outperform the larger peers for the first time in years (see below). As this trend continues, we expect the deeply undervalued gold explorers will begin to sharply re-rate.

Source: Koyfin, As of July 16 ^th 2024

mining Gold for Free Cash Flow

In periods in which AISC and the gold price are highly correlated, the correlation does not uniformly hold for all mines. Three factors in particular have helped us mitigate against the industry’s trend of rising mining costs: geology, vintage and location.

There is no substitute for good geology. It is like good genetics. The best coach cannot make an average runner into Usain Bolt, and the best management team cannot make an average mine world class. While grade is the most important geological variable, other factors such as continuity, scale and rock geochemistry can all have similarly meaningful impacts on the mine’s AISC. As a rule, predictable ore bodies lend themselves to improvement, complex ore bodies do not.
Newer vintage mines typically enjoy lower sustaining capital costs and lower staff turnover. New mines not only tend to operate more efficiently but also are better at retaining employees. This relationship can be seen in the data. From 1992-2023, AISC grew at an average rate of 5.3% for the 400 companies in our internal database. For the 240 mines in our dataset that began operations after 1992, they averaged just 2.4% growth rate in costs over the first four years of operation, suggesting a honeymoon period for new mines during which their costs tend to be more stable.
Francophone West Africa’s mines have experienced significantly less cost inflation over the past two decades. Not only have they enjoyed a stable currency and low rates of inflation, but they also have structurally lower labor costs. Whereas a typical North American mine spends 30% of its annual budget on labor, a typical mine in French West Africa spends closer to 10% on labor. Barrick’s AISC breakdown since the acquisition of Randgold illustrates this distinction nicely. Since 2017, costs at Barrick’s U.S. operation rose 126%, while costs at their African operations have increased just 45%.

Source: Barrick Financial Reports, Equinox Internal Analysis. Indexed to 2017 Levels

conclusion

The Equinox Partners Precious Metals Fund, L.P. is concentrated in companies with quality assets that can improve margins as the gold price appreciates faster than inflation. This strong quality bias in our stock selection has helped us generate a modest, but positive, compounded annualized return in a historically difficult and declining equity market for gold mining companies. If we experience a structural divergence between the gold price and AISC like we saw in the 1970s and again in the 2000s, our producing company free cash flow growth will accelerate and our smaller companies that are asset rich and cash poor should re-rate dramatically.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q2 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Wed, 24 Jul 2024 19:40:33 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose +5.7% in the second quarter of 2024. The positive performance for the quarter was primarily driven by our mining positions, with additional positive contribution from our energy companies.

A breakdown of Equinox Partners exposures can be found here .

Gold Miners vs. Gold

Source: Koyfin; 2024 YTD Total Returns as of July 19th, 2024

Source: Bloomberg; Bloomberg Gold Mining Index relative to Physical Gold Price, December 1983 to Present

^[1] Equinox Internal Analysis of Mining AISC

Source: Scotiabank Gold Monthly Statistics Report. Data as of June 30, 2024

Source: Koyfin, As of July 16 ^th 2024

mining Gold for Free Cash Flow

There is no substitute for good geology. It is like good genetics. The best coach cannot make an average runner into Usain Bolt, and the best management team cannot make an average mine world class. While grade is the most important geological variable, other factors such as continuity, scale and rock geochemistry can all have similarly meaningful impacts on the mine’s AISC. As a rule, predictable ore bodies lend themselves to improvement, complex ore bodies do not.
Newer vintage mines typically enjoy lower sustaining capital costs and lower staff turnover. New mines not only tend to operate more efficiently but also are better at retaining employees. This relationship can be seen in the data. From 1992-2023, AISC grew at an average rate of 5.3% for the 400 companies in our internal database. For the 240 mines in our dataset that began operations after 1992, they averaged just 2.4% growth rate in costs over the first four years of operation, suggesting a honeymoon period for new mines during which their costs tend to be more stable.
Francophone West Africa’s mines have experienced significantly less cost inflation over the past two decades. Not only have they enjoyed a stable currency and low rates of inflation, but they also have structurally lower labor costs. Whereas a typical North American mine spends 30% of its annual budget on labor, a typical mine in French West Africa spends closer to 10% on labor. Barrick’s AISC breakdown since the acquisition of Randgold illustrates this distinction nicely. Since 2017, costs at Barrick’s U.S. operation rose 126%, while costs at their African operations have increased just 45%.

Source: Barrick Financial Reports, Equinox Internal Analysis. Indexed to 2017 Levels

conclusion

The Equinox Partners, L.P. gold and silver mining portfolio is concentrated in companies with quality assets that can improve margins as the gold price appreciates faster than inflation. This strong quality bias in our stock selection has helped us generate a modest, but positive, compounded annualized return in a historically difficult and declining equity market for gold mining companies. If we experience a structural divergence between the gold price and AISC like we saw in the 1970s and again in the 2000s, our producing company free cash flow growth will accelerate and our smaller companies that are asset rich and cash poor should re-rate dramatically.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q2 2024 Letter

Fri, 19 Jul 2024 14:59:58 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. declined -2.0% in the second quarter of 2024 while the Emerging Markets index gained 5.1% over the same period. For the 2024 year to date through the end of June, Kuroto Fund, L.P. is up 5.1% and the Emerging Markets index has appreciated 7.5%.

Performance in the quarter was weighted down by declines in our Georgian investments and African banks. These declines were partially offset by strong, positive contributions from our oil and gas positions.

A breakdown of Kuroto Fund's exposures and contribution can be found here .

narrowing a vast universe

Analyzing emerging and frontier markets seems like an impossible undertaking to most domestically-focused investors. We’re often asked, “How can you possibly know what is going on in these far-flung geographies?”

Our answer: we don’t try to understand the business practices, macroeconomic and political ongoings of every emerging market and frontier country. That would be impossible. Instead, we carefully pick our spots, focusing on the twenty emerging and frontier countries that offer the most attractive investment opportunities in our opinion. Logistically, this entails traveling to these twenty countries and getting to know the best businesses and people associated with them. From a macroeconomic perspective, this means understanding the economic drivers, the government’s fiscal position, and central bank policy. On a political level, we focus on the scope of the domestic political debate and the geo-political forces shaping a country. Georgia, one of our largest country exposures, offers a perfect case study of our process.

narrowing a vast universe

Kuroto first invested in Georgia in the 4 ^th quarter of 2016. At that time, Georgian stocks were trading at low valuations due to the recency of the 2008 Russo-Georgian war. While the war had ended, investors were still avoiding Georgia. The prevailing wisdom of the time was that if Russia invaded once, they could invade again. Having closely followed the invasion in 2008 and ensuing events, we had a different opinion.

By 2012, it was clear that Georgian President Mikheil Saakashvili’s effort to join NATO had failed. NATO member states opposed Georgian membership, and after the fall of Mikheil Saakashvili’s government, there was scant domestic political support within Georgia to join NATO. As such, the root cause of the Russo-Georgian war had been resolved, making renewed conflict or additional loss of territory unlikely in our opinion. Our high degree of confidence in this conclusion requires a bit of historical context.

Following the collapse of the Soviet Union in 1991, Soviet-trained leaders ruled Georgia for another dozen years. Georgia stagnated under this incompetent and corrupt post-Soviet leadership, and that stagnation created the demand for a political revolution. In 2003, Mikael Saakashvili came to power in the Rose Revolution, won 96% of the vote at the age of 36, and immediately executed on his mandate to radically transform the country. He removed communists from the Georgian bureaucracy, established credible fiscal policy, and stabilized the country’s exchange rate. The results were impressive: Georgia skyrocketed to 7th in the world in terms of ease of doing business and began attracting significant investment from the West. Saakashvili then attempted to complete Georgia’s reorientation away from Russia by joining NATO. This proved a bridge too far, and on August 7th, 2008, Russia invaded Georgia. The war cost Georgia 20% of its territory and cost Saakashvili his reputation.

In 2011, Bidzina Ivanishvili’s Georgian Dream coalition won control of Parliament. Ivanishvili, who made his money in Russia, ran on a platform of reorienting Georgia’s foreign policy while keeping Georgia’s free market economic model. The result was a Georgia that refused to antagonize Russia while maintaining Saakashvili’s low-regulation, low-tax, free market policies. This platform proved popular, and to this day the Georgian Dream coalition dominates Georgian politics.

From an economic perspective, Georgian Dream’s mix of economic policies has delivered. Georgian real GDP growth has averaged 5.1% over the past decade inclusive of the COVID dip. Real GDP was originally projected to continue to grow 5.2% in 2024, and now looks likely to overshoot this projection given the country’s 7.8% Q1 real growth rate. Inflation is running at 2.2% and the Central Bank continues to maintain meaningful real rates with policy interest rates at 8%. The Georgian Lari trades at 2.7 Lari to the US Dollar, roughly the same level as 5 years ago. With a debt to GDP ratio of 39%, and a projected fiscal deficit of 2.5% for 2024, Georgia remains a paragon of fiscal responsibility.

Georgia’s chief macroeconomic vulnerability is its current account deficit – which was 4.3% of GDP in 2023 but averaged 7.5% over the past five years. In a normal year, trade remittances, tourism, and FDI counterbalance this deficit, but these sources of capital can dry up quickly in a crisis. The current account deficit in combination with the tendency of Georgian savers to rapidly switch between USD and Lari keeps the Georgian Lari constantly in the crosshairs of market forces. Georgian politicians and central bankers are acutely aware of this dynamic which has led to their very conservative macroeconomic policies.

Georgian policy makers have also opted for prudent foreign policy given the country’s obvious geopolitical vulnerabilities. While Russia’s invasion of Ukraine in 2022 raised the specter that Russia would again invade Georgia, the initial knee-jerk sell off in the Georgian stock market and currency turned out to be exactly wrong. Russia’s invasion of Ukraine was not a prelude to a Russian invasion of Georgia. Instead, the resulting sanctions on Russia caused a mini-economic boom in Georgia as trade flows shifted, IT workers relocated, and regional manufacturing moved to Georgia, the most business-friendly country in the Caucasus.

Bidzina Ivanishvili and the Georgian Dream coalition have been working hard to keep Georgia in the good graces of both Russia and the West. On the one hand, Georgia has free trade agreements with the EU and the US. On the other hand, Georgia has not fully implemented Western sanctions against Russia. To further diversify the country’s geopolitical position, the government of Georgia has courted Chinese investment. This has resulted in a Chinese commitment to build a deep-sea port on the Black Sea. This port would give China a direct trade route to Europe that avoids Russia and Iran, as well as the Straits of Malacca and the Suez Canal. In addition to the economic benefits of this investment for Georgia, having a Chinese-backed port and trade corridor provides further insurance against Russian aggression.

Balancing the interests of Russia, China and the US will inevitably upset each three of these large powers at different times. Most recently, Ivanishvili championed a law curtailing foreign donations to local NGOs which has upset the West. The new law requires any Georgian NGO receiving more than 20% foreign funding to register its employees as foreign agents. Ivanishvili supported this law because he is concerned that foreign nations will use Georgian NGO’s to stir up opposition to his Georgian Dream party in the elections this fall. This policy drew sharp rebukes from the EU and US governments, and effectively ended Georgia’s near-term hopes of joining the EU.

Our take is that this bill was not unreasonable given the high likelihood of foreign state involvement in Georgian politics. The prudent foreign policy for a small country fending off advances from the US, Russia and China is non-alignment. This appears to be the path that Ivanishvili is taking. If the country can preserve its independence, it should grow as a destination for international capital from around the region and has the potential to be the Singapore or Dubai of the Caucasus region.

CONCLUSION

Georgia is an example of the type of country where we've been finding our best investments in recent years. The country has obvious tip of tongue reasons to avoid it – it’s next to Russia, it’s small, and it’s not in an index so there are not passive fund flows. We've spent time in the country analyzing Georgia's politics, economy, and best businesses, and came away favorably impressed. Today, we own the country’s largest bank, which earns a 25%+ Return on Equity, grows revenue over 10%+ per year, and is trading below book value. We also own an investment holding company which is trading at half of our sum-of-the-parts Net Asset Value and is actively buying back stock at this discounted valuation. In normal market environments, these attractive combinations of value and quality in dominant businesses only exist in off the beaten path geographies.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Grant's Current Yield Podcast Interview

kbrennan@equinoxpartners.com (Kieran Brennan) — Tue, 28 May 2024 13:20:20 GMT

Grant's Current Yield Podcast - "A Matter of Perspective"

Jim Grant and Evan Lorenz of Grant's Interest Rate Observer sat down for a conversation with our CIO Sean Fieler in May 2024 on this episode Grant's Current Yield podcast entitled "A Matter of Perspective".

Equinox Partners Precious Metals Fund, L.P. - Q1 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Tue, 30 Apr 2024 23:02:41 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +5.6% in the first quarter.

A breakdown of the fund’s exposures and contribution can be found here .

1972 Redux

President Nixon famously pressured Fed Chairman, Arthur Burns, to run the economy hot going into the 1972 election , arguing that his opponent, George McGovern, posed a threat to democracy. If McGovern wins, “this will be the last conservative administration in Washington” claimed Nixon. Arthur Burns did run the economy hot in 1972, and Nixon was reelected, wining 60.7% of the popular vote and carrying every state except Massachusetts. The consequences of the Fed’s loose monetary policy were disastrous. The US stock market peaked a month after the Presidential vote on January 11th, 1973, and the S&P declined 45% over the following 21 months (53% in real terms). Inflation remained problematic for a decade.

President Biden, like Nixon, claims that his opponent poses a threat to America’s system of government. “Democracy is on the ballot,” intones Biden. We don’t know if Chairman Powell shares President Biden’s view, but it appears Powell is going to let inflation run hot into our November election. Like Arthur Burns 52 years ago, we think Powell’s passive approach to a lingering inflation problem is likely a prelude to a post-election spike in the price level.

Similarities, Differences and Consequences

The topline similarities between the inflation level and policy rates in 1972 and 2024 are striking. In both periods, inflation remained stubbornly above 3% after peaking a few years earlier in the high single digits. In both cases, the Fed kept policy rates between 5¼% to 5¾%.

Source: FactSet

By the summer of 1972, it was clear that 2% real rates were not going to slow the economy or forestall a future inflationary bout. Arthur Burns even noted in his July congressional testimony that “the need for further progress in curbing inflationary pressures remains great…” Nevertheless, Burns failed to act. Similarly, Chairman Powell recognizes that inflation has not been subdued: “More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal.” Yet, Powell also appears unwilling to raise rates.

In addition to the headline similarities between 1972 and 2024, there are four important dissimilarities to note:

A much smaller fraction of the workforce is unionized today, 10% vs. 27% in the early 1970s. As a result, labor is in a weaker negotiating position than it was fifty-two years ago, making a wage-price spiral less likely.
America’s economy is also more globalized than it was in the early 1970s. Imports have trebled as a percentage of GDP, rising from 4% to 12%. Accordingly, Americans benefit from globalization in a way that we did not historically.
Today’s high rate of immigration is disinflationary for the service sector in a way that wasn’t true in the early 1970s. Today, 15% of American residents are foreign born, compared to just 4.7% in 1972.
And, most importantly, we are beneficiaries of a deflationary software revolution.

While the aforementioned factors are all relevant, they are almost all in the process of reversing.

Biden and Trump are strong supporters of private sector unions. Biden recently joined a UAW picket line, and Trump is courting the Teamsters union for an endorsement. It is also worth noting that in the public sector, federal government workers will receive a 5.2% pay increase in 2024.
Biden and Trump are for higher tariffs. Biden recently called for the trebling of tariffs on Chinese steel and Aluminum imports. Trump has promised to impose a 60% tariff on all Chinese imports.
Only Trump would restrict immigration.
And most importantly, software has become a big enough part of our economy that it is bumping up against real world constraints and becoming inflationary. Last year, we saw generative AI development hampered by a lack of GPU hardware. Looking forward, according to Mark Zuckerberg, future AI expansion will likely be hampered by a lack of available energy. In a recent interview he said:

“You’re gonna run into energy constraints… Getting energy permitted is a very heavily regulated function… There’s no doubt that energy, and if you’re talking about building large new power plants… and then building transmission lines that cross other private or public land, that is just a heavily regulated thing. So you’re talking about many years of lead time… A big [data center] might be around 150 megawatts… No one has built a single gigawatt datacenter yet. I think it will happen; it’s only a matter of time…. To put this in perspective, a gigawatt is around the size of a meaningful nuclear power plant only going towards training a model.”

Markets are concluding that the disinflationary tailwind that characterized the past three decades has passed but have not yet fully grasped the potentially very negative implications of this change. The decline in the stock market from January 1973 to the Fall of 1974 seems unimaginable to today’s investors. In nominal terms, the S&P fell 45%, and in real terms it fell 54%. Even more incomprehensibly to today's investors, this sharp decline was not quickly reversed. The S&P, with dividends reinvested, did not achieve its nominal 1972 peak again until November 1978, at which point it had lost 37% of its purchasing power. In real terms, the stock market did not reach its 1972 peak until October 1982.

As bad as the 1970s were for capital markets, today’s situation could be worse. In 1972, Federal Debt to GDP was 34%. Today that same figure is 122%. With the right policies, America could have ended inflation in the 1970s. We simply lacked the will until Volker took the reins at the Fed. Today, it is not at all clear that, with debt at 120%+ of GDP, a determined Fed could end inflation today the same way that Volker did in the early 1980s. It is an open question as to whether higher rates would make the government’s path more obviously unsustainable and therefore lead to higher, not lower, long-term interest rates. It is also an open question as to whether a recession, which depresses tax receipts, would fix our inflation problem, or call into question the solvency of the Federal government.

In short, this is a perilous moment in America’s financial history, one in which it seems more investors are reawakening to the value of diversification. We are fielding more inbound calls than we’ve seen in a decade – often from investors who have no gold exposure and, in many cases, de minimis commodity exposure. We see great upside in our investments and encourage investors to increase their exposure to resources generally, and gold and silver in particular.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q1 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Tue, 30 Apr 2024 21:32:59 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. rose +2.2% in the first quarter of 2024. Our portfolio of Precious Metals Miners drove our positive performance during the quarter, offsetting a modest decline in our Operating Companies and a flat quarter for our Oil and Gas companies.

Over the past 6 months, our portfolio weighting in metals and mining has grown due to our purchases and outperformance. As of the end of April, the portfolio weight in Metal and Mining was 60% of partners’ capital, roughly equivalent to our weighting in Oil and Gas producers.

1972 Redux

Similarities, Differences and Consequences

Source: FactSet

In addition to the headline similarities between 1972 and 2024, there are four important dissimilarities to note:

A much smaller fraction of the workforce is unionized today, 10% vs. 27% in the early 1970s. As a result, labor is in a weaker negotiating position than it was fifty-two years ago, making a wage-price spiral less likely.
America’s economy is also more globalized than it was in the early 1970s. Imports have trebled as a percentage of GDP, rising from 4% to 12%. Accordingly, Americans benefit from globalization in a way that we did not historically.
Today’s high rate of immigration is disinflationary for the service sector in a way that wasn’t true in the early 1970s. Today, 15% of American residents are foreign born, compared to just 4.7% in 1972.
And, most importantly, we are beneficiaries of a deflationary software revolution.

While the aforementioned factors are all relevant, they are almost all in the process of reversing.

Biden and Trump are strong supporters of private sector unions. Biden recently joined a UAW picket line, and Trump is courting the Teamsters union for an endorsement. It is also worth noting that in the public sector, federal government workers will receive a 5.2% pay increase in 2024.
Biden and Trump are for higher tariffs. Biden recently called for the trebling of tariffs on Chinese steel and Aluminum imports. Trump has promised to impose a 60% tariff on all Chinese imports.
Only Trump would restrict immigration.
And most importantly, software has become a big enough part of our economy that it is bumping up against real world constraints and becoming inflationary. Last year, we saw generative AI development hampered by a lack of GPU hardware. Looking forward, according to Mark Zuckerberg, future AI expansion will likely be hampered by a lack of available energy. In a recent interview he said:

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q1 2024 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Mon, 29 Apr 2024 16:19:41 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. rose 7.3% in the first quarter while the Emerging Markets index gained 2.4% in the quarter.

The Kuroto Fund’s positive quarterly performance was primarily driven by our investments in Georgia and our banks in Nigeria and Kenya. A breakdown of Kuroto Fund's exposures and contribution can be found here.

KUroto's Historically Low Valuation

The Kuroto Fund currently trades at 5.1x this year’s earnings. Our portfolio of companies is growing earnings by 22% this year and generating a 7% dividend yield this year. It is important to note that the above weighted average figures represent an average of a diverse set of businesses and that a P/E ratio is not the most appropriate valuation ratio for some of the sectors in which we are invested. The preceding calculations also exclude two positions, each ~5% of the fund, that are holding companies and do not generate earnings today. That said, if you compare the current valuations of our companies to their historical averages, they are generally trading towards the low end of the historical ranges. While not perfect, we think the portfolio P/E ratio is an accurate way to represent the very attractive valuation of the fund today.

Only during the emerging market crisis of the late 1990s did Kuroto trade cheaper than it does today. We believe our portfolio’s surprisingly low valuation can be principally attributed to our concentration in smaller countries and markets that are excluded from or underrepresented in the emerging and frontier indices and therefore do not attract passive funds. It is also worth noting that several of the African markets in which we are currently invested have faced a challenging macro-economic environment following the COVID crisis.

Chart: Historical Portfolio Look-Through P/E Ratio

Source: Internal Equinox Analyst Estimates

Changes in KUroto's Sector Exposures

Over Kuroto’s twenty-five-year history, on average we have held approximately 30% of our portfolio in financials. Today, our portfolio weighting in financials is 44%. Our financials trade at 4x this year’s earnings and offer a 6% div yield. Over the past two decades as public companies, our financials have traded closer to 1.3x book value, 6.4x earnings, and generated a 2% dividend yield. In almost every case, the banks we own are the leading financial institution in a concentrated market. As a result, many of our banks are price setters and can generate high returns while assuming only modest amounts of credit risk.

We ramped up our energy company investments following the 2020 crash in oil prices. Our energy companies trade at a 22% free cash flow yield this year, and an estimated 27% free cash flow yield in 2025 ^[1] . For energy companies, we believe the free cash flow yield is a better approximation of valuation than the P/E ratio given that actual depreciation in energy companies does not always match accounting depreciation. ^[2] While there are some important accounting nuances here, it’s noteworthy that the free cash flow yield of our energy companies is roughly equivalent to the earnings yield of our operating companies.

Half of the remaining 27% of Kuroto is invested in MTN Ghana. MTN Ghana is the dominant mobile carrier and mobile money operator in Ghana. MTN Ghana trades at 4x earnings and offers a 15% dividend yield. The low valuation of MTN Ghana is best explained by Ghana’s poor macroeconomic environment and compares favorably to MTN Ghana’s historical average P/E multiple of 7x earnings since its 2018 IPO.

Finally, it’s worth nothing that despite the change in business mix, our portfolio level ROE is not meaningful different than in times past, largely due to the high expected profitability of our energy companies comparing favorably to that of our consumer-focused investments of years past.

^[1] Excluding one holding company from energy company portfolio metrics

^[2] Our free cash flow yield metric includes maintenance and growth cap ex, and excludes capital spent to acquire incremental acreage.

Changes in KUroto's Geographic Exposures

In addition to the evolution of our sector exposures, our geographic exposure mix has changed significantly over time. For the first fifteen years, Kuroto Fund only invested in Asia. We broadened the fund’s mandate in 2014 to global emerging and frontier markets and, over time, have largely divested from Asia.

Since 2014, the macroeconomic performance of the countries in which we’ve invested have been a mixed bag. Economies like Georgia, Greece, and Cyprus have benefited from sensible economic policies, inflows from tourists and refugees, and EU funding. Our holdings in these markets, which currently constitute 30% of our portfolio, are up several times from their lows and are still trading in the range of 4-5x earnings.

The macroeconomic conditions for our non-energy Africa portfolio companies are a different story. The macroeconomic conditions in Nigeria, Ghana, and Kenya have been abysmal for several years. These countries which were struggling pre-COIVD, emerged from the COVID crisis with unsustainable levels of public debt after real growth rates slowed and government spending spiked upwards during the crisis. These countries have only recently begun the politically painful process of cutting spending to a sustainable level. As a result, these markets' valuations are at the low end of their historical ranges. Our non-energy businesses in these countries trade at 5x earnings and a 9% dividend yield this year.

CONCLUSION

In the past, low valuations have been a prelude to outperformance. Despite all the caveats that we detail in this letter, we believe that depressed valuations of our holdings will be resolved through meaningful outperforming going forward.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.24, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners Precious Metals Fund, L.P. - Q4 2023 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Tue, 30 Jan 2024 01:15:16 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +16.94% in the fourth quarter and finished +0.17% for the full year 2023.

A breakdown of the fund’s exposures and contribution can be found here .

The Politics of Oil & Gold

The price and supply of oil and gold were central to American foreign and economic policy for much of the twentieth century. FDR’s meeting with Abdul Aziz ibn Saud on the deck of the USS Quincy in 1945 secured a long-term oil supply from Saudi Arabia. And, the Bretton Wood’s conference in the summer of 1944 tied the world’s currencies to the dollar and the dollar to gold.

By 2000, the political relevance of oil and gold had ebbed. At the turn of the millennium, oil traded at $25 USD per barrel and gold traded at $288 per ounce. There appeared to be more oil and gold than the market needed, and it was not obvious what America had to gain from actively managing the price or supply of either. So, while American policymakers remained engaged in the oil and gold markets, they understood that the price movements of these two commodities didn’t threaten the world’s security or macro economy.

As market forces asserted themselves and the world's economy boomed, the price of oil increased to $140 per barrel and gold rose to $970 per ounce by the summer of 2008. Rising oil prices were inflationary but not problematic as their effect was more than offset by the deflationary tailwind created by China’s 2000 accession to the WTO. Similarly, gold was gaining appeal as an investment but did not threaten the dollar’s role as the world’s reserve currency. That was then, this is now.

With the return of inflation and the obvious use of the US dollar as a tool of American foreign policy, the supply and price of oil and gold are again clearly political. The $3-trillion-dollar oil market is the largest commodity market in the world, and the price of oil is highly correlated with inflation. Accordingly, in an inflationary environment, the US government is incentivized to actively manage the oil price. Similarly, the world’s $16-trillion dollars of above-ground gold is the only asset class large enough and deep enough to seriously threaten the dollar’s role as the world’s reserve currency. Accordingly, the federal government has an interest in preventing gold price action that makes US Treasury look insolvent or the Fed look impotent.

It is broadly understood that the Biden administration has attached enormous significance to the oil market and is willing to use the power of the American government to suppress the oil price. This suppression helped the Federal Reserve get inflation down and denied Russia a foreign exchange windfall. It is also worth noting that low oil prices should help Biden’s reelection efforts if they can be sustained through November. To achieve the oil price suppression, the Biden administration cut the US strategic petroleum reserve in half and facilitated increased oil production in Iran and Venezuela.

While not explicitly, the federal government also cares about the gold price. In a break with precedent, the New York Fed is refusing to answer basic questions about its participation in the gold market . Importantly, this refusal comes as foreign central banks are buying more than 1,000 tonnes per year in an effort to diversify away from the US dollar. In the case of Russia and China, these purchases clearly reflect a political desire to challenge the dollar. But, in the case of the central banks of the Netherlands and Poland, the gold purchases are driven by growing discomfort with the US fiscal position rather than geopolitics.

Investing in markets that the US government is intent on keeping quiescent has been frustrating over the past eighteen months. Since a spike in the summer of 2022, the oil price has fallen 45% and the gold price is up just 2%. While the past eighteen months have been painful, there is good reason to believe that we are nearing the limits of the US government's ability to suppress these markets.

In the case of oil, the US strategic petroleum reserve has already disgorged 280 million barrels . These barrels can’t be released again. And, support for Iran and Venezuela’s oil production is becoming more of a political liability. The Biden administration pulled out all the stops to suppress the oil price when the Fed's credibility was on the line and there was a possibility that Russia would lose the war in Ukraine. Those moments have both passed.

With respect to gold, not only are the Chinese and Russians done accumulating dollars, but a broad swath of central banks are now committed to acquiring gold. According to a recent World Gold Council survey , 24% of central banks intend to acquire gold over the next twelve months. And, while the US government can easily participate in the market for paper gold, foreign central banks are accumulating physical metal, a much more difficult market to manage. There are also signs that U.S. retail investors are developing a taste for physical gold which they can actually hold. The popularity of one ounce gold bars at Walmart and Costco merits close attention. In the fourth quarter, these two retailers each sold several tonnes of gold. These figures pale in comparison to the 1,000 tonnes foreign central banks bought last year but raise the possibility of growing Western retail demand that would be very hard to manage.

The politics of commodity price suppression are central to the investment opportunity we see in both oil and gold. The American government’s effort to manage the price of oil and gold, while painful at times, is part of a process that produces the opportunity to invest in oil producers and gold mines at prices that don’t reflect the underlying market fundamentals. When the fundaments of the market eventually assert themselves, as we believe they will, we expect the upward revaluation of the companies we own will be substantial.

investment Thesis Review for the TOP 5 POSITIONS BY PORTFOLIO WEIGHT

Endeavour Mining

Endeavour Mining is West Africa’s largest gold miner, forecast to produce 1.2m ounces of gold in 2024 from its mines in Burkina Faso, Cote d’Ivoire, and Senegal. The company recently improved the quality of their asset base in 2023 by divesting of two older assets and discovering an exciting greenfield exploration target that could be their next mine. 2024 will be a pivotal year for the company as it brings on two new projects and shifts from a heavy capex spending cycle into a new period of FCF generation. Specifically, we expect Endeavour to generate $1.2b in cash flow and $800m in free cash flow this year assuming a $2,000 gold price.

As long-term investors, we’ve benefited from Endeavour’s countercyclical investment strategy. The company made two highly accretive acquisitions in 2020 when its peers were paralyzed by the Covid crisis. More recently, Endeavour’s exploration has also become an important value creator. In 2023, Endeavour announced their first greenfield exploration success with the discovery and delineation of Tanda-Iguela in Cote d’Iviore. The Tanda-Iguela resource now stands at 4.5Moz, and the deposit continues to grow. With the Tanda-Iguela discovery, the company is on track to meet their ambitious 5-year discovery target of 12-17Moz by 2025.

Despite the company’s track record of quality execution and growth, Endeavour trades at a 13% free cash flow yield. This modest valuation reflects a very pessimistic view of the jurisdictions in which the company operates and concerns about the recent termination of Endeavour’s longtime CEO, Sébastien de Montessus. While the circumstances surrounding Sébastien’s departure are regrettable, we do not believe that his departure will impact the company’s ability to achieve its near-term goals. We expect Endeavour to continue compound intrinsic value and throw off free cash flow while growing production.

Agnico Eagle Mines

Agnico Eagle is the third largest gold miner in the world, producing 3.3m ounces of gold per year, with 75% of that production coming from Canada. For decades, Agnico has pursued a high-quality, low-risk strategy. With the consolidation of the Canadian Malartic asset and the acquisition of Detour Gold complete, the company is focused on leveraging their large regional infrastructure in Ontario and Quebec, underpinned by 65Moz of resources in the region. (Equivalent to 20 year of future production.)

We believe that Agnico’s regional focus and scale combined will continue to deliver bottom quartile cash costs for many years to come. Specifically, the company’s geographic focus lowers both capital intensity and operational execution risk. We think that the full extent of these benefits is still not properly appreciated by the market.

While Agnico’s massive greenstone belt in Ontario and Quebec is the obvious center of gravity for the company, the company also has substantial operations and exploration projects in Australia, Mexico and Finland. At the moment, Agnico trades in-line with its large cap peer group. In our opinion, the company’s high liquidity, superior jurisdiction, long mine life, and excellent management merit a substantial premium to peers.

West African Resources

West African Resources (WAF) is a gold miner in Burkina Faso in the process of doubling its production. The company’s current producing asset, the Sanbrado mine, has meet its operational targets and FCF expectations, placing the company in a strong position to build its second mine, Kiaka, which is expected to start producing in 2025. Despite the company’s demonstrated track record of operational excellence, WAF trades at just three times last year’s cash flow. This low valuation is due purely to the heightened risk associated with operating in Burkina Faso.

WAF has committed US$500 million to the construction of its Kiaka mine. According to our estimates, at $2,000 gold, the Kiaka project generates a ~30% after-tax IRR. With the M5 pit and ore from Toega extending the mine life at Sanbrado through 2030, the additional production from Kiaka is adding to, not replacing production at Sanbrado. When both Kiaka and Sanbrado are in production, we expect WAF to become the largest gold producer in Burkina Faso, producing over 400,000 ounces per year.

We believe there has been additional selling pressure on WAF stock this past year due to concerns around the financing of their Kiaka build, which has since been resolved. WAF drew US$100 million of its US$265 million loan facility in December. At $2,000 gold, we expect WAF to fund the remaining Kiaka capex through cash on their balance sheet and future free cash flow. Leveraging their FCF without any additional equity dilution is a significant accomplishment we expect to be re-rated once the market has the same degree of confidence.

K92 Mining

K92 operates a high grade, underground gold mine in the highlands of Papua New Guinea. With more than five million ounces of gold equivalent at a grade of more than 8 g/t, K92’s Kainantu mine is indisputably world class.

In 2023, K92 produced ~117,000 ounces of gold equivalent at an estimated All-In Sustaining Cash cost of $1,100 per ounce. Going forward, K92 is projecting annual gold equivalent production will rise to 296,000 ounces 2026 and 470,000 in 2027. At these higher rates of production, All-In Sustaining costs should fall to $900. In 2027, assuming $2,000 gold, the company should generate free cash flow of $330 million and generate an IRR of 17% for the current shareholders.

K92’s attractive valuation is due in large part to the challenges the company has faced ramping up its production in the highlands of Papua New Guinea. The highlands, while offering high geological prospectivity, are notoriously difficult to operate in for both logistical and cultural reasons. Accordingly, the market is heavily discounting the company’s projection of 470,000 ounces in 2027.

For our part, we believe that K92’s almost complete large twin incline together with the raise bore ore and waste pass system represents a step change in the company’s ability to access high grade ore. We are also encouraged by the overwhelming support the company continues to receive from the government and local communities. Accordingly, while we agree that the company’s timeline and ultimate production target will likely slip, we remain confident that K92 will be a large scale, low cost producer of gold for much longer than our current 17-year mine life estimate.

Galiano Gold Inc.

Galiano Gold Inc. is a single asset gold producer that operates and manages the Asanko Gold Mine in Ghana. The Asanko Gold Mine went into production in January 2016 and had historically been a 45%/45% joint venture between Galiano and Gold Fields, with the Government of Ghana owning the remaining 10% equity interest.

On the 21st of December 2023, Galiano announced a binding agreement to purchase Gold Field’s 45% interest in the Asanko Gold Mine for US$20 million in shares, a 1% royalty on up to 447,000 ounces, and future cash considerations of up to US$85 million. This transaction is immediately accretive to Galiano on a cash flow basis and puts a 2.1 million ounces of proven and probable reserves on Ghana’s highly prospective Asankrangwa gold belt entirely under the control of Galiano Gold. Pro-forma, the company has no debt, ~$130 million in cash and a market capitalization of ~$230 million – a valuation which still doesn’t remotely capture the value of the asset.

While this transaction has been discussed for years, it appears that the internal politics at Gold Fields dictated the final timing of the deal. It is noteworthy that this agreement was struck just prior to Michael Fraser’s accession to Gold Field’s CEO role on January 1st, 2024. With this deal now inked, Michael will be free from time consuming JV decision-making process that the historic ownership structure produced.

The transaction is structured to ensure Galiano’s successful expansion, with the timing of future cash payments coming after the cash flow of the asset increases. We expect Galiano’s technically strong management team will waste no time increasing the company’s production to ~240,000 oz per year.

Organizational Update

In December, we parted ways with Daniel Schreck and Stephen Saroki.

Daniel joined Equinox Partners in 2009. Over the past 14 years he worked closely with our clients, cultivated new prospects, and oversaw a significant upgrade in our client communications. Daniel’s client responsibilities have been assumed by Kieran Brennan, who joined us in January 2021 and has been working with Daniel for the past 3 years.

Following a summer internship in 2016, Stephen Saroki joined our team as a full time research analyst in 2018. While a generalist by training, Stephen spent most of his time analyzing gold and silver miners. His company coverage has been picked up by Coille, Alfredo, and Sean.

We wish both Daniel and Stephen well in their next endeavors. Our team of 11 professionals now consists of six investment professionals and five in operations.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q4 2023 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Tue, 30 Jan 2024 00:57:03 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund, L.P. rose 1.07% in the fourth quarter and 19.46% for the full year.

By comparison, the EM index gained 5.6% in the fourth quarter and 10.3% for the full year 2023.

A breakdown of Kuroto Fund's exposures and contribution can be found here.

By way of update on the loss sustained in January of 2023 as a result of a post-execution error involving one of our service providers and FX trades in Nigerian Naira. With assistance from our outside counsel, through arbitration, we were able to recoup a portion of the loss. We have closed this matter and received all loss mitigation proceeds into the Kuroto Fund, LP account.

investment Thesis Review for top 5 Positions by Portfolio Weight

Georgia Capital

Georgia Capital is a London listed holding company with investments in the Republic of Georgia. The group owns 20% of the Georgia’s most profitable bank, largest hospital chain, largest pharmaceutical chain, largest private education group, largest insurance business, a Heineken brewery group, and a vineyard. Georgia Capital trades at roughly half of our estimate of NAV and approximately 4x look-through earnings.

In 2023, Georgia enjoyed a third consecutive year in a row of strong economic growth. After growing 10% in real terms in ’21 and ’22, the country’s economy grew by 6.8% in 2023. The country’s debt to GDP ratio, which peaked at just over 60% during the pandemic, has come down to less than 40% and inflation is again below 2%. This backdrop has provided a tailwind for Georgia Capital’s businesses, especially the bank, which continues to generate close to a 30% ROE on conservative capital ratios. The bank grew its book value 20% in the year while paying out ~10% of its market cap in dividends and share buybacks.

Georgia Capital took advantage of its record cash flow generation to refinance their 2024 debt. After repaying $100 million USD of the debt early, the group refinanced $200 million for 5 years at 8.5% fixed. This refinancing leaves Georgia Capital with a conservative leverage position at less than 15% of group NAV, a position that allows ongoing cash flow to be used in share buybacks, the most attractive capital allocation decision given the stock’s large discount to NAV.

Going forward, we expect the group’s businesses to continue to grow. In 2024, the bank should generate double digit growth while paying a large divided. We expect the other core businesses – healthcare, education, and insurance – to grow earnings by over 10% this year. We also expect the group to trim its investments in capital-intensive businesses, specifically the brewery, wine, real estate, and renewable energy business lines.

MTN Ghana

MTN Ghana, the largest telecom and mobile payments provider in Ghana, generated a 54% return on equity and delivered a 16% dividend yield last year. The company trades at just 3.7 times our estimate of 2024 earnings. Owning such a high-quality business at such a low valuation is attractive even if the Ghanian macroeconomic backdrop remains rough.

Through the first nine months of 2023, MTN Ghana grew revenue and earnings over 30%. This growth outpaced the 24% devaluation in the Ghanian Cedi last year. Inflation in Ghana has begun to normalize, dropping from a peak of 50% to 26% at last count. On the back of the country’s sovereign default, Ghana adopted an IMF program. This program should help the country make some of the necessary, and long overdue reforms. Even so, the Ghanian macroeconomic backdrop remains challenging.

If Ghana’s macro environment does begin to improve, MTN Ghana is well positioned to add to its 2023 growth rate. Additionally, the local stock market should see renewed interest in 2024 as the yield on Ghanian government debt falls. In a slightly more normal macroeconomic environment, we believe that MTN Ghana should trade at twice its current multiple. Even in a difficult economic environment, we expect MTN to maintain margins while paying out most of the earnings as a dividend.

Seplat Energy

Seplat Energy is an oil and gas company with onshore and shallow offshore fields in Nigeria. The company produces around 50k barrel of oil equivalent per day and offered a 10% dividend yield as of year-end 2023. Seplat is exposed to two potentially transformative events, a large-scale onshore gas project and an offshore oil acquisition. The successful completion of the project or the transaction would make Seplat one of Africa’s largest energy companies.

The potentially transformative gas project is the Anoh Gas Processing Plant. This project will make Seplat one of Nigeria’s largest suppliers of natural gas to the Nigerian power grid. A partnership between Shell, Nigeria’s national oil company and Seplat, the Anoh gas project is expected to come online later this year. Once complete, Seplat’s group production will rise from 50k boepd to over 70k. While the project is already a few years behind schedule, we believe that the project should finally be completed this year.

The potentially transformative offshore oil acquisition is Seplat’s acquisition of Exxon Mobil’s shallow water asset in Nigeria. In 2022, Seplat announced an agreement with Exxon to purchase 100k barrels of oil per day shallow water production. The production comes with one of the Nigeria’s largest oil export terminals and enough natural gas reserves for a greenfield LNG project. The agreed-upon price is attractive enough to encourage an assortment of well-connected Nigerians to attempt to purchase the assets in lieu of Seplat. Exxon Mobil, however, has no desire to sell to an entity with questionable corporate governance that lacks the necessary operational expertise. Accordingly, Exxon Mobil has been clear that they wish to sell only to Seplat.

Nigeria’s newly elected president – keen to increase investment into the oil sector – understands that the Exxon Mobil - Seplat transaction is a prerequisite to meaningful additional investment in the sector. Based on our meeting with several interested parties in Lagos this past November, we believe the deal is likely to proceed. If both the Exxon Mobil acquisition is consummated and the Anoh gas project is completed this year, as we think is likely, Seplat’s annual cash flow will rise to well over one billion dollars, which is more than the company’s current market cap.

Kosmos Energy Ltd.

Kosmos Energy is an offshore oil and gas company with assets in the Gulf of Mexico and off the west coast of Africa. The company is in the final stages of a multi-year growth plan that will take production from ~60k to ~90k boepd by mid-2024. At $70 Brent and ~90k boepd, Kosmos will generate ~$500 million USD per year in free cash, a 16% free cash flow yield. At an $80 Brent oil price, the free cash likely grows to $750mn, or a 24% free cash flow yield.

The centerpiece of the company’s growth plan is the Tortue field located off the coast of Mauritania and Senegal. This multi-billion-dollar development is a 50/50 partnership with the supermajor BP. The Tortue field, which is estimated to hold more than 15 trillion cubic feet of gas, will begin producing ~2.5 million tons of natural gas this year with an estimated 30 years of reserve life. Importantly, the Tortue field is just one part of the significant acreage Kosmos holds in Mauritania and Senegal where their total estimated inventory ranges from 50-100 tcf of gas. Kosmos plans to bring additional LNG projects online from these fields every couple of years over the next decade.

The development of such a massive LNG project requires a world-class team. BP is the operator, but Kosmos discovered the assets and is working closely on all aspects of the project. Kosmos’ close partnership with BP is a testament to the quality of the team that Kosmos’ CEO, Andy Inglis, has built. Andy, the former head of BP’s global exploration and production business, has been able to attract top tier talent as the supermajors de-emphasized deep water exploration.

Andy also understands the importance of generating a rapid payback on Kosmos’ investments. Accordingly, he has organized the Kosmos portfolio around existing infrastructure, allowing for quick and cheap tiebacks in the case of exploration success. Once Kosmos’ first LNG project is online next year, we expect Kosmos to re-rate significantly. Longer term, we expect Kosmos to continue to grow by bringing their already discovered resources online with internally generated capital.

Guaranty Trust Holding Company

Guaranty Trust is Nigeria’s best bank. Known for the honesty of its management, the trustworthiness of its financial statements, conservative lending practices, and a low cost structure and higher profitably, Guaranty Trust is unique among Nigeria’s banks. Guaranty Trust generates a sector-leading ROE of about 30% and at year-end, traded at 2.9x our forecast of ’24 earnings, 0.8x book, and offered a 19% dividend yield.

Nigeria’s economic and political backdrop is improving. The new government devalued the currency, ended the fuel subsidy, and is focused on boosting the country’s oil and gas production. Guaranty Trust was well positioned for this devaluation with its large USD asset mix and short duration investment book. In the first 9 months of 2023, Guaranty Trust booked a gain of 384bn Naira from the devaluation, equivalent to 34% of the group’s market cap. Further gains are likely to come as the Nigerian currency falls further. In addition to these gains, the higher interest rates are helping Guaranty Trust boost its net interest income which will allow for sustained higher profitability going forward.

When the Nigerian economy eventually normalizes, Guaranty Trust will be in a perfect position to capitalize on a return to strong growth. Given Nigeria’s low financial products penetration rate, there is white space to grow the loan book. Moreover, many of Guaranty’s peers are short of capital due to the difficult economic environment. Guaranty does not have the same issue and will be positioned to grow its loan book rapidly when the environment improves whereas its peers will be forced to retain capital to increase reserves.

organizational Update

In December, we parted ways with Daniel Schreck and Stephen Saroki.

We wish both Daniel and Stephen well in their next endeavors. Our team of 11 professionals now consists of six investment professionals and five in operations.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q4 2023 Letter

kbrennan@equinoxpartners.com (Kieran Brennan) — Tue, 30 Jan 2024 00:03:51 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners, L.P. declined -8.87% in the fourth quarter and –11.4% for the full year.

Equinox Partners’ 2023 decline follows four strong years of performance. Over the five-year period from January 2019 through the end of December 2023, our fund delivered a 174% cumulative net return and a 22.3% compounded annual growth rate. Oil and gold, our largest commodity exposures, were both up, with WTI Crude rising 57.5% and the spot gold price rising 61%. The equities linked to these commodities enjoyed positive performance as the Canadian Energy index appreciated nearly 100% and the Junior Gold Mining index rose 30% cumulatively. Within the Equinox portfolio, we outperformed both the Canadian Energy and Junior Gold Mining indices since the end of 2018.

Going forward, we anticipate higher gold and oil prices and believe that our producers of these commodities are deeply undervalued. We also believe that the severe volatility that continues to characterize the commodity complex offers us an exceptional opportunity to add value through our concentrated stock picking. In today’s commodity price environment, our portfolio of undervalued companies should generate reasonable rates of return. In a better commodity price environment, we expect our portfolio to compound rapidly.

Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail.

Bloomberg Commodity Index Chart 2019 - 2023

Down 27.7% since June 2022 peak

S ource: FactSet

The Politics of Oil & Gold

investment Thesis Review for the TOP 5 EQUITY LONG POSITIONS BY PORTFOLIO WEIGHT

Crew Energy Inc.

Crew Energy, an oil and gas company based in British Columbia with over 2,700 identified potential drilling locations in the Montney, is a likely takeover target as LNG Canada ramps up and expands.

The LNG Canada export facility should begin receiving gas later this year and reach full capacity in 2025. At full capacity, LNG Canada will takeaway 2bcf/d of British Columbia’s 6bcf/d of gas production. Should LNG Canada expand its capacity by twinning its existing pipeline, LNG’s offtake capacity will grow to 4bcf/d. Crew controls perfectly located natural gas assets that can help meet the incremental gas demand from LNG Canada.

To maximize Crew’s value in a transaction, management would like to buildout the company’s infrastructure and grow production as quickly as possible. That said, management and the board will not over-lever the company to finance this expansion. Accordingly, in 2023, as gas prices and cash flow fell, the company simply maintained its production and advanced some of the less capital-intensive parts of the expansion plan, i.e. permitting and plant design. If gas prices rise, Crew will expand more aggressively.

In today’s low gas price environment, Crew is working to prove up as much of its acreage as it can. This is a relatively low-cost way to add value in a transaction. To put Crew’s resources potential value in context, at the end of 2022, Crew held $1.4bn CAD of proved and probable reserves. This figure, which is twice the company’s $700bn CAD enterprise value, only includes 198 drilling locations.

Paramount Resources Ltd.

Paramount Resources is an oil and gas company based in Alberta which produces ~100k barrels of oil-equivalent per day. At $70 oil (WTI) and $3 natural gas (AECO), the company will generate 10%+ production growth and a 5% dividend yield. At $80 WTI, the total return (growth + free cash flow) will comfortably exceed 20%.

Paramount budgeted for 15% production growth in 2023 but delivered 9%. The 2023 production shortfall is a result of a third-party processing facility and is unlikely to reoccur. In 2024, we expect Paramount to grow production 16% while spending well within cash flow. We also expect the company to pay out $220mn CAD in dividends, a 5.8% yield on the current share price.

Paramount’s principal growth driver over the next five years is in the Willesden Green area of the Duverney Shale Basin. Paramount is positioned to grow production in this area to 50k barrels of oil equivalent per day by 2028. The Willesden Green project will generate significant additional free cash for the company and should provide attractive full-cycle returns given the company’s relatively low cost of entry to the play.

Finally, it is important to note that Paramount is likely in the process of bidding on Chevron’s Duverney assets. The Riddell family, which controls Paramount, has an outstanding track record of counter-cyclical value creation. Given that Chevron is a motivated seller and there are few qualified buyers, we expect Paramount to submit a very disciplined bid. The rumored price of the deal is $900MM USD. At that price, the deal should be highly accretive to Paramount.

International Petroleum Corporation

International Petroleum Corporation (“IPCO”) is an upstream oil and gas company with assets in Canada, Asia and Europe. The business went from strength to strength in 2023 as they beat production guidance, made a final investment decision on its 1.3 billion barrel of oil equivalent Blackrod field , elevated a member of the company’s controlling shareholder to CEO, and bought back 7% of the shares outstanding.

IPCO’s ability to make so much strategic progress in a weak oil market is a testament to the company’s strong cash generation. At $75 WTI, the company’s existing portfolio of assets generates a 14% FCF yield. This predictable cash generation enabled the company to both commit to the development of the Blackrod project in Alberta while returning over $100 million USD to shareholders through share buy backs in 2023. IPCO’s combination of rapidly growing production and a shrinking share count is unique in our portfolio of oil and gas companies.

With over 1.3 billion barrels of oil recoverable and an initial production of 30,000 boepd, the Blackrod project will almost double IPCO’s production. Blackrod already accounts for a majority of the company’s 2P reserves and is far and away IPCO’s most valuable asset. Importantly, with 65% of the construction costs locked in, IPCO will be able to internally finance the project even in a weak oil price environment.

The company’s ability to both move forward with Blackrod, while at the same time buying back stock, testifies to the Lundin Group’s smart capital allocation decisions. We expect the first oil at Blackrod in late 2026, and when the project completes the ramp-up, Blackrod will boost IPCO’s production and free cash flow generation significantly.

Kosmos Energy Ltd.

Galiano Gold Inc.

Organizational Update

In December, we parted ways with Daniel Schreck and Stephen Saroki.

We wish both Daniel and Stephen well in their next endeavors. Our team of 11 professionals now consists of six investment professionals and five in operations.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners Precious Metals Fund, L.P. - Q3 2023 Letter

Tue, 31 Oct 2023 20:55:28 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. declined -13.6% in the third quarter of 2023 and is down -14.3% for the year to date through September 30th, 2023.

Visit our performance page to view the Precious Metals Fund strategy summary in more detail.

bear market in Gold Mining

Since peaking on August 5th, 2020 at $65.95, the GDXJ Junior Gold Mining ETF is down 48%. Even this decline understates the extent of the bear market for most junior gold mining companies. Smaller gold mining companies, which constitute the majority of the publicly listed gold miners, have experienced a much more severe bear market over the past three years. Of the 654 publicly listed gold miners in August 2020 with a market cap between $250m to $10m, the median company—which today has a market cap of just $30m—is down 69.8% from the August 2020 peak.

As small gold mining companies have gone bid wanted over the past three years, we’ve been buyers of their deeply discounted shares. Since the fund’s inception in January 2021, we’ve invested $7m in exploration-stage gold and silver mining companies. Most of this capital has been allocated to companies with market caps of less than $100m. Through these purchases we have maintained a 28% portfolio weighting to these smaller companies despite the relentless decline in share prices.

Small, pre-production mining companies have been particularly hard hit by the increases in permitting timelines, costs, and discount rates. Each of these headwinds merits analysis:

Permitting: A growing number of regulatory hurdles are making it increasingly difficult to translate a discovery into a mine. According to Scotiabank, on average, whereas it took roughly 9 years from discovery to production twenty years ago, it now takes 15 years to go through the same process. This longer timeline is the result of increasingly onerous environmental regulations and political headwinds that have slowed mine development globally.

Costs: On average, the cost to build and operate a gold mine has risen by more than 20% over the past three years. These costs vary materially by region and type of mine. Nevertheless, the general direction of costs is up substantially. While some inputs, most notably steel, have retraced much of their post COVID runup, other costs, most notably labor, have continued to rise. Rising costs and a flat gold price have combined to make undeveloped gold mines less valuable, all other factors being equal.

Discount Rates: Since the summer of 2020, the yield on the 10-year U.S. Treasury has risen from 0.64% to 4.8%. Accordingly, market participants are using a higher discount rate to value future free cash flows. This discount math has a particularly negative impact on pre-revenue mining companies with free cash flow in the distant future. Eventually, a higher gold price should more than offset these higher discount rates, but that has not happened yet.

This headwind trifecta has made it hard to sell unpermitted mining projects at attractive prices or even fund the drilling, engineering, and environmental work necessary to progress these projects though the permitting process. As a result, a growing number of unpermitted deposits linger on the balance sheets of junior gold mining companies and are valued at less than they cost to discover. Put bluntly, exploration companies are now being punished for their exploration successes as well as their exploration failures. The stock market has effectively issued a cease-and-desist order to junior gold miners.

While the fundamental headwinds facing undeveloped deposits are real, the decline in the share prices of junior gold miners has become irrational and indiscriminate. At this point, sector specialists continue to sell, not because of the poor fundamentals, but because they are facing redemptions. Likewise, potential acquirers are not on the sidelines because they find the explorers financially unattractive, but because the market will likely punish them for making non-cash-flowing acquisitions. From our perspective, this is the perfect time to load up on high-quality undervalued companies that should trade at multiples of their current market caps if and when larger mining companies eventually decide to replenish their inventory of projects or grow through acquisition.

Our purchases

Since January 2021, we’ve added 12 exploration companies to our portfolio. Specifically, we’ve bought: Azimut, Borealis, C3, Dore Copper, Gelum, GoGold, Great Pacific Gold, HighGold, Integra, Japan Gold, Thesis, and Wolfden.

On portfolio weighted average basis, the exploration companies for which we have metrics collectively trade at $33 per ounce of gold and have an average IRR of 21% at spot gold prices based on our analysis.

Estimates based on internal analysis. Valuations based on comparable transactions per ounce using likely economic ounces (i.e. “Measured and Indicated” ounces) from company-specific technical studies.

We also have ~8.7% of partners’ capital invested in earlier-stage gold mining companies that haven’t published enough data for us to reasonably calculate their IRR. We believe these companies are severely undervalued, but we can’t clearly express this view with a uniform metric of valuation like IRR.

Investments in producing mining companies remain the largest component of our gold mining portfolio, accounting for a 61% weighting in the fund. Over the past three years we’ve initiated new positions in six producers: Agnico Eagle Mines, Argonaut Gold, B2Gold, Ero Copper, Hochschild Mining, and SilverCrest Metals. On a weighted-average basis these companies trade at $205 per ounce, compared to $33 per ounce for our new explorers. These producing companies offer an IRR of 12% at spot gold based on our analysis. Importantly, these companies don’t entail the same permitting and financing uncertainty of our exploration companies.

To date, our countercyclical investment in explorers has been painful. Our explorers are down on average 73% from the Jan 2021 fund inception, i.e. they have performed almost exactly in line with the 654 publicly listed gold miners that had a market cap between $250mm to $10mm in August of 2020. By comparison, our producers are down 23% over the same period. It has been a challenging three years for almost all gold miners, but exploration companies have been hardest hit, ours included.

Countercyclical Investing

Most dedicated gold-mining investors allocate capital pro-cyclically, buying as prices rise and selling as they fall. They tend to have investment horizons that are shorter than the gold cycle and take in capital as valuations rise and return capital as valuations fall. Needless to say, buying high and selling low makes it very difficult to add value over a full cycle. A better strategy is to invest when capital is fleeing the space at low prices and exit at attractive prices as capital pours in.

To take advantage, rather than be a victim, of the cycle in the gold mining space is easier said than done.

Countercyclical gold mining investing requires asset managers with a clear view of the gold price and like-minded clients. In our case, we believe that our long-term view of gold and our high-conviction clients give us this opportunity. Accordingly, when capital dries up in the gold mining sector and gold miners go bid wanted, we seek to judiciously increase our exposure to the most depressed segments of the market, just as we have over the past three years. During periods such as these, the unfinanced gold miners tend to offer the best opportunity to own high-quality assets at deeply discounted valuations.

But, even for very long-term investors, the critical variable to keep in mind when countercyclically investing in pre-revenue companies is time. When will this asset generate cash flow or be sold at an attractive price? What dilution will you suffer in the interim? Will the company be forced into an undesirable transaction while you wait? Taking account of these various factors is best done in an Internal Rate of Return (IRR) rather than a Price to Net Asset Value (P/NAV) framework.

IRR instead of P/NAV

IRR methodology captures the timing uncertainty that characterizes pre-revenue mining projects. If the years of drilling and studies are going to become a decade, the IRR calculation can accurately quantify that risk whereas the more conventional P/NAV methodology tends to underestimate the cost of lengthy project delays. Similarly, should years of forced dilution precede a construction decision, an IRR distills that risk much more accurately than the P/NAV conventional metric used in the gold mining sector today. The IRR calculation is, of course, only as good as the quality of the assumptions used. And, in those cases in which a company’s only plausible path to value realization is to sell the company, healthy skepticism needs to be applied to the numbers as such transactions are rare.

Despite all the challenges facing junior mining companies and all the necessary caveats about investing in pre-revenue companies, at today’s extraordinarily low valuations, the likely returns are eye-popping in our view. Importantly, these IRRs assume a continuation of the existing environment in which capital is very expensive for the sector and the exit price is a fraction of what it has been historically. If the gold price were to rise and the stocks of these companies were to follow suit, the IRRs would rise rapidly as these companies’ cost of equity capital would decline.

An Example: Thesis Gold

Thesis Gold, a 2.8% position in Equinox Partners Precious Metals Fund, L.P., typifies the combination of a growing intrinsic value and a declining share price that we find so attractive. Despite the company’s consistent exploration success, the company’s market cap has been cut in half since August of 2020.

In August of 2020, Thesis Gold had a resource of just 570,000 ounces and a massive drilling program ahead of it. Following a $60m CAD drilling campaign and the acquisition of an adjacent high-grade gold resource, the company has defined 3m ounces of gold and has a clear path to outline 5m ounces by mid-2024.

When in production, we expect Thesis to deplete at 3.9m ounces over 12 years, achieving an annual production of ~300,000 ounces at an all-in-sustaining cost of $1,200 per ounce. With an initial capital expenditure of ~$600m CAD, the company offers a potential acquiror a mid-teens IRR even after paying twice the current share price. Moreover, there are only a handful of undeveloped, potential +300,000 ounce per year assets globally, and none, in our opinion, of this quality in Canada.

According to our estimates, Thesis Gold will generate a 26% IRR for current shareholders. The company currently trades at a ~50% discount to the ~$135m CAD the company spent to define its resource. The market is saying that one of the most successful drill programs in Canada over the last decade destroyed roughly half of the capital spent. This is not only unreasonably pessimistic, but an exceptional investment opportunity in our opinion.

Sincerely,

Equinox Partners

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q3 2023 Letter

Mon, 30 Oct 2023 18:30:22 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners gained 2.8% in the third quarter of 2023 and is down -2.6% for the year to date through September 30th.

Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail.

bear market in Gold Mining

As small gold mining companies have gone bid wanted over the past three years, we’ve been buyers of their deeply discounted shares. Since the summer of 2020, we’ve invested $42m in exploration-stage gold and silver mining companies. Most of this capital has been allocated to companies with market caps of less than $100m. Through these purchases we have maintained an 11% portfolio weighting to these smaller companies despite the relentless decline in share prices.

Small, pre-production mining companies have been particularly hard hit by the increases in permitting timelines, costs, and discount rates. Each of these headwinds merits analysis:

Rising Cost s: On average, the cost to build and operate a gold mine has risen by more than 20% over the past three years. These costs vary materially by region and type of mine. Nevertheless, the general direction of costs is up substantially. While some inputs, most notably steel, have retraced much of their post COVID runup, other costs, most notably labor, have continued to rise. Rising costs and a flat gold price have combined to make undeveloped gold mines less valuable, all other factors being equal.

Our purchases

Since the summer of 2020, we’ve added 17 exploration companies to our portfolio. Specifically, we’ve bought Adventus, Almadex, Azimut, Azucar, Bluestone, C3, Dore Copper, Gelum, GoGold, Goldquest, Integra, Japan Gold, Regency Silver, Roscan, Thesis, Troilus, and Wolfden.

On portfolio weighted average basis, the exploration companies for which we have metrics collectively trade at $19 per ounce of gold and have an average IRR of 33% at spot gold prices based on our analysis.

We also have ~3.3% of partners’ capital invested in earlier-stage gold mining companies that haven’t published enough data for us to reasonably calculate their IRR. We believe these companies are severely undervalued, but we can’t clearly express this view with a uniform metric of valuation like IRR.

Investments in producing mining companies remain the largest component of our gold mining portfolio, accounting for 16% of Equinox Partners, L.P. Over the past three years we’ve initiated new positions in five producers: Argonaut, Eldorado, Galiano, Hochschild, and K92. On a weighted-average basis these companies trade at $64 per ounce, compared to $19 per ounce for our explorers. Despite their higher valuation per ounce, these producing companies offer a very attractive IRR of 28% at spot gold based on our analysis. Importantly, these companies don’t entail the same permitting and financing uncertainty of our exploration companies.

To date, our countercyclical investment in explorers has been painful. Our explorers are down on average 70% from their 2020 peaks, i.e. they have performed almost exactly in line with the 654 publicly listed gold miners that had a market cap between $250mm to $10mm in August of 2020. By comparison, over the same period, our producers are down a cumulative 48%. It has been a challenging three years for almost all gold miners, but exploration companies have been hardest hit, ours included.

Countercyclical Investing

To take advantage, rather than be a victim, of the cycle in the gold mining space is easier said than done.

IRR instead of P/NAV

Despite all the challenges facing junior mining companies and all the necessary caveats about investing in pre-revenue companies, at today’s extraordinarily low valuations, the likely returns are eye-popping in our view. The 20 pre-revenue mining companies we own have a weighted-average IRR of over 30% at spot gold, based on our estimates. Importantly, these IRRs assume a continuation of the existing environment in which capital is very expensive for the sector and the exit price is a fraction of what it has been historically. If the gold price were to rise and the stocks of these companies were to follow suit, the IRRs would rise rapidly as these companies’ cost of equity capital would decline.

An Example: Thesis Gold

Thesis Gold, a 1% position in Equinox Partners, L.P., typifies the combination of a growing intrinsic value and a declining share price that we find so attractive. Despite the company’s consistent exploration success, the company’s market cap has been cut in half since August of 2020.

According to our estimates, Thesis Gold will generate a 28% IRR for current shareholders. The company currently trades at a ~50% discount to the ~$135m CAD the company spent to define its resource. The market is saying that one of the most successful drill programs in Canada over the last decade destroyed roughly half of the capital spent. This is not only unreasonably pessimistic, but an exceptional investment opportunity in our opinion.

Sincerely,

Equinox Partners

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q3 2023 Letter

Thu, 26 Oct 2023 21:57:23 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund appreciated +7.7% in the third quarter and gained +18.2% for the year to day through September 30th, 2023.

Visit our performance page to view the Kuroto Fund, L.P. fund summary in more detail.

QUARTERLY SALES AND PURCHASES

In the third quarter of 2023, we sold two technology companies that we had owned for years as well as a recent vintage Brazilian oil and gas investment. The tech companies, FPT and Logo Yazilim, are great businesses but not undervalued. We exited these companies at a high-teens price-to-earnings multiple on forward earnings. The Brazilian oil and gas producer, while very cheap on projected cash flow, has struggled to grow production according to plan. In all three cases, we felt there were more attractive opportunities for our partners’ capital.

We redeployed a portion of the funds we raised from these sales into two dominant banks trading well below book value and generating 20%+ ROEs. We also purchased a high margin specialty chemicals business trading at a mid-single digit earnings multiple once its new plant ramps up and a West African offshore oil and gas producer with a 30%+ free-cash-flow yield. At the end of the third quarter, our weighting to oil and gas companies was 37%, close to where it stood at the beginning of the year.

NIGERIA Improves

21% of Kuroto Fund is exposed to Nigeria. It is important to note that almost half of our Nigerian exposure derives from oil and gas companies with operations in Nigeria. While these oil and gas companies are Nigerian taxpayers, they are U.S. dollar earners and not directly impacted by the Nigerian macroeconomic situation. Moreover, given these companies’ well-structured investment agreements, their existing production is largely insulated from Nigerian politics.

Excluding the aforementioned oil and gas investments, 11.5% of our partners’ capital is invested in Nigeria, the vast majority of which is invested in Guaranty Trust Holding Company—the nation’s best and largest bank. We have followed Guaranty Trust for more than a decade and have invested in it in the past. We initiated a new position in Guaranty Trust in the beginning of January and continued to accumulate shares during the first quarter. Price appreciation took the position over a 10% weight during the summer. As the country’s best bank, we believe Guaranty Trust is uniquely positioned to withstand Nigeria’s difficult environment and thrive should things improve.

On February 25th of this year, Nigerians elected Bola Tinubu as their president. Tinubu ran on a plan of normalizing Nigeria’s economic policy. Specifically, he promised one exchange rate, the removal of fuel subsidies, and an increase in oil production. Tinubu’s promise of quick reform was seen as credible by the market because of his track record as governor of Lagos State—the country’s largest state with an economy comparable in size to that of Ghana.

To his credit, President Tinubu has delivered. On May 29th, his first day in office, he removed Nigeria’s fuel subsidy. He then fired the head of Nigeria’s central bank and has worked to unify the country’s various exchange rates. While the exchange rate normalization is still a work in progress, there has been a large devaluation and the spread between the informal and official rate has narrowed drastically. Also, he has begun to improve the security situation in the Niger Delta, a prerequisite to higher Nigerian oil production. Oil production has increased modestly in the past several months, but it will take time to reach pre-pandemic numbers. While Tinubu’s reforms helped him win the presidency, the adjustment process will prove difficult. Nigerian consumers and businesses have been hit hard by the removal of the fuel subsidy and lower official exchange rate. It will still take some time for the benefits of Tinubu’s tough medicine to be felt throughout the economy.

As the best managed bank in Nigeria, Guaranty Trust has a solid balance sheet, conservative lending practices, and a net long U.S. dollar position. As a result, the bank is perfectly positioned to withstand Nigeria's short-term economic pain. Guaranty Trust Bank’s conservatism stands in stark contrast to its more aggressive peers. In recent years, as Guaranty Trust moderated its growth, other Nigerian banks took market share. As the Nigerian economy struggles, these market share grabs look increasingly imprudent. One of Guaranty Trust’s biggest competitors, FBN Holdings, was recently forced by regulators to raise equity at a large discount to book. We suspect that several other Nigerian banks will have to follow suit. Guaranty Trust, by contrast, just booked a massive gain on its U.S. dollar exposure and has an overcapitalized balance sheet.

Guaranty Trust’s increasingly dominant position should really payoff if and when the Nigerian economy normalizes. The opportunity to grow lending profitability in Nigeria is enormous. Retail credit to GDP is around 20% in Nigeria compared to 100% in many other emerging market countries. And with only 26% of Guaranty Trust’s assets currently lent to its bank customers, the growth opportunity for the bank is clear when the Nigerian economy stabilizes. In addition to the growth opportunity, Guarantee Trust should experience a healthy increase in its net interest margins as the country raises rates to stabilize its currency.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 9.30.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners Precious Metals Fund, L.P. - Q2 2023 Letter

Wed, 02 Aug 2023 17:45:18 GMT

Dear Partners and Friends,

PERFORMANCE

The Equinox Partners Precious Metals Fund, L.P. declined -6.6% in the second quarter and was down -0.9% in the first half of 2023.

Visit our performance page to view the Equinox Partners Precious Metals Fund, L.P. fund summary in more detail.

OUR BEST INVESTMENTS IN A BEAR MARKET FOR MINERS

Equinox Partners Precious Metals Fund, L.P. is down -30% since the start of the fund in January 2021. The passive Van Eck Junior Gold Miners ETF (GDXJ) is down -32% over the same period.

Historically, the performance of our gold miners hasn’t been this closely tethered to the GDXJ. We run a concentrated and high active share portfolio (85% active share as of June 30th, 2023) and there is a wide distribution of outcomes in the gold mining sector. Over time, these factors should generate differentiated performance.

We attribute our high correlation with the GDXJ over the past two and a half years to a suffocating bear market in gold mining. Persistent sector-wide declines have made it very difficult to generate our desired returns, particularly in smaller, pre-revenue companies. Exit opportunities at attractive valuations have become increasingly rare as the value of undeveloped ounces has declined. Economic but undeveloped ounces in desirable jurisdictions once traded between $100 to $200 per ounce, and now we see comparable assets valued between $10 and $20 per ounce.

The valuation compression in companies with undeveloped assets has weighed on our fund’s returns. However, rather than shift out of these companies into the larger, higher-multiple cash flowing companies, we have been adding to our holdings of companies with undeveloped assets with the view that the forthcoming strong market for gold and silver mining will see these companies rerate upwards dramatically. Accordingly, our allocation to undeveloped and unfinanced assets has risen from 8% to 15% since the beginning of 2021.

At the same time, the majority of our fund remains invested in companies that are currently cash flowing and/or are in construction. Our top three contributors since the fund’s inception, Bellevue Gold, Emerald Resources, and Endeavour Mining, each fit at least one of these two descriptions. Bellevue is building its first asset which is slated to go into production later this year. Emerald has successfully developed one cash-flowing asset and is now developing a second. Endeavour is a large, profitable senior gold miner that is growing while simultaneously generating and returning free cash flow. This letter will review each of these successful investments in more detail.

BELLEVUE GOLD

metrics from inception of position

- First bought: November 2021 / Current holding

- Dollar contribution: $0.3m

- Fund contribution: +1.1%

- Return of stock from initial purchase: +34%

- Return of fund from initial purchase: -22%

We invested in Bellevue four years after the company’s greenfield discovery in Western Australia. At that time, the market had lost interest in the company despite the increasingly attractive economics of the Bellevue deposit. By the spring of 2021, Bellevue had both a feasibility study and a 2.7m ounce resource at 9.9 grams per tonne. The quality of the management team was also a clear positive. Several members of Bellevue’s management team previously worked for Northern Star, a successful Australian producer with high insider ownership, underground mining expertise, and a culture of delivering on goals.

In 2022, Bellevue secured a $130m debt facility from Macquarie at attractive terms (~8.5% interest) and began construction. The mine is on budget, on schedule, and the first-gold pour is expected by the end of 2023. Once in production, Bellevue’s mine will average ~200,000 ounces of production over the first five years at an all-in sustaining cash cost of just $660-730 per ounce, making Bellevue one of the highest margin gold producers globally.

Despite the rerating that has occurred since 2021, we believe there is still significant upside in Bellevue. The company’s 50,000m exploration drill program is likely to sketch out additional resources. The Bellevue deposit is essentially open along strike and at depth, which makes it probable that the drilling campaign will be able to significantly extend the current 10-year mine life.

We sold half of our position this spring when one of the company’s founders and managing director, Steve Parsons, resigned and sold much of his stock. We are still unclear why he left and why he sold so much of his stock in the middle of the construction process. Despite that worrisome data point, we expect the company to reach commercial production in the first half of 2024 and the stock to rerate upwards. Evidence of this re-rate potential was demonstrated by the stock’s performance when the company announced a tolling agreement which generates ~$17m and de-risks the balance sheet future.

*Note: above financial metrics converted from $AUD denominated metrics to $USD metrics at an 0.66 $AUD/$USD exchange rate.

EMERALD RESOURCES

metrics from inception of position

- First bought: January 2021 / Current holding

- Dollar Contribution: $0.5m

- Fund Contribution: +2.2%

- Return of stock from initial purchase: +108%

- Return of fund from initial purchase: -29%

We took a position in Emerald in large part due to our confidence in the Managing Director (CEO) Morgan Hart. Morgan had an outstanding operational track record as COO of Equigold and Regis Resources. Additionally, Morgan and his team made sizeable purchases of Emerald stock with their own money.

We were also attracted to the economics of Emerald’s high-grade, open-pit mine in Cambodia: the Okvau project. With its attractive grade and strip ratio, it was obvious to us that Okvau would be highly free cash flow generative. The final outstanding question in our due diligence was in regards to Cambodia. While Cambodia had no history with foreign mining companies, Morgan had shown an ability to advance a project and obtain permits quickly. Accordingly, we participated in the construction financing in 2020 across our other funds.

Thus far, our confidence in Morgan has been well rewarded. Morgan and his team built Okvau on time and under budget, a particularly impressive feat given most of the construction took place during COVID. With an all-in sustaining cost of ~$800 per ounce, Okvau is among the lowest cost mines in our portfolio. Given the significant exploration potential both at depth and near the mine at Okvau, we are confident that there are many more years of mine life at Okvau that haven’t yet been formally placed in the mine plan.

Beyond Okvau, in May of 2022 Emerald made a strategic investment in Bullseye Mining Limited of Australia. Emerald currently owns ~60% of the company and is in the process of consolidating their ownership by buying out the remaining shareholders. Once Emerald gains a larger equity ownership of Bullseye, we expect it to begin developing a high-grade, open-pit mine and aggressively begin exploring the Bullseye land package in Western Australia. As the market has started to give Morgan and his team more credit for their serial success, we recently reduced our position as the stock rallied.

ENDEAVOUR MINING

metrics from inception of position

- First bought: January 2021 / Current holding

- Dollar contribution: $0.2m

- Fund contribution: +0.8%

- Return of stock: +12%

- Return of fund: -29%

Endeavour Mining is a well-run gold mining company focused on the underexplored geology of West Africa. This focus on scaling in West Africa has given the company a durable competitive advantage in its ability to add new mines with industry leading economics. CEO Sebastien de Montessus and his management team have executed on ambitious growth plans and Endeavour today produces over 1 million ounces of gold annually. Naguib Sawiris, the company’s largest shareholder and a non-executive board member, has also played a critical role keeping the company strategically disciplined.

In addition to Endeavour’s West African geographic focus, the company further defines its strategy as a portfolio of assets with 10+ year mine lives, targeting sub-$1000 per ounce AISC, and the ability to unlock growth organically through exploration. The company has consistently delivered on these objectives while maintaining a strong balance sheet and shareholder-capital-return policy. In pursuit of this strategy, the company has made well-timed acquisitions and divested older, higher-cost assets. More recently, Endeavour’s strong performance has been a result of its exploration success and its ability to execute construction of new projects on-time and on-budget.

Since 2016, the company has discovered 15m ounces at a discovery cost of less than $25 per ounce. Many of these ounces have been brownfield ounces which has helped extend mine lives and bring forward higher grade production at a rapid pace. In 2021, the company outlined its plan to discover another 12-17 million ounces over a five-year period. Success on this plan will ensure Endeavour’s portfolio is set-up to operate for many years to come and will generate strong free cash flow from those ounces.

Endeavour has also demonstrated its ability to find and advance greenfield assets: in 2023 the company presented its discovery of Tanda-Iguela in Cote d’Ivoire. The company staked this land package for minimal amounts of upfront capital and has gone on to find over 3m ounces at a cost of less than $10 per indicated ounce. These types of discoveries make Endeavour unique in its ability to simultaneously optimize the current portfolio of producing assets while also growing the pipeline for the next decade of production.

Lastly, Endeavour is intent on returning capital to shareholders, maintaining both a clear dividend policy and flexible share buyback program. Since the company originally outlined the policy in 2021, Endeavour has bought back over $235m in stock and paid $340m in dividends. If the gold price remains above the $1,500 per ounce level, shareholders can expect $150m paid in dividends annually, representing an approximate 3% dividend yield at the current share price. We expect these payouts to increase substantially once the company wraps up ongoing, large capex projects that are diverting some of its current cash flow.

Sincerely,

Equinox Partners

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q2 2023 Letter

Mon, 24 Jul 2023 21:27:11 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners declined -1% in the second quarter and was down -5.2% in the first half of 2023.

Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail.

investing through bull and bear markets

We recently reviewed our best ideas over Equinox Partners’ 28-year history. Our long-term performance can be divided into two distinct periods: the fifteen years prior to 2011 and the twelve years since. During the fifteen years from 1994 fund inception to the end of 2010, Equinox compounded at 20.4% per year. Over the past twelve years, Equinox has compounded at 3.0%, bringing our 28-year annualized return after all fees to 12.6%.

Our best investments prior to 2011 are easy to identify. We took meaningful positions in undervalued companies, and they appreciated dramatically. For example, we bought RJR near its lows in 2000. Over the next two and a half years, the stock more than trebled. Even more impressively, Inco Indonesia, which we purchased in early 2003, increased almost fifteen-fold by the fall of 200 6. We didn’t trade around these positions, nor did we need to. Our good stock picking was quickly rewarded as capital regularly flowed into the sectors in which we were invested.

Our experience since 2011 has been the exact opposite. Over the last twelve years, gold miners have been in a deep bear market, oil and gas companies declined then recovered, and emerging markets have drifted sideways (see below). As capital has sought returns elsewhere, our best performing investments in this period have not been buy-and-hold. Instead, our returns over the last twelve years have largely come from our ability to add to positions when companies become particularly cheap and exit those positions when they rerate.

To illustrate how we have achieved positive, albeit modest, returns in these challenging markets, we’ve reviewed four investments that have generated a meaningful P&L and made a sizable contribution to our fund’s performance since 2011. We’ve constrained the P&L to the period from January 1, 2011 to June 30 ^th , 2023, and selected companies that provide a representative sample of the markets in which we’ve been most actively invested. Specifically, we selected two energy companies, a mining company, and an emerging market company for our case studies.

PARAMOUNT RESOURCES

metrics from inception of position

- First bought: March 2013 / Current top 10 holding

- Dollar contribution: $10m

- Fund contribution: +27%

- Return of stock from initial purchase: -24%

- Return of fund from initial purchase: +75%

When we invested in Paramount in 2013, we were already very familiar with the company’s assets and management. We owned the company previously and a colleague had served on the board for years. As a result of our experience and long-standing connection with the company, we had a favorable opinion of Paramount’s assets and the Riddell family, Paramount’s controlling shareholder.

Despite our deep knowledge of the company, our 2013 investment was particularly ill-timed. We failed to appreciate the extent of OPEC’s strategic response to the rapid growth of U.S. shale production. Accordingly, when OPEC let the oil price fall to prevent market share gains by North American shale producers, our investment in Paramount suffered. In addition to our serious miscalculation about the global oil market, we had not grasped the extent to which growing natural gas production in Canada’s Western Sedimentary Basin would overwhelm the takeaway capacity in the region and depress Paramount’s realization on its sale of natural gas.

Recognizing the flaws in our original investment thesis, we reduced our position size by 53% when Paramount’s stock rallied in late 2016 and 2017. This sale reflected our miscalculation about both the oil market and gas markets as well as our frustration with Jim Riddell’s growing pains as a Paramount’s new CEO. While the Riddell family was exceptionally well aligned with shareholders, Jim was still learning how to be an effective executive. The execution of his team at Paramount was clearly not what it needed to be, as the company regularly missed guidance due to operational issues.

By the time the price of oil collapsed in 2020, Jim had grown as a CEO. He remained strategically focused on long-term value but had also put in place a team that could execute at a high level. Confident that Paramount’s assets were being grossly misvalued by the stock market and that oil prices would rebound to more sustainable levels, we increased our shares held by 120%. Our decision to buy Paramount shares near their lows in the spring of 2020 transformed a bad long-term investment into a good one.

CREW ENERGY

metrics from inception of position

- First bought: December 2014 / Current top 10 holding

- Dollar Contribution: $43m

- Fund Contribution: +34%

- Return of stock from initial purchase: -30%

- Return of fund from initial purchase: +111%

Our experience investing in Crew is similar to our decade-long investment in Paramount, only better. Whereas we purchased Paramount prior to the OPEC-induced oil collapse of 2014, we bought Crew afterwards. At the time of our investment in Crew, we were attempting to take advantage of the precipitous declines in oil and gas companies and were particularly attracted to Crew’s superior long-lived assets with sizable natural gas exposure.

For the five years after our initial investment, the natural gas benchmark in Alberta traded at average price of $1.59 USD/MMBtu. The low natural gas price weighed on Crew returns and the company’s internally generated cash flow was insufficient to finance the management team’s organic growth strategy. As a result, Crew accumulated debt as it grew, and the company de-rated from 6.5x EV/DACF at the end of 2013 to 3.7x EV/DACF at the end of 2018. Despite the disappointing returns, we remained invested in Crew believing that gas in Alberta would not stay depressed indefinitely.

Following five years of marginal economics and lackluster returns, Crew’s shares declined another 67% from February 2020 to April 2020 during the 2020 COVID crisis. The market’s longstanding frustration with Crew’s inability to generate free cash flow quickly turned to panic over the company’s leveraged balance sheet. While Crew’s debt load was problematic if the low commodity prices of 2020 persisted for years, the market was missing two important facts. First, and most obviously, gas and oil prices could not remain at unsustainably low prices for very long. Second, and more importantly, Crew’s debt mainly consisted of a $300m bond that had a 2024 maturity. So, while the company’s debt ratios were certainly stressed in 2020, Crew did not have a liquidity problem.

As a result of our conviction about Crew’s liquidity position and the quality of its assets, from August 2019 to April 2020, we increased the quantity of shares held in Crew by 120%. These timely purchases, some of which occurred at stock prices as low as 15 cents CAD per share, transformed an underperforming position into a substantial contributor to the fund’s performance .

MAG SILVER

Metrics from 2011 to exit

- First bought: July 2008 / Last sold: April 2023

- Dollar contribution: $6m

- Fund contribution: +24%

- Return of stock: +9%

- Return of fund: +49%

In 2011, MAG was recovering from a hostile but unsuccessful takeover bid from its joint venture partner, Fresnillo. While we were pleased with the efforts of MAG’s board to prevent a takeover at an unattractive price, we were concerned about the company’s corporate governance. In particular, we were concerned that the board would not be able to move beyond the confrontation and develop a productive relationship with Fresnillo.

We also were concerned about MAG’s strategy of diversifying away from its world-class Juanicipio joint-venture asset through periodic capital raises and exploration spending. As a result, we formed a group called “Mining Investors for Shareholder Value” to improve the board at MAG. Our efforts resulted in the removal of one board member and the addition of Peter Barnes and Rick Clarke to the board in October 2012.

As our confidence in the governance of MAG grew, so too did our position size. We bought shares several times in the three years after the changes to MAG's board, and by the first quarter of 2016, MAG was the largest position in Equinox Partners. Our sales from the 2016-2018 period reflected declines in our assets under management rather than a change in our optimism about MAG. We remained substantial shareholders through the construction of the company’s flagship Juanicipio mine.

Unfortunately, the completion of the Juanicipio mine and resulting free cash flow generation did not deliver the rerating we expected. The problem with our investment thesis was two-fold. First, following the election of Lopez Obrador in 2018, the Mexican government has become increasingly hostile to mine development and imposed an unnecessary one-year delay on the project’s startup after construction was completed. This politically motivated delay sent a signal to the market that President Obrador’s administration did not view the development of this asset favorably. Second, the state of Zacatecas in which the joint venture asset is located, had become increasingly dangerous as local cartels fought for control of the state.

As a result of these two headwinds, we fully exited MAG in the spring of 2023. At the time, the company had completed the construction of the Juanicipio mine, but given the permitting problems in Mexico and security issues in Zacatecas, the company had no realistic prospect of expanding the mine or constructing other mines on the highly prospective joint venture property.

ARAMEX

Metrics from 2011 to exit

- First bought: May 2010 / Last sold: April 2019

- Dollar contribution: $54m

- Fund contribution: +11%

- Return of stock: +212%

- Return of fund: -44%

We first invested in Aramex in May of 2010. Later that year, the Arab Spring broke out. When Aramex shares traded off, we added to our position. The company’s performance in subsequent years made it one of our best performing investments since 2011. By 2013, Aramex was one of our top-five positions.

At the time of initial our investment, Aramex dominated the domestic delivery business in both Saudi Arabia and the UAE with a 50%+ market share in each. The resulting network effects enabled the company to generate a 50% adjusted ROE (ex-cash and goodwill) while undercutting its international competitors on price.

We were particularly impressed with the founder and chair of Aramex, Fadi Ghandour. Fadi had returned to Saudi with a degree from George Washington University and the intention of creating the FedEx of the Middle East. He did exactly that. Not only did Fadi mimic the business model of Fed Ex, but he also incorporated Western notions about business practices into the culture of Aramex. As a result, the company was particularly meritocratic. This internal system of rewarding hard work and competence was obvious throughout the organization, including the C-Suite. Hussein Hachem rose to become the CEO of Aramex in 2013. He had started off as a country manager for Kuwait: a small, bordering on irrelevant, market for Aramex. Hussein proved himself, was repeatedly promoted, and rose to CEO. Given the quality of the business and management, we knew that Aramex should not trade at half the multiple of Fed Ex and UPS.

After the initial phase of the Arab Spring passed, it became clear that neither Saudi Arabia nor the UAE were likely to undergo a political revolution similar to what occurred in Tunisia and Egypt. As the political uncertainty receded, the shares of Aramex rerated upwards. Given the quality of the business, management, and growth prospects, we could have owned the company for several more years. Our eventual decision to sell in 2017 was not driven principally by valuation, but by concerns regarding the departure of the CEO and share sales by founder. With the shares at a reasonable multiple and the incoming controlling shareholder not having demonstrated a clear commitment to Western notions of corporate governance, we elected to exit the majority of our position by 2017 and exited entirely in early 2019.

Conclusion

Despite wild fluctuations in the investment environment over the past 28 years, we’ve remained consistent in our approach to better business value investing. Simply put, we seek to own great businesses at low valuations for long periods of time and short overvalued securities facing serious headwinds. Our focus on valuation has prevented us from becoming disoriented during even the most turbulent markets. Our focus on quality ensures that our companies tend to grow their intrinsic value over time.

While our consistent approach has not generated consistent returns, we’ve had excellent performance when commodities and emerging markets have been strong. We’ve even generated very modest, long-term returns when the commodity cycle and emerging markets have gone against us. The combined result is a respectable, but not extraordinary, long-term compounded annual return of +12.6% net of all fees.

The future of financial markets is by definition uncertain. Nevertheless, it is worth noting that we’ve survived twelve extraordinarily challenging years in both commodities and emerging markets. Today’s combination of overextended valuations in large-cap U.S. companies and depressed valuations in our sectors suggest to us that we are on the cusp of a return to a more favorable period for our style of investing. Specifically, our gold miners which trade at a steep discounts to their intrinsic value should rerate dramatically as markets come to appreciate gold’s long-term role as a dollar alternative. Oil and gas companies should also rerate as markets realize that demand for hydrocarbons is not shrinking. And, finally, emerging markets should rerate as dollar denominated stocks and bonds struggle to generate positive returns.

Sincerely,

Equinox Partners

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q2 2023 Letter

Mon, 24 Jul 2023 13:00:04 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund appreciated +6.5% in the second quarter and gained +9.7% in the first half of 2023.

Visit our performance page to view the Kuroto Fund, L.P. fund summary in more detail.

Generating returns in good and bad markets

Kuroto Fund’s 24-year history can clearly be divided into two periods. For the first eight years of the fund, from January 1999 to the peak of October 2007, the MSCI Emerging Markets Index increased more than five-fold and compounded at a 21% annualized rate. Since 2007, the MSCI Emerging Markets Index has compounded at just 0.5% per year. Kuroto Fund outperformed in both periods. During the first period ending in October 2007, Kuroto compounded at an incredible +29.0% per year. Since 2007, Kuroto Fund has compounded at a much more modest +3.9% per year .

In the initial eight-year period, our investment successes were straightforward. We bought stocks that appreciated rapidly and then sold them. For instance, we held positions in Namyang Dairy and Dabur for approximately three years during which they increased five-fold in dollar terms on average. Inco Indonesia, even more impressively, rose more than thirty-fold in just over three and a half years. We bought each of these companies at mid-to-low single-digit multiples of free cash flow and sold them at more reasonable multiples on much higher earnings.

The period from October 2007 to 2023 has been much more challenging. Over the past almost sixteen years, we had to work hard to generate modest returns. To illustrate how we achieved these returns since 2007, the following letter outlines our buy and sell decisions in four companies that have generated good IRRs and have made the greatest contribution to Kuroto Fund’s performance over that period.

FPT

- First bought: June 2014 / Current 6% position

- Dollar contribution: $27.9m of period’s $34.6m / Avg. period AUM $181m

- Fund contribution: +33%

- Return of stock from initial purchase: +576%

- Return of fund from initial purchase: +81%

- IRR based on purchases and sales: +16%

We first purchased shares in FPT in 2014. At the time, FPT was a Vietnamese conglomerate with several business lines that didn’t fit together: the third largest local broadband cable company; the second largest cell phone retailer; an IT distribution company; and a small but quickly growing tech outsourcing business focused on Japan. While we were skeptical about the quality of some of FPT’s businesses, nevertheless we believed that FPT had a real competitive advantage as the only private broadband company in Vietnam. The meritocratic culture at FPT in which young people could join and rise through the ranks without connections struck us as obviously superior to the incentive structure at the company’s state-run competitors.

To our delight, FPT has outperformed our most optimistic expectations. Dr. Binh, the company’s controlling shareholder, turned out to be an excellent entrepreneur. He sold majority stakes in FPT’s two, low-quality businesses: the cell phone retailer and the technology distribution business. The broadband business, after a period of heavy investment, has compounded revenue at double digits and seen margin improvement, allowing earnings to grow faster than our expectations. But the real surprise has been the success of the education and global technology businesses.

Leveraging FPT’s brand as the country’s best place to work in technology, the company created FPT University, which has become one of Vietnam’s premier technology education institutions and presently enrolls over 100k students. This business is highly profitable and a meaningful contributor to the bottom line. Moreover, this business has provided a steady flow of new graduates for the global technology-outsourcing business. FPT’s global technology-outsourcing business has grown into the group’s biggest business by far. The business line has expanded from Japan to have a large presence in the U.S., Europe, and the rest of Asia. And, it has moved up the value chain from very low-end technology outsourcing to higher-end digital-transformation services. FPT now owns the country’s largest and most impressive technology ecosystem and is in a stronger position to grow today than it was when we initially invested.

As the chart above shows, we allowed the position size grow to over 20% of the fund, only meaningfully reducing the position as the opportunity to invest in extremely undervalued oil and gas businesses presented itself last year. Today, FPT is 6% of our fund. It trades at a mid-teens earnings multiple and is still growing earnings around 20% per year. Our investment success in FPT is proof that a strong corporate culture can help an organization overcome serious challenges and generate value for long-term shareholders.

LOGO YAZILIM

- First bought: August 2018 / Current 2.4% position

- Dollar contribution: $9.6m of period’s $17.1m / Avg. period AUM $86m

- Fund contribution: +15%

- Return of stock from initial purchase: +67%

- Return of fund from initial purchase: +61%

- IRR based on purchases and sales: +47%

We purchased shares of Logo Yazilim in the summer of 2018 as the Turkish lira was in freefall and the U.S. government was threatening to destroy the Turkish economy with sanctions over the imprisonment of Pastor Andrew Brunson. We had been following Logo since 2014, had spoken to management several times, and had identified it as a business that we would love to own at the right price. The summer of 2018 delivered that price.

Logo was and remains the dominant enterprise resource planning (ERP) software company in Turkey for small-and-medium-sized businesses. By 2018, the company was well-positioned to navigate Turkey’s periodic macroeconomic and geopolitical storms and thrive in a more benign environment. Logo’s customers face enormous switching costs, so the company had the ability to increase prices in-line with inflation after a modest lag. In addition, ERP was very underpenetrated throughout the country, so the growth opportunity was large. Moreover, the company had little debt and traded at just 8x forward earnings estimates. Because of the high equity-market volatility caused by the crisis, we were able to buy over 5% of the company in a short amount of time and became one of the largest shareholders outside of the founder.

As Turkey’s 2018 crisis progressed and ultimately passed, Logo not only survived, but thrived. The ERP business grew substantially, its Romanian subsidiary turned profitable and became a meaningful contributor, and the company took advantage of a regulation change to ramp up a tax compliance software business that has grown from nothing to over 20% of the top line. By 2021, the market understood the quality of the business, and the shares re-rated to over 20x earnings. As a result, we reduced our position from a high of 17% of the fund to around 6%.

In 2022, the USD value of Logo’s shares declined significantly again as the stock was punished by a combination of the lira’s decline and a stock market derating as foreign investors fled the Turkish equity market. We increased our position as the shares declined, believing that we could again generate good returns owning Logo. This investment thesis worked for a while but we decided to sell most of our position in early 2023 as it became apparent that Turkey’s latest economic difficulties weren’t going to recede quickly.

Today, Logo’s shares have derated to 10x earnings. The business remains very resilient and the opportunity for growth in a better economic environment remains, but the company fundamentals are hard to forecast because of the macroeconomic environment in Turkey. With the political situation clarified, and Erdogan beginning to implement a more orthodox economic team, there is reason for hope. At the moment, we are waiting for a bit more clarity before adding to our Logo position. Today, Logo is a 2% position in our fund. Our successful investment in Logo reminds us of the importance of maintaining a buy list of well-researched businesses in case the opportunity presents itself.

LG H&H

Metrics from inception of accounting system in 2007

- First bought: June 2003 / Last sold: March 2019

- Dollar contribution: $42.1m of period’s $226.4m / Avg. period AUM $337m

- Fund contribution: +14%

- Return of stock from 2007: +1680%

- Return of fund from 2007: +1205%

- IRR based on purchases and sales: +22%

LG H&H is an early vintage investment that we initially bought in June of 2003 and held through the Global Financial Crisis of 2008. After the Asian Crisis in the late 1990s, LG H&H had struggled with declining market share in their door-to-door cosmetics business, and the management team was not sure how to improve the company’s margins on its household branded products business. On top of these problems, LG H&H had a leveraged balance sheet following an acquisition spree in the mid-1990s.

The silver lining to all these problems was that the LG group parent company had recently hired an experienced Proctor & Gamble executive to be the new CEO of LG H&H and granted him relatively large amounts of autonomy within the LG chaebol. This meant that as minority shareholders we would benefit from Western style capital allocation and business rationalization at LG H&H. Furthermore, we were able to buy LG H&H preferred shares at a meaningful discount to the common shares even though they had the same economic characteristics. This was a quirk of the Korean market that allowed us to hold onto the shares for over a decade with a high margin of safety even as LG H&H’s common shares traded at a valuation that was close to fair value.

The turnaround of LG H&H worked much better than we expected. Management was able to stabilize the company’s market share in its high margin cosmetics business and turned around its home care product line. They rationalized SKUs and focused on the 20% of the brands that generated 80% of the profit. As a result, the company more than doubled margins, meaningfully grew the top line, and deleveraged its balance sheet. The company then launched an aggressive growth strategy in China that was incredibly successful.

The stock we bought re-rated from a mid-single-digit earnings multiple to a mid-teens multiple as LG H&H transformed into an easier to understand, high return on capital branded products business with a pristine balance sheet and a proven management team. The CEO from Procter & Gamble retired in 2014, and we continued to own the business until fully exiting in 2019 at what we believed was a full valuation.

Since our sale, LG H&H’s China business has collapsed and the company has struggled with COVID lockdowns, regulation, and poor brand mismanagement. The stock retraced back to where it was trading over a decade ago. While the current valuation is not demanding, the outlook is cloudy and the investment case is hard to underwrite. This result underlines to us the value-investing fundamentals of staying on top of a company’s competitive advantage, buying with a meaningful margin of safety, and selling when that margin of safety disappears.

ACE HARDWARE INDONESIA

- First bought: February 2008 / Last sold: November 2012

- Dollar contribution: $34.1m of period’s $335.1m / Avg. period AUM $342m

- Fund contribution: +11%

- Return of stock from initial purchase: +792%

- Return of fund from initial purchase: +78%

- IRR based on purchases and sales: +45%

We bought ACE Hardware in Indonesia at a discounted valuation during the Global Financial Crisis of 2008. We liked the business’s strong balance sheet, high margins, and low valuation. Additionally, we felt that they had the special sauce of how to do retail in Indonesia. While the company was a licensee of the U.S. ACE hardware brand, they had changed their merchandising to fit Indonesian tastes. Instead of selling hammers and nails, the company was selling a high-margin product mix that included everything from children’s toys to fish aquariums. Although the product mix didn’t make much sense from an American perspective, it worked well in the Indonesian context. The company was rapidly growing both square footage as well as same-store sales. The result was a fast-growing company that spun off cash.

We had reservations about the durability of the margins, the sustained lack of competition, and serious concerns about a related-party distributor that was controlled by the family that also controlled Ace Hardware Indonesia. After digging deeper and conducting diligence on the controlling family, we were able to build conviction that the family was operating in an ethical—if not Western—fashion, and that the margins reflected the unique merchandising strategy of ACE that other brick and mortar retailers in Indonesia would find hard to replicate.

Over the course of our five-year holding period, the shares increased almost 9-fold. When the shares reached what we saw as a fair valuation and the Indonesia rupiah became relatively strong, we elected to exit. Now nine years after our exit, the shares are trading 30% below the price we achieved in our last sale. The company’s deteriorating fundamentals were largely driven by an increase in competition at the high end from IKEA and at the low end from an aggressive Malaysia low-priced brand. Additionally, online retail expanded rapidly in Indonesia. Ace’s growth has slowed dramatically and our concerns about the sustainability of its incredibly high margins are now shared by the market—it just took 15 years for the competitive dynamic that concerned us to play out. Our investment in Ace Hardware Indonesia highlights the importance of keeping a close eye on an investment’s competitive position and exiting a position when the margin of safety goes away.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 6.30.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners Precious Metals Fund, L.P. - Q1 2023 Letter

Fri, 28 Apr 2023 15:12:37 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, LP gained +6.4% in the first quarter of 2023.

Visit our performance page to view the fund summary in more detail. [1]

bernanke's legacy: quantitative easing with inflation

In the fall of 2008, Chairman Bernanke initiated the first round of quantitative easing (QE) as an emergency measure to stop a disorderly credit contraction. Concerned that the new liquidity would stoke inflation, the Fed requested the authority to pay interest on reserves held at the Fed. On October 3 ^rd of 2008, President Bush signed the Emergency Economic Stabilization Act into law, and three days later, on October 6 ^th , the Fed availed itself of its new power to disincentivize the banking system from leveraging the money the Fed was about to create.

The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.

- Federal Reserve Board of Governors, October 6 ^th , 2008

Bernanke’s plan to offset the inflationary impact of QE worked brilliantly. The banks grew their reserves at the Fed rather than their loan books, inflation remained anchored, and within six months asset prices bottomed. The results were so good that rather than returning to normal monetary policy, Bernanke began making the case for QE2. Bernanke and his colleagues at the Fed knew that they had not articulated a credible strategy to reduce the Fed’s balance sheet and that failure to unwind QE might impair the Fed’s credibility. They went ahead anyway.

Another concern associated with additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time.

- Federal Reserve Board of Governors, August 27 ^th , 2010

Just five months after the end of the Fed’s initial $1,200 billion round of QE, Bernanke launched a second round of QE. His protegee at the Fed, Kevin Warsh, voted for the program out of respect for his mentor, but actively campaigned against QE2 and tried to press his colleagues into opposition: "If I were in your chair, I would not be leading the Committee in this direction, and frankly, if I were in the chair of most people around this room, I would dissent." Warsh followed up his private opposition with an op-ed in The Wall Street Journal arguing for strict limits on QE. When that failed to convince his colleagues to change direction, he resigned from the Board of Governors. Thomas Hoening was the only member of the FOMC to vote against QE2. With unemployment still at 9.8% and inflation still anchored, the other members of the FOMC believed that the economy could digest a second round of QE. They were right.

In the summer of 2012, fifteen months after QE2 ended, Bernanke initiated a third round of QE. By this point, Bernanke and his colleagues at the Fed were obviously enamored with QE. But, sensing that the unprecedented actions of the Fed might end badly, Bernanke felt compelled to inform the public of the Fed’s pure motives, commitment to public service, and sensitivity to data. More importantly, Bernanke still believed that he could begin extricating the Fed from QE while he was still Fed chair.

In June of 2013, with just seven months left in his second term as chair, Bernanke announced his intention to reduce the QE3 asset purchases to $65 billion per month from $85 billion per month and wind down the program entirely by mid-2014. This announcement prompted a violent reaction in the market memorably dubbed the ‘taper tantrum’. In the face of market volatility and widening credit spreads, the Fed reversed course, postponing the reduction in the third round of QE until January of 2014.

While Bernanke’s serial balance sheet expansions were all technical successes on their own terms, they created a political appetite for QE that the Fed has was unable to control. Bernanke thought he was keeping the Fed free from politics by making “tough decisions, based on objective, empirical analysis and without regard to political pressure.” Regardless of his intentions, the opposite occurred. His multiple rounds of QE without causing inflation erased a long-standing political taboo in Washington against money printing. The resulting increase in political expectations of the Fed became abundantly clear when President Obama searched for Bernanke’s successor.

Sensing a free lunch, President Obama floated the idea of elevating the most liberal member of the FOMC to succeed Bernanke. Historically, such a trial balloon would have elicited a sharp rebuke from the bond market. Instead, the opposite happened. The bond market loved the idea. Janet Yellen even campaigned for the promotion by extolling the virtues of QE. Importantly, the Senate confirmed her without a partisan fight. Senator Bob Corker, the junior Republican senator from Tennessee, quietly rounded up eleven Republican votes for her confirmation. His efforts not only avoided a political debate of QE, but instead demonstrated bipartisan support for the policy.

This bipartisan support for QE extended beyond the Obama administration and became overwhelming during the Trump administration. While President Trump often railed against the Fed’s easy-money policies while on the campaign trail in 2016, once in office he wanted a Fed that would keep the money flowing. That meant sidelining the hard money Republicans such as Kevin Warsh and even John Taylor, and instead selecting Jay Powell—a nominal Republican who had been appointed to the Fed by President Obama and who had voted for multiple rounds of QE.

Powell, after an early attempt to normalize interest rates in 2018, lived up to his promise as a flexible central banker. He delivered a fifth round of QE in 2019 in the form of $400 billion of repurchase agreements. This was the most surprising burst of QE in some ways, because in the fall of 2019 the macroeconomic indicators were strong, i.e. the stock market was up 12% on the year, unemployment was at a secular low of 3.5%, and GDP was growing at a 4% clip. But when the Secured Overnight Financing Rate amongst banks spiked from 2.43% to over 9% on September 17 ^th , the Fed stepped into to calm markets by buying $75 billion of repos. This massive liquidity injection did not immediately calm markets, and the Fed continued to buy repos until it had injected over $400 billion into the markets.

The Covid crisis, just six months later, elicited a round of QE so massive that it finally rekindled inflation. While other factors such as the supply chain and fiscal deficits were at play, the Fed’s insane $3 trillion of QE in three months sticks out as the proximate cause of the inflation problem. The resulting combination of the Fed’s largess, government spending, and lockdowns induced the American savings rate to spike from 8.3% to 33.8% and drove a 26% year-on-year increase in M2 money supply.

Despite the lingering inflationary effects of QE, the consensus today is not that QE is fundamentally flawed, but simply that we’ve found its limits. Talk of MMT has gone away, but expanding the Fed’s balance sheet remains an entrenched policy option. The Fed’s recent decision to discount Treasuries held by banks at par following the FDIC’s seizure of Silicon Valley Bank received little pushback, and Bernanke just did another victory lap when receiving his Nobel prize in Economics. The question for investors is not how QE is viewed today, but whether today’s broadly favorable view of QE survives the next phase of monetary policy during which QE will be more compelled than voluntary.

In an ironic twist, the Fed’s 2008 decision to pay interest on reserves, which was so crucial to prevent the early inflationary effects of QE, is now forcing the transfer of hundreds of billions annually to the private sector. While paying interest on reserves in 2008 was disinflationary when at the time policy rates were zero, paying interest on reserves today is decidedly inflationary. Specifically, 5% on the $5.8 trillion of reserves and repurchase agreements the Fed currently holds on its balance sheet causes a $292 billion transfer to private financial institutions annually. Moreover, this rate of QE arithmetic gets higher as interest rates go up—a particularly toxic dynamic.

By itself a $292 billion annual cash injection is probably manageable in a $23 trillion U.S economy. The real problem arrives when this new baseline of transfers from the Fed is combined with another round of blowout deficits that must once again be financed by the Fed. This, unfortunately, seems about to happen. The Federal government just posted a $1.1 trillion fiscal deficit for the six months ending March 31 ^st , a 65% increase from the prior year period. If this percentage increase versus the prior fiscal year holds, America’s fiscal deficit for the twelve-month period ending September 30 ^th will top $2 trillion . An average recession that elicits countercyclical spending and a further decline in federal tax receipts could double that number. With foreign central banks no longer buying and our domestic banks reducing their interest rate exposure, the only plausible home for a growing supply of treasuries is the Fed’s balance sheet—QE7. Markets are sanguine about this scenario, we are not.

Sincerely,

Equinox Partners Investment Management

^{Corresponding End Notes to above hyperlinks}

^{Monetary Policy since the Onset of the Crisis} ^{. Jackson Hole, August 31, 2012 and} ^{Transcript of Chairman Bernanke’s Press Conference} ^{. September 13, 2012}
^{Concluding remarks at the Ceremony commemorating the Centennial of the Federal Reserve Act} ^{. December 16, 2013.}
^{What Happened in Money Markets in September 2019} ^{. Board of Governors, February 27, 2020 and} ^{Fed Preps Second $75 Billion Blast With Report Markets Still On Edge} ^{. Bloomberg, September 17, 2019.}
^FRED
^{The Fed} ^{pays interest on $3.16 trillion of bank reserves and on another $2.67 trillion of interest-bearing reverse repurchase agreements.}
^{U.S government posts $378 billion deficit in March}
^{CBO Budget Projections}

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q1 2023 Letter

Fri, 28 Apr 2023 14:51:06 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners declined -4.2% in the first quarter of 2023.

Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail. [1]

bernanke's legacy: quantitative easing with inflation

- Federal Reserve Board of Governors, October 6 ^th , 2008

- Federal Reserve Board of Governors, August 27 ^th , 2010

Sensing a free lunch, President Obama floated the idea of elevating the most liberal member of the FOMC to succeed Bernanke. Historically, such a trial balloon would have elicited a sharp rebuke from the bond market. Instead, the opposite happened. The bond market loved the idea. Janet Yellen even campaigned for the promotion by extolling the virtues of QE. Importantly, the Senate confirmed her without a partisan fight. Senator Bob Corker, the junior Republican Senator from Tennessee, quietly rounded up eleven Republican votes for her confirmation. His efforts not only avoided a political debate of QE, but instead demonstrated bipartisan support for the policy.

Powell, after an early attempt to normalize interest rates in 2018, lived up to his promise as a flexible central banker. He delivered a fifth round of QE in 2019 in the form of $400 billion of repurchase agreements. This was the most surprising burst of QE in some ways, because in the fall of 2019 the macroeconomic indicators were strong, i.e. the stock market was up 12% on the year, unemployment was at a secular low of 3.5%, and GDP was growing at a 4% clip. But when the Secured Overnight Financing Rate amongst banks spiked from 2.43% to over 9% on September 17 ^th , and the Fed stepped into to calm markets by buying $75 billion of repos. This massive liquidity injection did not immediately calm markets, and the Fed continued to buy repos until it had injected over $400 billion into the markets.

Despite the lingering inflationary effects of QE, the consensus today is not that QE is fundamentally flawed, but simply that we’ve found its limits. Talk of MMT has gone away, but the policy option of expanding the Fed’s balance sheet remains an entrenched policy option. The Fed’s recent decision to discount Treasuries held by banks at par following the FDIC’s seizure of Silicon Valley Bank received little pushback, and Bernanke just did another victory lap when receiving his Nobel prize in Economics. The question for investors is not how QE is viewed today, but whether today’s broadly favorable view of QE survives the next phase of monetary policy during which QE will be more compelled than voluntary.

Sincerely,

Equinox Partners Investment Management

^{Corresponding End Notes to above hyperlinks}

^{Monetary Policy since the Onset of the Crisis} ^{. Jackson Hole, August 31, 2012 and} ^{Transcript of Chairman Bernanke’s Press Conference} ^{. September 13, 2012}
^{Concluding remarks at the Ceremony commemorating the Centennial of the Federal Reserve Act} ^{. December 16, 2013.}
^{What Happened in Money Markets in September 2019} ^{. Board of Governors, February 27, 2020 and} ^{Fed Preps Second $75 Billion Blast With Report Markets Still On Edge} ^{. Bloomberg, September 17, 2019.}
^FRED
^{The Fed} ^{pays interest on $3.16 trillion of bank reserves and on another $2.67 trillion of interest-bearing reverse repurchase agreements.}
^{U.S government posts $378 billion deficit in March}
^{CBO Budget Projections}

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q1 2023 Letter

Thu, 27 Apr 2023 20:23:14 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund appreciated 3.0% in the first quarter of 2023.

Visit our performance page to view the Kuroto Fund, L.P. fund summary in more detail.

Select Opportunities in the Global Tech Pullback

For twenty-four years, we have repeatedly allocated Kuroto Fund’s capital to areas where capital is fleeing and valuations are compressed. Notably, we invested heavily in Asia post the Asian financial crisis and in international oil companies following the COVID-induced oil crash of 2020. In both instances, Kuroto Fund took large contrarian positions. In addition to these sizable decisions, we have made a series of smaller but equally contrarian investment decisions over the past decade including investments in companies in out of favor markets such as the Republic of Georgia, Nigeria, Ghana, and Turkey. Given our demonstrated pattern of investing in sectors and geographies that others are exiting, it is with great interest that we are watching the extensive pullback in technology companies globally, and particularly within our purview of the developing economies.

Last year, the EM Information Technology index declined 34%. From peak to trough, the index was down 41%. While these declines are substantial, unfortunately even these declines haven’t resulted in the index retracing much of the sector’s historic run. The EM Tech index is still 24% above its 2019 level and is trading at 19x forward earnings. That said, the tech selloff is creating a handful of interesting opportunities. Some smaller cap EM tech stocks are down much more than the index and are trading at attractive, while not distressed, multiples. As a result, we have been taking advantage of this sell-off to initiate two small positions, both roughly 3% weights, in stocks that are down over 50% from peak.

One of our additions is in a locally dominant software business that trades at a mid-teens earnings multiple and grows over 20% per year. The other is a rapidly growing, but barely profitable, global classified business trading at an attractive multiple on normalized margins. Combined with two longer held tech investments, technology now accounts for a modest but still material 15% of Kuroto. Three of the four tech companies we own are very profitable, trading at mid to low teens earnings multiples and growing earnings 20%+ per annum. The fourth just turned profitable last year and is a business that generally supports very high margins.

In addition to our 15% true tech weighting, our 14% investment in MTN Ghana and 7% investment in TBC Bank have large technology drivers. Specifically, more than half of MTN Ghana’s value derives from its app-based mobile money business. For our investment in TBC Bank, the upside is largely dependent upon its first mover advantage in Uzbekistan’s mobile banking market with a banking app. Interestingly, unlike our pure tech investments, MTN Ghana and TBC Bank both trade below 5x earnings, making them compelling value investments regardless of their sector.

In sum, while we are finding opportunities, our increased tech allocation has been modest as the opportunity also remains modest in our opinion. There are three reasons for our caution. First, and most importantly, the overall valuation in the global tech sector remains well beyond what we’re willing to pay. Second, many of the global tech businesses that have sold off have unproven business models. Third, we continue to find the opportunity set outside of tech, most notably in oil and gas E&P, more attractive. That said, we have been looking and have a list of several high-quality, smaller global tech businesses that we would like to own if their shares derate further.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 3.31.23, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Gold Forum Europe 2023: Sean's Speech on Gold Mining Returns

Thu, 13 Apr 2023 19:17:54 GMT

Replay and Slides of CIO Sean Fieler's KeyNote at Gold Forum Europe 2023

Managing Partner and CIO Sean Fieler gave a keynote address at the Gold Forum Europe 2023 conference in Zurich Switzerland on April 12th 2023.

The links above will take you to a web replay of the speech where Sean discusses the history of returns in the gold mining sector over his career, as well as thoughts on drivers of historical underperformance and several suggestions for ways the industry and shareholders can change behavior to improve returns in the coming cycle.

WSJ: CBDC Opinion Piece

Wed, 08 Feb 2023 19:39:48 GMT

A CBDC Dollar would empower the fed, not Americans - Sean Fieler

"A growing number of Democratic and Republican policy makers support creating a central bank digital currency, or CBDC, that would further empower the Federal Reserve. Although the parties disagree on the particulars, their broad agreement on the idea creates a political opening for the Fed and the Biden administration to move ahead with a CBDC that will compromise Americans’ freedom...."

Equinox Partners Precious Metals Fund, L.P. - Q4 2022 Letter

Fri, 20 Jan 2023 22:37:48 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners Precious Metals Fund, L.P. rose +16.5% in the fourth quarter of 2022, finishing with a total return for the calendar year 2022 of -19.4%.

A breakdown of the fund’s exposures and contribution can be found here.

Top 5 Year End Holdings

Please note all figures are in $USD as of 12/31/2022 unless noted otherwise.

Endeavour Mining PLC

9.5% of Partners' Capital

Endeavour Mining is West Africa’s largest gold producer, generating 1.4m ounces of gold in 2023 from six mines across Cote d’Ivoire, Burkina Faso, and Senegal. The company’s controlling shareholder, Naguib Sawiris, and seasoned CEO, Sebastien de Montessus, have built a high-quality portfolio that should generate $1.2b in cash flow and $750m in free cash flow at $1,850 gold. Last year, Endeavour returned approximately $300m to shareholders via dividends and buybacks and reinvested the majority of the company’s free cash flow to grow reserves and production.

While management has done a series of countercyclical deals to accelerate the company’s growth, the engine driving Endeavour’s long-term growth is exploration. Because of its post-colonial history, French West Africa combines highly prospective ground and a dearth of historic exploration dollars. As a result, we believe Endeavour’s land package is perfectly positioned for low-risk exploration success. Rather than hunting around for new deposits, Endeavour is focused on near-field additions to existing orebodies. The results speak for themselves: over the past six years, Endeavor added 11.5m ounces at an average cost of less than $25 per ounce. We find Endeavour’s detailed plans to deliver continued exploration success ambitious but believable.

Despite its successful track record of execution and standing as a top-10 gold producer in the world, Endeavour trades at a 13% free cash flow yield. We believe this discounted valuation is due to the jurisdictions in which the company operates. While Senegal, Burkina Faso, and Cote d’Ivore are great places to develop assets on-time and on-budget, they are also characterized by high levels of political turmoil. Going forward, we expect West Africa to continue to generate headline risk, and Endeavour to continue to compound intrinsic value.

Agnico Eagle Mines Ltd.

8.9% of Partners' Capital

Agnico Eagle is a top-five global gold producer with 3.3m ounces per year of production concentrated in low-risk jurisdictions. Specifically, 74% of its current production comes from Canada, with the remaining production coming from Australia, Mexico, and Finland. Ammar Al-Joundi, Agnico’s CEO who took over from Sean Boyd in 2022, has continued Agnico’s long-standing focus on low-cost assets in low-cost jurisdictions. Despite this strategic continuity and ongoing operational success, Agnico lost the premium multiple it carried over the last five years and today trades at just a slight premium to its net asset value.

During the two decades of Sean Boyd’s leadership, Agnico went to scale by consolidating large greenstone belts and driving operational efficiencies. Now under Ammar’s leadership, the company maintains this strategy as evidenced by Agnico’s recent acquisitions of Detour Gold and Canadian Malartic. Agnico conservatively estimates that by consolidating this joint venture they can save $80m over ten years.

With a low single-digit free cash flow yield and modest production growth, Agnico will likely compound its intrinsic value more slowly than our other gold miners. That being said, we believe that Agnico’s liquidity, scale, and quality merit the premium valuation it long had.

West African Resources Ltd.

8.6% of Partners' Capital

West African Resources (WAF) is a producing gold miner in Burkina Faso led by its founder, CEO and 1.5% owner, Richard Hyde. Over the past sixteen years, Richard and his team have built a company with over 12m ounces of resources that has generated more than $250m of free cash flow. Despite the company’s stellar track record, WAF’s enterprise value stands at merely 3.2x our estimate of 2023 cash flow. We believe this particularly low valuation is due to the company’s location in Burkina Faso as well as the company’s unpopular decision to press ahead with the development of its new Kiaka mine.

At a time when other companies are divesting from Burkina, WAF is reinvesting in the country. Over the past two years, WAF bought the Toega and Kiaka deposit from B2Gold for a combined $145m. With these acquisitions, WAF is positioned to ramp its production from 230,000 ounces per year to more than 400,000 ounce per year by 2025. Toega is a low-risk acquisition with ore that will be shipped to WAF’s exiting Sanbrado operation. Requiring little additional capex, the project should generate a high IRR. The market’s concern is with the Kiaka project, a ~$500m capex spend with construction commencing in 2023 and the first gold pour expected in 2025.

The drawbacks of Kiaka are straightforward: low-grade and hard ore. That said, at spot gold, Kiaka generates a 20%+ IRR and an after-tax NPV of approximately $1b according to the company. Moreover, the simplicity of the flow sheet and mine plan in addition to Kiaka’s proximity to the existing Sanbrado operation should allow for future synergies and operating flexibility. In late 2022, WAF awarded the build to Lycopodium, the same firm that successfully built its current producing asset. WAF intends to fund the capex of Kiaka with its substantial cash balance, free cash flow, new debt, and a modest amount of equity. We believe the result will be a long-lived, large-scale operation that will generate reasonable free cash flow in today’s gold price environment and spectacular free cash flow in a strong gold price environment.

Eldorado Gold Corp.

8.3% of Partners' Capital

Eldorado is an intermediate gold producer with assets in Canada, Turkey, and Greece which trades at approximately three times our estimates of 2023 cash flow. The company’s discounted valuation reflects the market’s displeasure with the company’s $845m development project in Greece: Skouries. The market is concerned that the project will not be on-time and on-budget and/or not produce ounces economically when completed in 2025.

Accordingly, when Eldorado announced that its Skouries project in Greece was fully funded with attractively priced debt, the market shrugged. Specifically, on December 15th, Eldorado press released a €680 million debt package to fund the project at approximately a 5% interest rate, with the possibility of slightly lower rates on the back of additional low-cost EU “Recovery and Resilience” funding. With debt representing 80% of the funding requirement, the final 20% will come out of Eldorado’s cash flows.

Our view is that Skouries will in fact be completed in 2025. When in production, the Skouries mine will add 140,000 ounces of gold and 67m pounds of copper to Eldorado’s roughly 500,000 ounce production profile. As per the mine plan, Skouries is a 19-year mine with over a 25%+ project-level IRR at spot gold prices. Like the market, we are skeptical of Skouries’ advertised IRR and the ability of management to deliver the project on-budget given the challenges associated with operating in Greece. That said, we believe that Skouries will generate an acceptable return at today’s gold prices and superior returns at higher gold prices. Moreover, the company’s market cap is more than covered by Eldorado’s operations in Canada and Turkey.

Orezone Gold

6.6% of Partners' Capital

In 2022, Orezone transitioned from a developer to a producer with the delivery of its Bombore mine in Burkina Faso one quarter behind schedule and slightly over budget. The delay and cost overrun were attributable to delivery problems with the generators for which they had contracted years earlier. Following the mobilization of four diesel generators from Senegal in July, Orezone managed its first gold pour in September and commercial production in December.

Power issues aside, the mining and processing of the ore at Bombore has proven straightforward, and production has been better than we expected. The processing facility is operating at 15% above nameplate capacity and achieving recoveries 4% higher than estimates in the published feasibility study. In 2023, we expect Orezone to produce close to 150,000 ounces at an all-in sustaining cost per ounce (AISC) of approximately $1,000. This should translate to a nearly 60% EBITDA margin and $100m of free cash flow at spot gold prices.

Additionally, Orezone’s land package has proven better than we anticipated. In addition to the 4.2 million oxidized ounces in resources that the company has identified, Orezone discovered an additional two million ounces of sulfides at almost double the grade of its current resources. This exploration success offers Orezone an opportunity to increase the size of its planned sulfide circuit from 2.2 million tonnes per year to 5 million tonnes per year, which would translate into a production profile of 300,000–400,000 ounce per year. While the sulfide circuit feasibility study has not been completed yet, we believe that the project will have an IRR of over 30% at $1,800 gold.

Given the prospectivity of Orezone’s land package, the company should be able to grow production and cashflow for years. We would not be surprised if 10m ounces are ultimately recovered from the Bombore land package. In our view, the principal headwind for the company is the country of Burkina Faso. While Orezone’s community and government relations are good, the country is in the midst of a war against jihadists from the Sahel. The line of control is hundreds of miles from Orezone’s operations, but the success of the company depends on the survival of the country of Burkina.

Sincerely,

Equinox Partners Investment Management

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q4 2022 Letter

Fri, 20 Jan 2023 21:33:07 GMT

Dear Partners and Friends,

PERFORMANCE

Kuroto Fund gained 16.8% in the fourth quarter of 2022 bringing the calendar year 2022 return for the fund to -7.9%. By comparison, the EM index gained 9.7% in the fourth quarter of 2022 and declined -20.1% for the full year.

A breakdown of Kuroto Fund's exposures and contribution can be found here.

COMMODITY PESSIMISM PERVADES

Having been out of favor for years, commodities were decimated in the spring of 2020 when global demand collapsed. With almost three years of hindsight, it’s clear that this near-death experience on the back of a lengthy commodity bear market severely traumatized commodity investors and producers alike. Accordingly, even as the commodities have rebounded sharply, pessimism pervades the sector, and commodity producers and investors remain fixated on the return of capital rather than expansion into the nascent bull market in commodities. In our opinion, the prevailing commodity pessimism is not the result of enlightened thinking about supply and demand dynamics but rather the product of the psychological scarring of those invested in commodities and generalist investors who continue to believe that commodity businesses are inherently low return and unpredictable.

Oil, the largest and most economically important commodity, provides the most glaring example of underinvestment. In 2022, oil producers spent just over $300bn on upstream capital expenditures, down from a peak of over $500 billion. Today’s oil companies are committed to returning the majority of their cash flow to investors who have little faith in the long-term prospects of the businesses. Exxon, the largest of the supermajors, is a case in point. In a December 8th investor presentation, Exxon’s CEO, Darren Woods, reiterated the company’s intention of keeping oil reinvestment well below half of Exxon’s cash flow assuming $60 oil. With a fortress balance sheet and aggressive return of capital, Exxon is preparing for another bear market, not a commodity super cycle.

Exxon and other oil producers regularly pin their underinvestment on the coming energy transition. However, this argument fails to explain why many other commodities are suffering from the same underinvestment as oil. For example, copper, which is slated to play a critical role in the energy transition, has experienced almost equally large percentage declines in capital expenditure over recent years. As a result of the underinvestment in copper, by 2026 there is likely to be a significant shortfall in the global copper supply. Eventually correcting this shortfall promises to be extraordinarily painful for consumers of copper given that the average copper project takes over ten years to bring online.

Generalist investors who don’t want anything to do with commodities deserve much of the blame for the continued underinvestment. Many of these investors were formed by the bull market of the past decade and believe that fortunes are made in tech, not commodities. They point out that there are no trillion-dollar commodity companies and few centi-billionaire commodity companies CEOs because commodity companies don’t lend themselves to differentiation and long-term value creation. Put succinctly, the same investors who were willing to pay any price for tech business also are unwilling to own commodity company at any price. Moreover, even if these investors were to change their mind, many would not know where to begin. An entire generation of investors has never deeply analyzed a commodity business, and most who have, have been turned off by the politics, capital intensity, and cyclicality.

It is not just equity investors who have become skittish about commodity investing; commodity pessimism extends to participants in the futures market as well. Oil, in particular, is in severe backwardation, i.e. futures prices are below the spot price. That said, $60 oil implies an unbelievable pessimism about future oil demand. If this very low price does indeed come to pass, much of the pessimism that prevails in the oil market today is more than justified. Investors in the space own structurally low-return businesses and should extract as much capital as quickly as possible from the sector.

For our part, in contrast to both the stock market and the futures market, we believe that pervasive commodity pessimism has laid the foundation of a massive commodity super cycle. The supply problems are not going to be cured anytime soon and growing resource nationalism ensures increased friction when markets eventually decide to invest. Perhaps the only thing that could prevent much higher commodity prices across the board would be the implosion of the Chinese economy or a prolonged decline in global economic activity. While the likelihood of these bearish outcomes is not driving the prevailing commodity pessimism, some combination of the two events is likely in our opinion. These downside scenarios would likely be positive for gold and silver prices and not particularly bearish for oil given OPEC’s renewed ability to manage supply. Given this view, our Kuroto Fund weighting in hydrocarbon producers in remains high.

Top 5 Year End Holdings

Please note all figures in above table and below descriptions are in $USD and as of 12/31/2022 unless noted otherwise. Several securities’ prices have moved meaningfully since year-end impacting market capitalization, valuation ratios, etc.

MTN Ghana

MTN Ghana is Ghana’s dominant cellular telecom provider and mobile-money business. The company trades at 3.3x our estimate of 2023 earnings, with a 21% dividend yield, and generates a 50% return on equity. The low valuation is due entirely to the challenge of operating in Ghana. In 2022, Ghana defaulted on its domestic and U.S. dollar debt and targeted MTN with a series of bespoke taxes.

From an operating perspective, MTN Ghana had another strong year. Through the first nine-months of the year, the company grew revenues 28% and earnings 49% in local currency terms. MTN gained market share in mobile telephone, increasing its share to 60% of the country’s voice traffic. In mobile-money, we believe MTN is maintaining its dominant market share.

From a macro perspective, 2022 was a disaster for MTN Ghana. The Ghanaian Cedi declined over 50% as inflation spiked to more than 50%. Ghana reached an agreement with the IMF in December which should give the government new tools to cut spending. That said, we expect the government to remain dysfunctional in the short term. Over the medium term, Ghana should become a more tolerable country in which to operate as it lives within the constraints of the IMF bailout package.

The larger concern for investors in MTN is the series of direct attacks the government of Ghana has levied against the company. In February of 2022, Ghana’s minister of finance announced approval of a 2% tax on mobile-money transfers. While this tax did not name MTN, with a 90% market share MTN was the obvious fiscal target. As could have been predicted, the 2% transaction tax succeeded in disrupting the mobile-money business while not raising any revenue for the government. Accordingly, in December, the government of Ghana reduced the 2% tax to a more workable 1%. Unfortunately, the government followed up this announcement with a politically motivated tax evasion investigation of MTN. While the substance of the tax evasion charge is dubious to say the least, the continued attack on the company is a problem.

In short, MTN is a very healthy company in a very unhealth country. Safaricom—an analogous company in Kenya—trades at three-and-a-half times the valuation of MTN Ghana. If Ghana becomes a more normal, but not high functioning country like Kenya, then we would expect a substantial rerating of MTN shares. If Ghana continues to attack MTN as the deepest pocket in the country, then MTN’s extraordinarily low multiple is not low enough. While MTN Ghana was the largest detractor to our performance in 2022, we still think that Ghana is more likely to become an average, rather than a particularly horrible, African country in which to do business.

Georgia Capital

Georgia Capital is a diversified holding company in the Republic of Georgia. The company owns a listed and observable 20% stake in Georgia’s second largest bank (Bank of Georgia), and its large portfolio companies include the country’s largest hospital network and largest pharmaceutical store network. Additionally, Georgia Capital owns a diverse portfolio of smaller investments in sectors spanning insurance, real estate, hospitality, utilities, renewable energy, beverages, auto service, and digital services. Georgia Capital trades at 3.5x our estimate of its look-through earnings.

The principal reason for Georgia Capital’s low valuation is its $300m 6.125% bond which matures in April of 2024. Even after selling its 80% stake in Georgia’s largest water utility for $180m in February of 2022, Georgia Capital still does not have the liquidity to fully pay its bonds. Our optimism about the company depends upon Georgia Capital’s ability to roll over $200m of the bond or liquidate $200m of its $320m worth of publicly traded securities—or some combination of the two. While the debt does not mature for 15 months, we expect management to execute on a solution in the coming months.

On the back of a solution to its debt rollover, there is good reason to be optimistic about the company’s prospects. The Georgian economy has been on a tear since Russia’s invasion of Ukraine. As we detailed in our Q3 2022 letter, investors were initially concerned about the potential negative spillover that Russia’s invasion of Ukraine could have on Georgia. Instead, the war has had a very positive effect on the country’s businesses, including those owned by Georgia Capital. This environment has given the company a welcome opportunity to sell assets, retire debt, and buy back shares at discounted prices.

Kosmos Energy

Kosmos Energy is an offshore oil and gas company led by Andy Inglis. Andy joined BP in 1980 and rose through the ranks to become the chief executive of BP’s Exploration and Production business. At BP, Andy oversaw a multi-billion-dollar exploration budget and was a plausible future BP CEO. The Deepwater Horizon spill in the Gulf of Mexico in 2010 abruptly changed Andy’s career trajectory. While Andy was not responsible, he along with several of BP’s leaders left or were let go.

In 2014, Andy became CEO and Chairman of Kosmos Energy. For the past eight years he has used his unique skill set and connections to assemble a set of world-class offshore assets in Africa and the Gulf of Mexico. With a market cap of $3.5b and 2022 free cash flow of approximately $700m, the market is giving Andy little credit for his vison or expertise. We think that’s about to change.

In 2023, Kosmos’ flagship Tortue LNG project comes online. The Tortue project is the first of a multi-phase, decade-long natural gas development project in offshore West Africa that is perfectly timed to help Europe meet its newfound need to diversify its natural gas supply. The project is so important that German Chancellor Olaf Scholz paid a visit to Senegal to lobby for Germany’s share of this long-term natural gas supply.

More broadly, Andy continues to take advantage of the global exodus from offshore oil and gas development. This exodus has given Kosmos the opportunity to build a world-class portfolio of offshore assets that generate rapid paybacks. When the oil cycle eventually turns, we suspect that the same sort of E&P companies that have been divesting assets and facilitating Kosmos’ growth will become bidders for the package of world-class assets that Andy is assembling.

Seplat Energy

Seplat is the largest and most professional indigenous oil and gas company in Nigeria. The company was founded by two Nigerian entrepreneurs who continue to own close to 10% of the shares each. Since 2020, the company has been run by Roger Brown, an Irish ex-pat formerly of Standard Bank and PWC, who joined Seplat in 2013 as CFO. The board of directors includes the former head of Shell Nigeria as well as the CEO of Maurel & Prom—a French oil and gas company that owns a 20% stake in Seplat.

In 2022, we estimate that Seplat generated roughly $330m of operating cash flow, $170m of free cash flow, and paid a 12% dividend yield. The company has several projects underway that are scheduled to be completed later this year, including a new gas-liquids development and a new export pipeline. Once these new projects are up and running, we estimate that the company will generate roughly $350m of free cash flow per year starting in 2024. On today’s market cap of $700m, this would represent a 50% free cash flow yield.

In addition to the company’s organic growth plans, Seplat has an agreement to purchase part of Exxon’s Nigeria operations. The outcome of this acquisition is political and therefore uncertain. That said, if completed, the deal would double Seplat’s production and cash flow with no share dilution. As the only respectable indigenous oil and gas company in Nigeria, Seplat is uniquely positioned to acquire additional assets from oil majors who are looking to exit the country.

Logo Yazilim

Logo is Turkey’s leading enterprise-resource-planning software (ERP) provider for small and medium businesses. The company trades at 14 times our estimate of 2023 earnings and is well positioned to grow in Turkey’s underpenetrated ERP software sector. The management, technology, and strategy of Logo continue to impress us. At the same time, since year-end 2022, we have trimmed our weighting in this holding solely on account of the recent political and macroeconomic developments in Turkey.

Turkey’s macroeconomic and political environment has become increasingly unstable. Inflation had been running as high as 85% in October 2022. Moreover, the political and macroeconomic environment will likely come under further stress in the run up to elections on May 14 ^th . We expect Erdogan to pull out all the stops in an effort remain in power, and we anticipate his opposition remains united by their desire to remove him.

While the outcome of Turkey’s election is admittedly unpredictable, either a win for the opposition or Erdogan would likely be a positive for Turkey. The worst-case would be a contested election and/or a coup. An additional non-negligible scenario involves a split government in which Erdogan remains President but loses parliament. Given the surprisingly strong uptick in the Turkish stock market and strength of the Turkish lira in advance of this uncertainty, we decided to trim our position in Logo.

Sincerely,

Sean Fieler Brad Virbitsky

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q4 2022 Letter

Fri, 20 Jan 2023 19:36:21 GMT

Dear Partners and Friends,

PERFORMANCE

Equinox Partners rose +17.3% in the fourth quarter of 2022 and +20.8% for the full year.

Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail. [1]

COMMODITY PESSIMISM PERVADES

For our part, in contrast to both the stock market and the futures market, we believe that pervasive commodity pessimism has laid the foundation of a massive commodity super cycle. The supply problems are not going to be cured anytime soon and growing resource nationalism ensures increased friction when markets eventually decide to invest. Perhaps the only thing that could prevent much higher commodity prices across the board would be the implosion of the Chinese economy or a prolonged decline in global economic activity. While the likelihood of these bearish outcomes is not driving the prevailing commodity pessimism, some combination of the two events is likely in our opinion. These downside scenarios would likely be positive for gold and silver prices and not particularly bearish for oil given OPEC’s renewed ability to manage supply. Given this view, our weightings in the monetary metals and hydrocarbons remain high.

Top 5 Year End Holdings

Crew Energy Inc.

Crew Energy is a natural gas producer in British Columbia. With a strong balance sheet, strategic asset base, and still-modest valuation, Crew is well positioned to grow production and achieve a premium multiple in a transaction.

Management’s execution of a countercyclical investment program has put the company on solid financial footing. In the summer of 2022, Crew Energy completed a two-year strategic plan that they embarked on in the depths of the COVID crisis. The results of the program were significantly better than initially forecasted largely due to better than expected commodity prices. In 2022, we estimate that Crew generated $225m in operating cash flow and $74m in operating free-cash flow. Both figures exclude $95m Crew realized through the disposal of a non-core asset.

On the back of the successful completion of this two-year strategic plan, Crew announced another, even larger, countercyclical investment program. Over the next four years, the company intends to double production as its peers focus on returning capital. Crew will outspend cash flow in both 2024 and 2025 while keeping debt to cash flow under one turn. At $4 gas and $75 oil, we estimate Crew’s four-year investment will deliver an IRR of approximately 26%, at which point the company would be trading north of a 30% FCF yield.

While Crew’s expansion plan is sensible, the market is weary of the company’s growth strategy. Key areas of concern are: 1) disagreements between indigenous groups and the BC government which could prevent BC from issuing drilling permits; [2] 2) delays and cost overruns; 3) low natural gas prices; 4) new taxes on oil and gas producers; 5) the inability to achieve a premium multiple in an exit. While we are certainly mindful of all these potential risks, the board is prudently positioning Crew to play a strategic role in the export of LNG to Asia. In our opinion, this unique positioning makes it likely that Crew will achieve a premium valuation in a transaction.

Paramount Resources Ltd.

Paramount Resources is an oil and gas producer based in Alberta. Paramount combines high-quality assets and a net-cash position with a steep discount to our estimate of intrinsic value. Paramount is growing production 15% this year while also generating a 10% FCF yield. We believe the company can keep growing at attractive rates while generating a double-digit free cash flow yield for shareholders. Additionally, at $100 oil prices, this free cash flow yield rises to approximately 20%.

The biggest question for us is how the Riddell family, who controls Paramount, will deploy the company’s free cash flow. The board has committed to paying out a majority of the company’s free cash flow in 2023. The resulting schedule of dividends and distributions should deliver an 8% yield at today’s stock price. Going forward, we expect Paramount to redeploy most of its free cash flow into acquisitions. Given the Riddell family’s excellent long-term track record of value creation and large ownership of the company, we trust them to allocate capital intelligently.

The Riddell’s astute, countercyclical capital allocation strategy has been on display for the past two years. In 2020, at a moment when almost all of Paramount’s peers were paralyzed by the uncertainty in the energy market, Jim Riddell pulled the trigger on Paramount’s acquisition of 20% of NuVista Energy—a company with an adjacent land package. Paramount would have preferred to buy all of NuVista, but NuVista wasn’t a willing seller in the summer of 2020 and Paramount wasn’t willing to go hostile.

Paramount’s 2022 accumulation of land in the Willesden Green Duvernay is a second example of the Riddell’s ability to create value through deals. Last year, Paramount purchased two separate land packages resulting in over 250k acres with over 600 high-graded locations that can support a production plateau of 50k boepd for over 20 years. Given the quality of these well locations, Paramount thinks they should be worth over $1m each. We estimate Paramount paid less than $200k per location. Importantly, Paramount was able to more than offset the cost of the Willesden Green deal by selling its Kaybob Duvernay land package at a valuation of ~$1.3m per drilling location.

NuVista Energy Ltd.

NuVista Energy is an oil and gas producer based in Alberta. Like Paramount, NuVista combines high quality assets, strong free cash flow and a steep discount to our estimate of intrinsic value. And, like Paramount, NuVista is growing production (19% in 2023) while also generating a 10% free cash flow yield at current oil prices. At $100 oil, the company would generate a 20% free-cash-flow yield. We believe NuVista can grow at attractive rates while generating double-digit free cash flow yields for several years. Finally, we expect NuVista to return most of its free cash flow to shareholders.

In 2022, NuVista achieved its ambitious de-leveraging goal and publicly committed to returning ~75% of future free cash flow to shareholders. Having been skeptical of management in the past, we were pleasantly surprised by both outcomes. We attribute management’s newfound clarity and focus to the realization that the company could be taken over. Ever since Paramount took a run at NuVista in 2020, management elected to give investors exactly what they want to get the share price up and stave off an unwelcome bid from Paramount. Given this rationale, it’s not surprising that most of that return of capital will be done via share repurchases. Last year alone, NuVista reduced its share count by 7.8%.

Over the medium term, we think NuVista can grow ~10% per year while returning most of its free cash flow to shareholders. When multiples for E&P companies eventually expand, we expect NuVista to be a seller. The C-suite and board at NuVista own meaningful stock options that will crystallize upon a change of control, and thus are incentivized to transact when the time is right. Until that day comes, we think shareholders of NuVista can expect to receive over a 20% total return per year (free cash flow yield + production growth), in a company with over a decade of top-tier inventory and de minimis debt.

MAG Silver Corp.

MAG Silver is the 44% owner of the world-class Juanicipio silver mine in Zacatecas, Mexico. After four years of construction, the mine was commissioned in the first week of 2023. We expect production to ramp up to 4,000 tonnes per day by the end of this year but never achieve the 8,000 tonnes per day we were anticipating. Accordingly, at $24 silver, we estimate the cash flow from MAG’s 44% stake to be around $100m. As a result, we reduced our position to a more modest weight in January.

The electrification of the Juanicipio mine just before Christmas of last year ends a painful chapter in MAG’s history. This world-class asset, which was discovered over 2003-2006, took a full 16 years to come into production. Initially, conflict between MAG and their JV partner, Fresnillo, was to blame for the delay. But in recent years, the disfunction of the AMLO administration, a drug war in the state of Zacatecas, and the COVID shutdowns across Mexico, were the culprits. Given the challenges MAG and Fresnillo faced completing the Juanicipio mine, both companies will take a cautious approach to further expenditures on the JV property.

Even so, the Juanicipio mine will be expanded beyond 4,000 tonnes per day when additional ore is sent through Fresnillo’s Saucito plant which is just a few kilometers away from the Juanicipio JV. Longer-term, the aggressive exploration of the JV land package and exploitation of additional veins will require a better environment in Mexico. While Mexico is not yet Venezuela, it is on the path to becoming a failed state. This unfortunate reality makes the expansion of the Juanicipio JV to 8,000 tonnes per day unlikely anytime soon.

International Petroleum Corp. (IPCO)

IPCO is a Swiss based oil and gas company controlled by the Lundin family. At $80 oil, we calculate that approximately 20% of the company’s market cap is available for distribution or reinvestment each year. At $100 oil, IPCO’s free cash flow yield is above 30%. Given this wave of free-cash-flow generation, low valuation, and attractive investment opportunities, the decision to reinvest free cash flow or return it to shareholders is top of mind for the Lundin family. Last year, after paying off its remaining debt, the majority of the company’s free cash flow was used to repurchase shares, resulting in a 10% reduction in shares outstanding in calendar year 2022. Over the next two to three years, we expect the majority of the company’s free cash flow to be deployed into a Canadian oil sands project called Blackrod.

IPCO’s Blackrod project is a fully permitted Canadian oil-sands pro ject with over one billion barrels of resource. When IPCO decides to go ahead and develop this asset, the investment will consume $600m of capital, or two years of free cash flow. The investment decision is in essence a prediction about the future oil price. Given the Lundin’s family’s relatively bullish view of the oil price, we believe they will proceed with the investment. When built, we estimate that the project will more than double the company’s production and reserves.

Sincerely,

Equinox Partners Investment Management

^[2] On Jan 18 ^th 2023, it was announced Province of BC came to an agreement with the Blueberry River First Nations Indigenous group: Canadian province and First Nations reach Montney shale play deal | Reuters

Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, FactSet or independent sources. Values as of 12.31.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q3 2022 Letter

Tue, 01 Nov 2022 17:43:46 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

In the third quarter of 2022, Equinox Partners, L.P. declined -10.4%. For the year to date through September 30th, the fund gained +3.0%.

Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail. [1]

NATURAL GAS INVESTING : THE Opportunity

As we write, 1,000 cubic feet of gas (an MCF) trades at $5.60 in North America, $38 in Asia, and $48 in Europe. These massive price disparities are incentivizing unprecedented investments in liquified natural gas (LNG) facilities to move cheap gas from North America to Continental Europe and North Asia. As more gas is liquified and traded across geographies, price disparities should eventually converge on the transportation differential of $5 to $7 per MCF. We believe Equinox Partners, L.P. is positioned to capitalize on this convergence through our ownership of cheap gas in geographies that will realizes higher prices as the LNG market grows.

[ letter continues below the Research Room video box ]

Watch our Research Room episode on Natural Gas and Crew Energy

The Rub

While the long-term natural gas arbitrage opportunity is clear, the devil is in the details. There are a variety of restrictions that prevent the free movement of gas across geographies. Even within North America, there are long-standing disparities in natural gas prices. Notably, gas in Canada’s Montney and Pennsylvania’s Marcellus have both traded at discounts to the North American natural gas benchmark for years. The mindboggling delays to the Mountain Valley Pipeline (MVP) are a case study in impediments to the transportation of natural gas. Even though the MVP pipeline is commercially attractive and 97% complete, there is no obvious way to complete the project given the environmental opposition. In many cases such political realities make the natural gas arbitrage opportunity more theoretical than real.

The Consensus

North American natural gas investors have focused on plays with favorable transportation situations. The Haynesville and Permian plays in Louisiana and Texas respectively both fit this bill. They combine attractive geology and a permissive regulatory environment that enables E&P companies to develop these plays at a rapid clip while generally achieving benchmark pricing for their production. As a result of these investments, the Haynesville and Permian have together added over 20bcf a day of production over the past five years. This rapid production growth has even outstripped the growing LNG exports from the Gulf of Mexico, which have increased by 12bcf a day over the past five years.

After years of consistent investment, a growing number of tier-one locations in the Haynesville and Permian have been exploited, and incremental growth potential is limited. As this geological reality plays out, the further growth of North American natural gas production will have to come from prolific fields that have been constrained by transportation issues. In particular, the Montney and the Marcellus will play a larger role in natural gas production going forward. Of these two, we prefer the Montney in Western Canada for two reasons. The play is making clear progress on the long-term transportation issue, and Western Canada’s gas trades at a particularly large discount to Henry Hub.

OUR LARGEST INVESTMENT: WESTERN Canadian GAS

Even though Western Canada has some of the cheapest gas in North America, the futures market is decidedly bearish on its gas. AECO, the Western Canadian benchmark, is projected to average just $3.5USD per MCF over the next five years. That is a 25% discount to Henry Hub natural gas pricing in Louisiana, and an 85% discount to the Asian benchmarks where a growing share of Western Canada’s gas will eventually be exported.

The stock market is equally pessimistic about Western Canadian gas producers. Western Canadian E&P companies trade on low cash-flow multiples that assume low realized natural gas prices. This pessimism is partly attributable to the long-standing problem Western Canadian producers have had getting their gas to market. This historical problem, however, should soon become less relevant as a growing fraction of Western Canada’s gas production is exported to Asia.

With a $29 billion USD price tag, LNG Canad a is the most expensive construction project in Canada’s history. The first phase of LNG Canada is projected to come online in April of 2025. The second phase, which will more than double the initial capacity, should be completed by the end of this decade. The $29 billion price tag only covers phase 1. Together, the two phases of this project will result in 4-5bcf per day of additional demand in Canada’s Western Sedimentary Basin. This amount of incremental offtake is significant given that the entire basin’s production is currently 16.5bcf per day. Amazingly, despite the pending increase in demand from LNG Canada, the effect of LNG Canada is not noticeable in the future’s market for gas in Canada nor in the producers' valuations.

LNG Canada consortium members can obtain the incremental gas they need via the drill bit, the spot market, long-term supply contracts, and/or acquisitions. Of these options, the spot market is the least likely given that it entails both price and supply risk. In our opinion, the consortium members will secure the gas they need by growing their own production, entering into long-term supply agreements, and/or making acquisitions. Each of these three strategies has the advantage of allowing LNG Canada consortium members to lock-in their spread for years, if not decades.

To the extent that LNG Canada consortium members will be dependent upon long-term supply contracts and acquisitions, the concentration of the producers of gas in Western Canada makes for some interesting game theory. CNQ and Tourmaline, the two largest producers of gas in Western Canada, produce over 2bcf per day a piece. While these companies could individually meet a sizable portion of the LNG demand, both would be challenging acquisition targets. With market caps of $69 billion USD and $18.5 billion USD respectively, both are too large for all of the LNG Canada participants, except for Shell. Moreover, there is no incentive for either CNQ or Tourmaline to solve LNG Canada’s supply problem without achieving a massive acquisition premium or by improving the overall supply-demand dynamic for gas in Western Canada.

Absent an improbable takeout offer from Shell, CNQ and T ourmaline will work to achieve premium prices on both the gas they contract, as well as the balance of the gas they will continue to sell in Canada’s Western Sedimentary Basin. Accordingly, we believe there is a high likelihood that the Canadian natural gas market could remain tight for a prolonged period and may even eventually trade at a premium to Henry Hub.

The supply-demand trends in Western Canada make us generally optimistic about the basin and particularly optimistic about our investment in Crew Energy. We project that Crew will be producing 300MCF per day of gas by the time LNG Canada Phase 1 comes online. Importantly, with its large, unexploited land package, Crew can sustain that level of production for more than 20 years. Moreover, Crew’s land package is co-located with LNG Canada’s pipe. This combination of factors makes Crew’s production not just valuable but strategically important. Recognizing the company’s strategic value advantage, unlike many of its peers, Crew has not contracted any of its gas out of the basin after 2025, making all of the company’s gas available for delivery to LNG Canada.

While Crew’s assets merit a prem ium price, we calculate the company’s upside without a strategic premium, and assume a rerating of the gas price in Western Canada to $5 USD per MCF, Henry Hub’s long-term average. Assuming 300MCF per day of production, $5 USD gas, and a historically normal cash flow multiple of 5x, we believe Crew is worth $3 billion USD. This is four times the company’s current enterprise value of approximately $750 million USD.

Map of Crew’s Land Package in the Montney

Sincerely,

Equinox Partners Investment Management

^[1] Sector exposures shown as a percentage of 9.30.22 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 9.30.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners Precious Metals, L.P. - Q3 2022 Letter

Fri, 28 Oct 2022 19:00:16 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

In the third quarter of 2022, Equinox Partners Precious Metals, L.P. declined -12.0%. For the year to date through September 30th, the fund declined -30.3%.

Visit our performance page to view the Equinox Partners Precious Metals, L.P. fund summary in more detail. [1]

the gold price

Gold trades at roughly the same price it did a decade ago. This is a wildly disappointing outcome given the last decade seemed to be the perfect setup for gold. Since the fall of 2012, we’ve witnessed a massive spike in U.S. debt, trillions in quantitative easing, the highest inflation rate in 40 years, persistent geopolitical instability, and consistent central bank gold buying. Having reflected on the combination of these seemingly bullish factors and an unchanged gold price, we think it necessary to rearticulate what factors we believe are necessary to drive gold prices meaningfully higher.

In our opinion, the two critical ingredients for a bull market in gold are a diminution of the Federal Reserve’s creditability and/or strong physical gold demand.

Notably absent from our list are three factors upon which gold investors are fixated: the Federal Reserve’s policy rate, the trade-weighted U.S. dollar index, and the Federal Reserve’s balance sheet. To be clear, these three factors are relevant to the price of gold. But as the past decade has shown, by themselves these factors are neither decisive nor consistently correlated with the gold price. Rather, the significance of these factors is dependent upon the extent to which they reflect the Federal Reserve’s credibility.

Real rates, by contrast, have historically correlated more reliably with the gold price. That said, real rate estimates are only as good as the inflation expectation data they use. As the graph below shows, the 5-Year Forward Inflation Expectation Rate as calculated by the St. Louis Federal Reserve is exactly the same as it was a decade ago. In our opinion, real rates that assume no uptick in long-term inflation are not credible, and it is not surprising that the historical correlation between the price of gold and real rates broke down this year. The other factor that could theoretically be largely independent from the Federal Reserves’ credibility and move gold prices meaningful higher is physical gold demand.

The Fed Fund’s Rate, the U.S. dollar, and Quantitative Easing

While gold has declined 7% this year as the Fed’s policy rate has risen rapidly, the inverse correlation between the Fed’s policy rate and the gold price has not held in the previous two rate-hiking cycles. Gold rallied from 2004 to 2006 and again from 2015 to 2019 as the Fed raised rates. So, while Fed policy rates clearly play a role in the gold price, it should be equally clear that a higher nominal policy rate will not necessarily lower gold prices. Similarly, rate cuts are not always bullish for gold. From 2007 to 2009 the Fed aggressively cut rates, and again from 2019 to 2020. In the 2007 to 2009 period, gold fell, while in the 2019 to 2020 period, gold rose.

The same weak correlation holds true for quantitative easing and the gold price. The Federal Reserve’s balance sheet was $2.8 trillion a decade ago when gold was at $1,700 per ounce. The Federal Reserve’s balance sheet today stands at $8.7 trillion dollars while gold is at $1,650 per ounce. This is not to say that there is no relationship between QE and the gold price. Gold rallied when QE began as the markets expected inflationary consequences beyond the control of the Fed. However, after years of QE failing to either move CPI or inflation expectations, the market came to believe that QE was relatively benign, and the correlation between the size of the Fed’s balance sheet and gold prices broke down as a result.

The trade-weighted U.S. dollar index also has limited long-term value as a predictor of the price of gold. While the strong dollar has been a negative for the gold price in 2022, the U.S. dollar index and gold were positively correlated in 2019 and 2020. Fundamentally, the U.S. dollar index fails to capture the extent to which central banks are collectively debasing their currencies. With negative real rates having become the norm in an overindebted world, the U.S. dollar index could prove stable as all currencies decline in real terms.

Real Rates

Real interest rates have historically offered investors a far better guide to the gold price than the nominal Fed policy rate, the U.S. dollar index, or the Fed’s balance sheet. The most relevant real yield for gold is calculated by subtracting estimated future inflationary expectations from the 10-year Treasury yield. As the graph below makes clear, this year the projected real yield has risen precipitously as 10-year rates have increased quickly and long-term inflationary expectations have remained anchored. The October implied 10-year forward real rate is 1.8%, the 10-year yield of 4.1% less the 10-year future expected inflation rate of 2.3%.

The problem with the above real rate calculation is that it uses an improbably low 2.3% 10-year inflation expectation. This 2.3% expectation is disconnected with both our current inflationary experience and our past experience of getting inflation under control. While the Federal Reserve has adopted an aggressive stance since August, it is not at all clear that their policies will be enough to subdue inflation even temporarily, let alone control it for a decade. To quote Stan Druckenmiller: "Once inflation goes above 5%, it has never come back down without the Fed Funds Rate exceeding the CPI."

It turns out that such constrained future inflation expectations give a lot of weight to some pretty flimsy data points. Specifically, the implied future inflation expectations in the last two graphs are computed by the Cleveland Fed using Blue Chip economic forecasts, the forecast of the Survey of Professional Forecasters, and inflation swaps pricing. The results of these surveys and pricing of inflation swaps are neither robust nor transparent. Moreover, there is a troubling conflict of interest, given that the Fed is compiling, calculating, and calibrating the data that are assessing its own credibility.

There is also good reason to believe that the Cleveland Fed’s expected inflation calculation contains a downward bias. This bias can be partially observed through the spread between the inflation expectations of consumers conducted by the University of Michigan and the inflation expectations of professional forecasters used by the Cleveland Fed. The one-year rolling spread between consumers and forecasters over the last two years of 2% is the largest on record going back to 1982. [1] Notably, a close second was in 2008 before the GFC. This is particularly relevant, because over that time, the average Joe has been better at predicting actual CPI than the professional forecaster. Specifically in 2021, consumers expected an average 4% inflation in the year ahead while forecasters guessed 2%. Actual CPI in 2022 has averaged 8%.

[1] Specifically, as of August, the average American is expecting inflation of 4.8% over the next twelve months. Professional forecasters, on the other hand, are expecting one-year inflation to average just 3.4%. Notably the period around the GFC had similar consumer forecasts, but inflation did not meaningfully materialize like it has now.

Physical Gold Demand

Gold is one of the largest markets in the world. When the measure of gold’s liquidity includes the physical market, derivatives, futures, and exchange-traded products, gold’s daily turnover rivals the market for U.S. Treasuries.

While gold may seem irrelevant to some, there is no sign of gold’s irrelevance in its trading activity. There is also ample institutional demand for gold-linked products as can be seen in the over-the-counter derivative market. As of the last report from the Office of the Comptroller of the Currency, insured U.S. financial institutions are party to over $400 billion of gold derivatives. While the graph below overstates the actual growth because of a report change, it nevertheless illustrates that the amount of such derivatives is sizable and growing. [1]

[1] “Beginning January 1, 2022, the largest banks are required to calculate their derivative exposure amount for regulatory capital purposes using the Standardized Approach for Counterparty Credit Risk (SA-CCR). Under SA-CCR gold derivatives are considered precious metals derivative contracts rather than an exchange rate derivative contract resulting in an increase in reported precious metals derivative contracts compared to prior quarter...”

That the increase in demand for gold derivatives has corresponded with a weak gold price can be seen as a positive or a negative for gold investors. On the one hand, it reflects gold’s continued relevance to institutional financial market participants. On the other hand, it shows that there is ample paper gold ready to meet this financial demand for gold-linked products. Given the surprising, but apparently limitless supply of paper gold, we believe investors' growing preference for physical gold is particularly important.

One such shift from paper gold to physical gold can be observed through COMEX delivery data. Since the onset of the Covid pandemic, a sizable number of COMEX gold (and silver) futures contract owners have stood for delivery. Given that the paper market for both gold (and silver) dwarfs the size of the physical market, any shift from paper to physical demand is a positive. Increased premiums on coins and bars also corroborates that physical demand is increasing.

One of the largest buyers of physical gold remains central banks. The extent of central bank physical purchases remains opaque. We don’t, for example, know the extent to which central banks are buying pooled or allocated gold: “the gold bar weight lists of central banks are never published, as their publication would reveal that much of their gold is not sitting in unencumbered storage in London, but has long been lent out.” [1] That said, it is clear that a growing number of central banks are not only buying gold, but choosing to take delivery as well. This list includes China and Russia, as well as Poland, Hungary, Brazil, and India.

If we are right and either a decline in the Federal Reserve’s credibility or an increase in physical demand is necessary to trigger a bull market in gold, there is good reason to be hopeful. As we write, the Federal Reserve’s credibility and the physical gold market are both under considerable pressure. If the Fed cannot get inflation convincingly under control soon, their credibility will inevitably decline. Likewise, if retail and central bank gold demand continue to grow, the constraints of the physical market could very well dictate the gold price.

[1] Bullion Star Blog

Sincerely,

Equinox Partners Investment Management

^[1] Sector exposures shown as a percentage of 9.30.22 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 09.30.22 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 9.30.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q3 2022 Letter

Fri, 28 Oct 2022 16:07:14 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund, LP declined -6.6% in the third quarter of 2022 and was down -21.1% for the year to date through September 30 ^th , 2022. By comparison, the MSCI EM index declined -11.6% in the quarter and -27.2% for the year to date.

Visit our performance page to view the Kuroto Fund, L.P. fund summary in more detail. [1]

Georgia's economic boom

In Kuroto Fund's first quarter 2022 letter , we discussed the impact that Russia’s invasion of Ukraine would likely have on our Georgian investments, which represent 21.5% of the fund as of the end of Q3 2022. Immediately following the invasion, our investments in Georgia sold off by more than 30%. Markets were concerned that Georgia—which lost 20% of its territory to Russia in 2008—might be subject to another Russian invasion. And, even if Russia didn’t invade Georgia, it seemed inevitable that Georgia’s GDP would be hit, with regional trade flows slowing, Russian tourism stopping, and remittances from Georgians living in Russia declining. In fact, the exact opposite has occurred. Russia’s struggles in Ukraine make it unlikely that Russia will invade Georgia, or any other former Soviet republic for that matter. Moreover, Georgia is experiencing what can fairly be described as an economic boom.

Georgia’s real GDP growth is expected to exceed 10% this year—the second straight year of 10%+ growth in real terms. This growth is being driven by three factors: 1) regional trade and manufacturing rerouting to Georgia because of sanctions on Russia; 2) an influx of Russian work-from-home tech employees to Georgia; 3) a large increase in remittances from Georgians living in Russia.

The first factor—a regional trade and manufacturing shift to Georgia—can best be understood by looking at a map of the region. Any overland trade from Asia to Europe, or vice-versa, has four possible routes through the region. The first, through Russia, is no longer an option. The second, through Azerbaijan and Armenia, doesn’t work because of the ongoing conflict between those two countries. The third, through Iran, is obviously problematic. Consequently, the most favorable trade route is through Georgia Furthermore, Western businesses operating in the region seeking to serve Eurasia might have previously picked Russia to export into the Caucasus. That is no longer a possibility. Hence, companies have started to shift their operations to Georgia, given its status as the best place to do business in the region. Heineken’s Georgian subsidiary, for example, recently started exporting from the country to its neighbors. Georgia may only have 3.7 million people, but Azerbaijan has 10 million, Kazakhstan has 19 million, Uzbekistan has 34 million, and the other "Stans" have 22 million people between them. Georgia was already a business hub in the region; the war has provided additional tailwinds.

The second factor—a mass influx of Russians into Georgia—has more than made up for lost tourism due to the conflict. Over the first four months of the war, 50,000 Russians fled to Georgia, where they can stay a year without a visa. Many of these Russians are tech workers who have kept their jobs and are working remotely. Hotels and restaurants in Tbilisi are packed, and the spending has provided a strong boost to the local economy. To quantify the impact of this immigration, assume 10,000 of the immigrating tech workers earn USD$100,000 per year. That equals USD$1b in income. Georgian GDP is only USD$16b. In addition, since Putin’s mass mobilization in September, the number of Russians fleeing to Georgia has increased. At its peak, we understand that as many as 10,000 people were crossing the border from Russian to Georgia per day. This second group of expats are likely lower earners looking to avoid the draft, but they will also have a positive impact on Georgian GDP.

The third factor is remittances. Initially, we were concerned about the potential a drop in remittances from the large number of Georgians living in Russia. There are roughly 400,000 Georgians living in Russia, or more than 10% of the Georgian population. Instead, we think remittances have increased due to the strong ruble and a preference to store capital in Georgia rather than Russia.

These war-related tailwinds would not have been possible without the strong foundation Georgia laid over the past 15 years as the most politically and economically free country in the region. While there is some element of “best house on a bad street”, Georgia has taken advantage of opportunities that have come its way. From a financial perspective, its government debt to GDP is around 50% and is projected to decrease going forward. Inflation is currently down from a peak of 13.8% to 10.9% at the latest reading. The central bank rate is 11%, which is enough for marginal real rates. Next year, inflation is expected to decline to 6%, giving Georgia one of the largest, expected real rates in the world for 2023. In addition, the government has been proactive about signing free-trade agreements with both the EU and China. Plus, the nation’s ease-of-doing-business ranking is top ten globally. All this has helped make Georgia a hub for manufacturing and services in the region and given the country one of strongest ten-year GDP growth rates in the world.

Our investments in the country, TBC Bank and Georgia Capital, are reaping the benefits of this situation. TBC Bank is expected to generate close to a 30% ROE this year in Georgia, while growing loans close to 20% (though still below nominal GDP growth). Despite this, the stock is trading at 0.7x book value and less than 4x earnings this year based on our estimates. Georgia Capital is seeing similar performance in its banking arm, strong growth in its consumer-oriented business, and is selling non-core assets to de-lever and buyback shares. Buying back shares while trading at ~40% of its sum of the parts is a particularly attractive proposition in our opinion.

Sincerely,

Sean Fieler and Brad Virbitsky

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 9.30.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Mine Visit Note: Orezone

Tue, 20 Sep 2022 16:03:58 GMT

EQUINOX PARTNERS - Precious Metals Miners
Site visit - Orezone Gold Corporation
july 2022 Note and Videos

Watch our Research Room on Orezone

Dates July 25, 2022

Mines Visited Bomboré

Countries Visited Burkina Faso

Equinox Team CIO, Sean Fieler | Analyst, Stephen Saroki | Head of IR, Daniel Schreck

OVERVIEW

Orezone Gold Corporation (ORE Canada) is a development-stage gold mining company that owns the Bomboré asset located just south of the capital of Burkina Faso, Ouagadougou. They are in the process of building the asset, with first gold pour expected in Q3 of 2022. While in a tough jurisdiction, management has skillfully organized financing and put together a construction team that is on track to deliver the project on time and on budget in our view.

metrics

Market Cap $358 million USD

Enterprise Value $405 million USD

EV/CF 2.7x 2023 cash flow estimate

P/NAV (5% discount) 0.48x

Resources 6.2m ounces of gold

EV/Resource $66 per ounce of gold

Reserves 1.8m ounces of gold

EV/Reserve $221 per ounce of gold

AISC ~ $900 per ounce estimate once in production

Thesis

We expect Orezone’s Bomboré build to be a real triumph in the mining space. While others have struggled with both schedules and budgets (IAMGOLD’s Côté and Argonaut Gold’s Magino), Orezone is tracking to be on time and on budget with the entirety of the mine build occurring during COVID. Trading at less than half of NAV, not including resources outside of reserves or exploration, Orezone should experience a re-rating as it goes from developer to producer. The additional upside in terms of its resource, the upsizing of its sulphide circuit, and the excellent exploration results, suggest that the market hasn’t internalized the opportunity here, in my view.

Trip summary

We've owned Orezone for years, seeing the company and project progress along the way, especially so in the last few years. Now, with Bombore supposedly only a month away from production, we wanted to assess the project and progress for ourselves as a part of our ongoing research and diligence. Making our way from the Ouagadougou to the mine site in the morning, Sean, Dan, and I were able to meet the team. We saw the processing facility, visited one of the oxide pits, the tailings storage facility, the off channel reservoir, and the core shack. We had excellent access to the team, and were able to conduct a thorough assessment of the project.

Management and governance

This visit was focused on the operating team. All in all, this is an impressive team, especially for a junior mining company like Orezone to put together. In getting to chat with them, it was clear that they were well organized and focused. In addition, they have all of the skill sets necessary to deliver the project.

John Le Roux, General Manage r: He’s been everywhere in his 30 years in the mining space. This includes the Ok Tedi Mine, which at the time was owned by BHP Billiton and is one of the more prolific mining deposits in history. He improved operations there and told us that it is the only time in his mining career that he was asked to slow the rate of improvement. Previous to Orezone, he was the GM for NordGold’s 3 mines in Burkina Faso. He also held senior positions with AlacerGold, Eldorado Gold, and Centerra Gold, spending time in Turkey and the Kyrgyz Republic. He is an outstanding get for Orezone.

Ricardo Rodrigues, VP Projects and Project Manager: Previously worked as the construction manager for Perseus Mining, where he built Sissingué and Yaouré (Côte d’Ivoire), managing Lycopodium in the process. Sissingué was ahead of schedule and on budget and Yaouré was ahead of schedule and under budget. Importantly, he was able to complete a mine on time and on budget during Covid. If I were to be building a gold mine in West Africa, Mr. Rodrigues would be on my short list of candidates to consider to lead the build. He's working with basically the same team to build Bombore.

Pascal Marquis, Senior VP Exploration : He has 35 years of mineral exploration experience, having worked at Agnico Eagle and Trillion Resources prior to joining Orezone in 2002. From discussions, he has been a long-term holder of Orezone's stock. He’s got a ton of experience in West Africa exploration, which is especially important because not all rocks are the same. He leads the geologist exploration team of four. Pascal stressed that he is IRR conscious and not just digging for rock: for instance, having built the water reservoir close to the local river using a simple gravity-fed sluice.

Ousseni Derra, Country Manager : A native Burkinabi, Mr. Derra plays a vital role in exploration, permitting, and government relations. A geologist by training, he makes sure that the Orezone has the capability to operate in a continuous and unobstructed fashion. Prior to joining Orezone in 2009, he worked for Billiton Metals, Goldfields, and Ashanti Goldfields.

Watch our Research Room episode on Burkina country risk

JURISDICTION

The general perception of Burkina Faso is heavily influenced by international headlines. Between jihadist activities and coups, most investors are reticent to want to underwrite investments there. But despite this noise, we view it as one of the better mining jurisdictions in the world. Land concessions are easily attained. Exploration permits are readily given. Mining permits generally come within 12 months. To provide some context, even in Tier 1 jurisdictions like Canada, many projects take 4 to 5 years to permit. The government in Burkina understands the economic proposition offered by mining and enthusiastically supports the industry. The people line up for jobs as they pay considerably 3-4 times more than any alternatives available to them.

While there has been a rise in violence committed by jihadist militants, which is obviously concerning, our travels indicate that the corridor south of Burkina Faso’s capital (Ouagadougou), where Bomboré is located, remains a safe area in the country. We spoke with the head of security and saw some of his 20-person team. They have extensive local contacts in the villages which is essential for intel. The local community of around 15,000 people wants Orezone there due to the good, high-paying jobs and stability. There is a local military base nearby.

We actively track the security situation throughout the country, and find that the lion’s share of issues occur in the northeast and eastern portion of the country (see map). For example, Nordgold recently closed its Taparko mine, which is located 200 km northeast of Ouagadougou. However, the binary nature of security in the country is such that one region is very safe, while another is anything but. It is incumbent on miners to secure their site and logistics supply chain. While concerning from a headline perspective, security tends not to affect mining operations. In fact, we’ve recently come across a lot more difficulty in Latin America on that front than we have in West Africa. Even the coup in Burkina Faso in January 2022 had no impact on mining operations. In talking with people at the mine site, they seemed to suggest it was meaningless, having no effect either on the mine or the lives of the people.

Corporate Social Responsibility (CSR)

One of the more remarkable things about Burkina Faso is that mining constitutes the vast majority of direct foreign investment. There are no Starbucks or McDonalds, not even in the capital city. Google and Facebook will not be opening offices there any time soon. Mining, on the other hand, has brought in billions of dollars in investment to the country. In addition to the 10% free carried interest, ~4% royalty, and 27.5% tax rate, the project in operation will employ about 500 hundred people, with over 90% of these people being Burkinabe. Even what is ostensibly a low-paying job as a truck driver pays more than 4x the annual per capita income in the country. Mining promotes economic development, and is offering the people of the country an opportunity for a better life. According to the team, the Burkinabe people are the best and hardest workers regionally, and even globally. Given the regional importance of gold mining, and to Burkina in particular (80% of export value), there is a strong ecosystem of geology schools and company-specific advancement.

catalysts

The primary catalyst for Orezone is going from developer to producer, as there is commonly a multiple re-rating. Exploration will also serve as a focus as the company begins the show the potential of the land package, especially in the P17 zone. In addition, the sizing up of the sulphide circuit relative to market expectation should serve to improve the economics and NPV of the project.

bombore

Production: Expected first gold pour in Q3 2022, which we think they will hit.

The Processing Mill:

1. We weren’t able to walk through the mill since the construction team is actively putting on the final touches. We could see all of the major parts from a distance, discussed each, and had a quick handshake with the commissioning manager from the Lyco team whom Ricardo worked with at Perseus.

2. They’ve commissioned 70% of the systems, including all of the front end parts of the mill (Conveyor, Ball Mill, etc.). The only parts they haven’t commissioned (at least as of our visit) are on the back end of the flow sheet: the elution circuit (where gold is separated from carbon and returned to solution with the use of a concentrated cyanide solution) and the gold room (where a gold sludge is delivered, dried, and smelted resulting in doré gold bars).

3. In addition, Lycopodium, who is the contractor for the processing mill build, has a sterling track record of delivering projects on time, on budget, and with the ability to do 15-20% above nameplate capacity, which for the initial circuit at Orezone is 5.2 million tonnes per annum (Mtpa). In this case, Ricardo thinks they’ll be at 70% of name plate for about a week before quickly ramping up to full production.

4. Finally, we were also able to see how their current layout allows for the 2.2 Mtpa+ sulphide circuit.

Earth and Ore Movement:

1. A full year’s worth of ore has already been stockpiled. While we initially had some questions about their ability to move the appropriate tonnage with 30 tonne haul trucks, their movement of ore in fact has progressed well.

2. On top of this, given the sheer availability of ore stockpiles and the varying grade, it should be fairly easy for them to find of blend of ore that allows them to get the production that they are targeting.

3. The oxides are very soft and easy to move. They are free dig, and don’t require explosives. However, it remains an open question if the pit will continue to exhibit that characteristic.

Power Supply:

1. The build planned for 14 MW of capacity provided by four 3.5 MW generators. They have two of the 3.5 MW diesel generators, and they’ve rented two 1 MW generators, giving them a total capacity of 9 MW. They will replace their currently rented units with the two additional 3.5 MW generators. The third just shipped from the US, and the fourth will leave in August. They’ve already turned the plant on once and will do so again once they fix a gen set with injector issues.

2. According to the Feasibility Study, during the initial oxide treatment phase “the annual average electrical load on site is estimated to be 6.6 MW with a peak demand of 8.6 MW.” While this might be enough, we will be considerably more comfortable when the two additional 3.5 MW generators have reached the site. Of all the things we saw at the project, this is our greatest concern.

3. They don’t have grid power, but are looking to figure out if grid power is possible going forward.

4. Not specific to this operation, the rising fuel costs are a concern for all companies that use generators to provide power. It's a big chunk of AISC per ounce.

Tailings Storage Facility/Off Channel Reservoir/Etc.

1. The Tailings Storage Facility looks great. The earthworks and the lining are complete.

2. The Off Channel Reservoir is full of water, and there is river that runs through the land package that provides an abundance of water for the operation.

3. All in all, the rest of the project looks great in my view.

exploration & upside

1. The Feasibility Study only includes the 1.835 M oz in the Mineral Reserve Estimate. Orezone has a Mineral Resource Estimate of 6.162 M oz. In addition, lots of these additional resources sit in a halo adjacent to the reserves, would be included in a mine plan if current precious metals prices persist. It should be noted that the current mine plan uses pit shells designed at $1250 gold, while $1400 gold would incorporate the vast majority of these additional resource ounces (see two images with this pit concept outlined).

2. Examples: Notice the AMC FS Pit Design, done at $1250 Au oz, versus the Conceptual $1400 Pit Shell. The strip appears to remain similar, and yet this would conservatively add 15-25 years of mine life to the mine. These are ounces that have already been identified, but haven’t been included in a mine plan. We see the same dynamic at Maga Hill.

3. Exploration of the P17 Trend: The results speak for themselves. 32.00 meters at 3.98 g/t, 12.20 meters at 10.01 g/t, etc. They are just getting started. Some of the P17 trend is included in the mining concession (P17S), but most of is outside the mining concession. On top of this, there are several other targets on Orezone’s land package outside of the mining concession that are very attractive. Overall they want to, “convert a lot of inferred ounces that look good and expand our pits”

4. Upsizing the Sulphide Circuit: The current sulphide circuit, is expected to be 2.2 Mtpa, but with the right amount of sulphide ore, could be upsized to 5.2 Mtpa. This is contingent upon success than sulphide exploration success. Given what they’ve already found at P17, this decision already appears to make economic sense. Specifically, they think they have 1.2m ounces of convertible inferred suphides via 77k meters of drilling. 75% of the core drilling is done and 1/3 has been assayed. Of the overall drilling the new P17 region is just 10% of that. They are “feeling out” how big the sulphide plant should be. Orezone should be able to do this without tapping equity markets . They are soft-targeting next year for a construction decision that would take them into 2024.

*** END ***

*Figures and statements as of July, 2022 visit. This is an internal research note written by an analyst employed by Equinox Partners Investment Management, LLC. It is not intended for distribution. This information was intended exclusively for the person to whom it was delivered and ought not to be distributed further. Opinions are expressed throughout this note as of the date of the note. Opinions can be wrong or can prove to be right. Investment decisions are made in part as a result of mine visits and company discussions, but not exclusively so.

Past performance is not a guarantee of future results. Any investment in a fund or managed account entails a risk of loss, including the entire amount invested. Performance is shown net of management fees, performance fee, and expenses, for each series in the consolidated managed account unless otherwise indicated. Account values are presented gross . Index returns adjusted for inception date of accounts. All performance is unaudited and based on valuations prepared by the adviser and is subject to revision. Net exposure includes short position exposure. See the End Notes on the following page for more important information regarding the performance information shown.

End Notes

THIS INFORMATION IS INTENDED EXCLUSIVELY FOR THE PERSON TO WHOM THIS WAS DELIVERED WHO IS DEEMED TO BE A PROFESSIONAL FAMILIAR WITH FINANCIAL INSTRUMENTS AND HEDGE FUND PRODUCTS IN PARTICULAR. ANY FURTHER USE BY AND/OR DELIVERY TO A THIRD PERSON IS STRICTLY PROHIBITED AND ALLOWED ONLY AFTER THE PRIOR EXPRESS WRITTEN CONSENT OF MASON HILL ADVISORS, LLC. THIS INFORMATION IS CREATED SOLELY FOR INFORMATIONAL PURPOSES WITH THE EXPRESS UNDERSTANDING THAT IT DOES NOT CONSTITUTE: (I) AN OFFER, SOLICITATION OR RECOMMENDATION TO INVEST IN A PARTICULAR INVESTMENT; (II) A MEANS BY WHICH ANY SUCH INVESTMENT MAY BE OFFERED OR SOLD; OR (III) ADVICE OR AN EXPRESSION OF OUR VIEW AS TO WHETHER A PARTICULAR INVESTMENT IS APPROPRIATE. NO SALE OF SHARES OR INTERESTS WILL BE MADE IN ANY JURISDICTION IN WHICH THE OFFER, SOLICITATION OR SALE IS NOT AUTHORIZED OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE THE OFFER, SOLICITATION OR SALE. ANY OFFERING OF SHARES OR INTERESTS BY AN INVESTMENT FUND WILL BE MADE SOLELY PURSUANT TO THE PRIVATE PLACEMENT MEMORANDUM PREPARED BY AND FOR SUCH INVESTMENT FUND AND WILL CONTAIN MATERIAL INFORMATION NOT CONTAINED IN THIS DOCUMENT. ANY DECISION TO INVEST IN ANY SHARE OR INTEREST OF ANY INVESTMENT FUND SHOULD BE MADE SOLELY IN RELIANCE UPON THE PRIVATE PLACEMENT MEMORANDUM AND ANY SUPPLEMENTAL DOCUMENTS. FURTHER, AS A CONDITION TO PROVIDING THIS INFORMATION, MASON HILL ADVISORS, LLC SHALL HAVE NO LIABILITY, DIRECT OR INDIRECT, TO ANY OTHER ENTITY ARISING FROM THE USE OF THIS INFORMATION.

THE INFORMATION PRESENTED HEREIN IS CURRENT ONLY AS OF THE PARTICULAR DATES SPECIFIED FOR SUCH INFORMATION, AND IS SUBJECT TO CHANGE IN FUTURE PERIODS WITHOUT NOTICE. THERE IS NO OBLIGATION TO UPDATE THE INFORMATION HEREIN. NONE OF THE INFORMATION CONTAINED HEREIN HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, ANY SECURITIES ADMINISTRATOR UNDER ANY STATE SECURITIES LAWS OR ANY OTHER GOVERNMENTAL OR SELF-REGULATORY AUTHORITY. NO GOVERNMENTAL AUTHORITY HAS PASSED ON THE MERITS OF THE OFFERING OF INTERESTS IN A FUND OR THE ADEQUACY OF THE INFORMATION CONTAINED HEREIN. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

IRS CIRCULAR 230 NOTICE. TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE U.S. INTERNAL REVENUE SERVICE, YOU ARE HEREBY NOTIFIED THAT THE U.S. TAX INFORMATION CONTAINED HEREIN (I) IS WRITTEN IN CONNECTION WITH THE INFORMATION PROVIDED ON THE FUND AND OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN, AND (II) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING TAX RELATED PENALTIES UNDER U.S. FEDERAL, STATE OR LOCAL TAX LAW. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISER.

Mine Visit Note: WAF

Mon, 19 Sep 2022 16:04:02 GMT

EQUINOX PARTNERS - Precious Metals Miners
Site visit - west African resources
july 2022 Notes and Videos

Watch our Research Room episode on WAF

Dates July 26, 2022

Mines Visited Sanbrado

Countries Visited Burkina Faso

Equinox Team CIO, Sean Fieler | Analyst, Stephen Saroki | Head of IR, Daniel Schreck

OVERVIEW

West African Resources (WAF Australia) is a gold producer that owns the Sanbrado mine located south of the capital of Burkina Faso, Ouagadougou. Ahead of schedule and under budget, WAF poured first gold in Q1 2020. In 2021, its first full year of production, the company produced 288,719 ounces of gold, meeting guidance on costs while exceeding guidance on production. In the final quarter of 2021, the company made two key acquisitions. They acquired the 1.3 million ounce Toega deposit, which will go through the Sanbrado processing facility. In addition, they acquired the 6.8 million ounce Kiaka deposit. These acquisitions lengthen mine life along with giving the company sightlines to 400,000 ounces of annual production. Despite the unique challenges offered by the jurisdiction, WAF’s management team has shown an ability to operate and deliver, and in the meantime allocate capital in an accretive fashion.

metrics

Market Cap $960m USD
Enterprise Value $795m USD
EV/CF 4.8 x 2023 estimated cash flow
P/NAV (5% discounts) 0.4x
Resources 11.6m ounces of gold

EV/Resource $69 per ounce of gold

Reserves 1.5m ounces of gold

EV/Reserve $530 per ounce of gold

AISC ~$1000 per ounce estimate '22

Thesis

Aligned with shareholders, CEO Richard Hyde, who owns 1.7% ($16 million) of the company, has put together an impressive operation. In addition to the exploration upside on the original Sanbrado land package, he accretively acquired the Kiaka and Toega deposits from B2Gold. In the process, he has generated considerable value and given the company a runway toward 400,000+ ounces of annual gold production by 2025. The attractive organic growth and production profile should lead to both improved NAV and a re-rating in the company’s stock.

Trip summary

Sean, Dan, and I were picked up from Orezone’s Bomboré mine and spent the evening at Sanbrado with the senior operations team. The next morning, we visited two of the pits, the processing plant, the tailings storage facility (TSF), and the underground mine. The team was welcoming and offered us a comprehensive picture of the asset and future plans. We got a good sense of the organic growth in/around the core operations, while getting a better understanding of Kiaka. It's essential to meet the people actually operating the mine.

Management and governance

This visit was run by the operating team. While definitely the youngest operating team at the mine level that I’ve come across, the experience was impressive. The group was both knowledgeable and motivated. We had ample time to speak with them on a personal and professional level, and they demonstrated that they are a capable and cohesive group.

Luke Holden, General Manager : He’s has over 15 years of experience in the mining space, with site-based operational roles in West Africa and Australia. Most recently, he was Director General of Nordgold’s Taparko mine in Burkina Faso. Intelligent, honest, and hard working, he’s put together a solid team. He commands his team’s respect.

Tim Ashworth, Underground Manage r: Having both open pit and underground mining experience, Tim is the elder statesman of the team. He has managed mines all over the world, including nickel mines in the Philippines, Turkey, and Vietnam. In addition to other African experience, he was previously working as the Underground Manager for Regis Resources, an Australian producer with a good reputation.

Jessica Morgan, Open Pit Manager : With 20 years of experience in the space. She worked for Freeport-McMoran and Glencore in the Democratic Republic of Congo. She did work for Randgold in Mali. Jessica worked at Nordgold’s Taparko mine in Burkina Faso. Her most recent position prior to West African Resources was as Regional Manager for Nevada Gold Mines.

Watch our Research Room episode on Burkina country risk

JURISDICTION

The general perception of Burkina Faso is heavily influenced by international headlines. Between jihadist activities and coups, most investors are reticent to underwrite investments there. But despite this noise, we view it as one of the better mining jurisdictions in the world. Land concessions are easily attained. Exploration permits are readily given. Mining permits generally come within 12 months. Projects come on time and on budget. To provide some context, even in Tier 1 jurisdictions like Canada, many projects take 4 to 5 years to permit. The government in Burkina understands the economic proposition offered by mining and enthusiastically supports the industry. The people line up for jobs as they pay considerably 3-4 times more than any alternatives available to them.

The country poses several challenges, first and foremost security is an issue. There is also limited and unreliable grid power; the country is land locked; and, asphalt roads are infrequent as you approach the interior. That said, the local work ethic is outstanding, and economic development, whether from FDI, local spending has a long fairway.

Since the killing of Muammar Gaddafi in the fall of 2011, security has deteriorated throughout French West Africa. In recent years, there have been a widespread rise in violence committed by jihadist militants, a trend which is obviously concerning for Western mining companies. While the overall concern is warranted, the particularly location of a mine is of paramount importance. Where the Sanbrado mine is located, for example, remains a relatively safe. The lion’s share of issues have been occurring in the lawless northeast and eastern portion of the country. Mines in these regions, such As Nordgold’s Taparko mine and Endeavour’s Boungu, have suffered as a result (see map).

The good news is that safe and unsafe areas are relatively well defined. As such, your mine’s location in the principal determinant of its security situation. But, even in the safe parts of the country, security requires a significant investment. Accordingly, the mine has a series of security check points, a double walled camp, proximity gun towers, numerous security protocols, and an ample complement of security guards with military experience.

Our take aways are that while security is concerning, mining operations are not effected unless the mine is actually attacked. In particular, the mines benefit from strong community support, and it doesn’t take a genius to figure out why. There is so much local support for the companies because the alternative to mining for most people is substance farming. Because of the deep residue of local support, even the coup in Burkina Faso in January 2022 had no impact on mining operations. In talking with people at the mine site, they seemed to suggest it was not going to change what they do.

Corporate Social Responsibility (CSR)

One of the more remarkable things about Burkina Faso is that mining constitutes the vast majority of direct foreign investment. There are no Starbucks or McDonalds, not even in the capital. Google and Facebook don’t have offices there. Mining, on the other hand, has brought in billions of dollars in investment to the country. In addition to the 10% free carried interest, ~4% royalty, and 27.5% tax rate, the project employs about ~1350 people, with 90% of these people being Burkinabe. Even what is ostensibly a low-paying job as a truck driver pays more than 4x the annual per capita income in the country. Mining promotes economic development, and is offering the people of the country an opportunity for a better life. According to the team, the Burkinabe people are the best and hardest workers regionally, and even globally. Given the regional importance of gold mining, and to Burkina in particular (80% of export value), there is a strong ecosystem of geology schools and company-specific advancement.

investment timeline

West African Resources has a robust pipeline of organic growth opportunities. With their acquisition of Toega, they’ve evened out and lengthened Sanbrado’s production profile. The Kiaka acquisition will be a new, separate asset, and is expected to be in production in 2025. On top of these, there are clear opportunities on the Sanbrado land package that have yet to be fully explored, including what will likely be additional satellite pits and another underground which could extend the mine life by 15+ years.

sanbrado

The Processing Mill:

1. Built by Lycopodium, the mill operates like a well-oiled machine. We walked the mill from rock crushing to gold pour (Sean pressed the button but sadly couldn't keep the gold). Lycopodium builds tend to operate at ~10-20% above nameplate capacity, and Sanbrado’s mill is no exception.

2. They are in the process of installing an additional gravity circuit. This is an improvement should help to enhance throughput through the mill with minimal cost and a high return.

3. What became apparent in observing the mill is the hardness of the rock (Bond Work Index ranges from 10-25) and the importance of reliable power to get the appropriate grind size. While far from the hardest rock, it is no simple task to get the right grind size, and WAF does a great job of doing this.

The Open Pits:

1. After visiting the M1 Pit, which has been fully mined out, we visited the M5 pit.

2. There are two blasts in each 24 hour period. They occur before each shift change.

3. Even though we visited during the rainy season, the open pits seem to be operating well. The excavators are operating efficiently, and the trucks are not waiting long before they are filled with either ore or waste.

4. Given the competency of the rock, the bench widths were fairly narrow, and the pit slope angles were fairly steep. This is good precisely because it means the company is not moving excess waste.

The M1 Underground:

1. The underground mining conditions are excellent. The rock is competent. Most noticeably, the shotcrete wasn’t redundant, an affirmation of the competency of the rock.

2. They were 3 or 4 working faces, and this is more than sufficient to get the right tonnage and blend to meet production targets. It is clear that the group has done a great job of grade control drilling, so they’ve been effective identifying the ore with minimal dilution.

3. There is room to extend the ramp further down, as the ore slopes 80 degrees and appears as if there’s more depth. They are drilling exploratory holes now to prove out the thesis. There is some exceptional grade in the pit which we saw up close.

Tailings Storage Facility/Off Channel Reservoir/Etc.

The Tailings Storage Facility looks great, has plenty of capacity, and is managing the water well.

growth

1. Toega: WAF acquired Toega from B2Gold for what amounts to ~$50 per ounce in the ground plus a 0.5% royalty that kicks in after a 3% royalty pays $25 million (this $25 million is included in the purchase price of $45 million, but is staged as production occurs) and the 0.5% royalty is capped 1.5 million ounces of Toega production. Toega has a 1.3 million ounce resource with a gold grade of 1.9 g/t. Combined with a strip ratio that is below 5 (4.7 to 1), these ounces are very economic. What’s more important is that the Toega deposit is located just 14 km from Sanbrado and will be trucked to the asset. As a result, this high grade material will not require substantive capex to mine and process. This was a shrewd acquisition on behalf of WAF. We expect this deposit to enter the mine plan within the next 24 months and will solidify WAF’s ability to produce ~200,000 ounces at Sanbrado over the next 10 years.

2. Kiaka: Acquired from B2Gold for less than $15 per ounce plus a 3% royalty on the first 2.5 million ounces produced and a 0.5% royalty on the next 1.5 million ounces produced, WAF again exhibited excellent judgement from a capital allocation standpoint. Located 45 km to the south of Sanbrado, Kiaka ore will not be shipped. Instead, WAF just released a feasibility study on the economics of a mine at Kiaka. With $430 million in capex, the project has an NPV using $1750 gold and a 5% discount rate of $856 million. This includes just 4.5 million of the 7.7 million ounces in resource and delineates an 18.5 year mine life with production averaging 219,000 ounces per year. With widths of hundreds of meters, 0.8g/tonne, and a low strip it’s “like an iron ore body that could do 250k ounces/year for 20 years”. Expected to go in production in 2025, WAF has sight lines to doubling their production in just 3 years. They have to be prudent on developing the mine, as always, as mills now have a 96 week lead time. They will be making a decision soon as a result.

exploration

1. WAF’s land package is large and, on our view, in the early stages from an exploration perspective. Given the prolific nature of the belt, we have confidence about the ability to consistently add mine life over time.

2. Underground Potential: On just the Sanbrado land package, we expect there to be multiple undergrounds. In addition to the M1 underground that is currently being mined, it seems clear that there will also be an M5 underground below the M5 pit. In looking at the continuity of the mineralization at depth, this is low-hanging fruit for the company. On top of that, the M1 underground shows no signs of stopping at depth, which is pretty consistent with what we’ve seen in this region of West Africa.

3. MV3: Just 6 km from Sanbrado, the company has already found this satellite open pit deposit with depth potential. They have already drilled out excellent widths and grades, and this deposit has just started to be drilled. (bottom image to right)

*** END ***

End Notes

Kuroto Fund, L.P. - Q2 2022 Letter

Mon, 08 Aug 2022 16:16:47 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

In the second quarter of 2022, Kuroto Fund, L.P. declined -12.6%. For the year to date through June 30th, the fund declined -15.5%.

Visit our performance page to view the Kuroto Fund, L.P. fund summary in more detail. [1]

the scourge of misaligned DIRECTORS

The corporate governance norms in emerging and frontier markets companies are qualitatively different from those in developed markets. Most notably, in all except one of our investments, the founder effectively controls the company through his role in the C-Suite, board room, and as a major shareholder. This sizable shareholding of the controlling party generally provides a tight alignment between the controlling and minority shareholders. That said, the arrangement entails a high degree of key man risk and creates enormous uncertainty when the founder retires. While we are willing to accept key-man risk associated with the founding shareholder, the general failure of these companies to build a board of financially aligned non-executive directors strikes us as imprudent and unnecessary.

Accordingly, we have adopted a policy of voting against directors who have served for two or more years but have invested less than two years of directors’ fees into the company’s stock. We will also be actively corresponding with the managements and boards of Kuroto Fund’s holdings to express our view regarding the financial alignment of directors and shareholders. In our opinion, shareholders should not support directors who lack meaningful financial alignment with the companies for which they bear ultimate governing responsibility. This will result in us voting against a meaningful number of non-executive directors.

In our opinion, adopting a clear, lower-bound for director share ownership is the best way to push back on the indifference of boards to non-executive-director stock ownership and the decision of some companies to prohibit non-executive directors from owning stock all together. Amazing as it sounds, a handful of companies restrict their non-executive directors from owning shares in the companies they oversee. These prohibitions on share ownership are intended to ensure that non-executive directors are unbiased in their representation of all stakeholders in a given company. Unfortunately, these prohibitions often lead to poor financial outcomes for shareholders. Lest you think we are making this up, we offer South Africa’s Gold Fields—the fifth largest gold producer in the world—as a case in point.

The Gold Fields board has adopted a policy of prohibiting its non-executive directors from owning the company’s stock. The logic of this policy is derived from a governance report named after Mervyn King, a former judge of the Supreme Court of South Africa. The fourth iteration of this governance report, the King IV Report published in 2016, makes the case that independent directors must represent all stakeholders, not just shareholders: “…[I]nstead of prioritizing the interests of the providers of financial capital, the governing body gives parity to all sources of value creation, including among others, social and relationship capital as embodied by stakeholders”. Given this need to represent all stakeholders, aligning directors’ financial interests with shareholders creates an undesirable bias in their decision making. In effect, the King IV Report sees non-executive directors as a priesthood serving a higher cause. To perform their duties properly, directors must be freed from a worldly profit motivation.

To be fair, Gold Fields’ non-executive directors are an impressive lot. They hold advanced degrees from elite universities. They have studied mine engineering and geology. They’ve run telecom companies and investment banking practices. They have served in a variety of prestigious academic and government capacities. And, we can be sure they are steeped in the latest and best research on good governance. The company’s website proudly touts its board’s qualification to steward a complex enterprise like Goldfields.

[1] Page 25 King IV report

As impressive and diverse a group as they are, Gold Fields non-executive directors all share one important trait. They lack any financial alignment with the shareholders of Gold Fields.

Name: S hares Owned / Options Owned

Yunus Suleman: 0 / 0

Steven Reid: 0 / 0

Alhassan Andani: 0 / 0

Peter Bacchus: 0 / 0

Maria Christina Bitar: 0 / 0

Terence Goodlace: 0 / 0

Jacqueline McGill: 0 / 0

Philisiwe Sibiya: 0 / 0

Not surprisingly, it took only a few years for Gold Fields’ high-minded prohibition on non-executive-director share ownership to manifest itself in a decision that is particularly undesirable to shareholders. On May 31 ^st of 2022, Gold Fields announced its bid to acquire Yamana Gold for $6.7b of Gold Fields stock. The deal has three obvious problems: 1) it offers shareholders no synergies; 2) it is dilutive to Gold Fields shareholders; 3) it triggers offensively large payouts to the management of Yamana. So, why would the Gold Fields board agree to such an obviously unattractive deal?

The board of Gold Fields offers six reasons for the acquisition of Yamana at a 34% premium: 1) Asset Quality; 2) Cash Flow Growth; 3) Jurisdiction Quality; 4) Pipeline; 5) Competitive Advantage; 6) ESG Commitment. Notably absent from the list is any mention of the value destructive premium the Goldfield’s board agreed to pay for Yamana. The reason Gold Fields doesn’t mention valuation is that the deal is dilutive on every measure imaginable. In our opinion, the math is so clear that this is a deal that could only be approved by a board that lacks meaningful financial alignment with the company’s owners.

This is not to say that the Gold Fields non-executive directors don’t stand to benefit from the deal. They will be directing a larger company with assets in more attractive jurisdictions. It is also true that the assets they are acquiring are more ESG friendly, and they are acquiring a pipeline of projects to finance and build in the future. So, as a board member that doesn’t own stock the deal is a painless opportunity to oversee a larger, better company. For the investment bankers and lawyers involved, it is also great—as all deals are. In fact, like most bad deals, this deal is great for just about everyone other than the actual owners of the company that is overpaying.

The market, to its credit, immediately sensed that the Gold Fields’ board had betrayed their shareholders. The shares of Gold Fields traded down a whopping 20% on the day of the announcement. This abrupt derating of Gold Fields shares in turn cut the premium to Yamana by more than two-thirds. The panicky behavior of both Gold Fields and Yamana since the announcement suggests that the deal may fail to win approval from the shareholders of either company. With the premium radically reduced, Yamana shareholders may reject a deal which would leave them saddled with a demonstrably misaligned Gold Fields board. The Gold Fields shareholders may reject this deal simply because it is value destructive.

Happily, we are not invested in either company. But this deal clearly highlights to us the problem of unaligned non-executive directors absent a controlling shareholder. Lest companies complain that our bar is too high, we offer a recent Kuroto investment, Kosmos Energy, as an example of a more responsible approach to director alignment. Kosmos is the one company we’re invested in that does not have a meaningful founder presence. However, it makes up for it by requiring meaningful stock ownership among both the management and non-executive directors. Specifically, Kosmos requires non-executive directors to own five years of their cash compensation in stock. Kosmos is not an anomaly – it is common for companies in the oil and gas industry to mandate that board members own at least three years of directors’ compensation in stock. Not coincidentally, the industry has turned into a sector which prioritizes returns on and of owners’ capital.

Sincerely,

Sean Fieler and Brad Virbitsky

^[1] Sector exposures shown as a percentage of 6.30.22 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 6.30.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners Precious Metals, L.P. - Q2 2022 Letter

Tue, 02 Aug 2022 16:11:28 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

In the second quarter of 2022, Equinox Partners Precious Metals, L.P. declined -13.3%. For the year to date through June 30th, the fund declined -20.9%.

Visit our performance page to view the Equinox Partners Precious Metals, L.P. fund summary in more detail. [1]

the scourge of misaligned DIRECTORS

Based on years of active engagement with the directors of public companies, we’ve adopted a strict policy of voting against directors who have served for two or more years but have invested less than two years of director’s fees into the company’s stock. In our opinion, shareholders should not support directors who lack meaningful financial alignment with the companies for which they bear ultimate governing responsibility. We estimate that this policy will result in our voting against approximately 10% of the board-slate candidates in next year’s proxy season.

Adopting a clear, lower-bound for director share ownership is the best way to push back on the growing indifference of boards to non-executive-director stock ownership and the decision of some companies to prohibit non-executive directors from owning stock all together. Amazing as it sounds, a handful of companies restrict their non-executive directors from owning shares in the companies they oversee. These high-minded prohibitions on share ownership are intended to ensure that non-executive directors are unbiased in their representation of all stakeholders in a given company. Lest you think we are making this up, we offer Gold Fields—the fifth largest gold producer in the world—as a case in point.

[1] Page 25 King IV report

As impressive and diverse a group as they are, Gold Fields non-executive directors all share one important trait. They lack any financial alignment with the shareholders of Gold Fields.

Name: S hares Owned / Options Owned

Yunus Suleman: 0 / 0

Steven Reid: 0 / 0

Alhassan Andani: 0 / 0

Peter Bacchus: 0 / 0

Maria Christina Bitar: 0 / 0

Terence Goodlace: 0 / 0

Jacqueline McGill: 0 / 0

Philisiwe Sibiya: 0 / 0

We, happily, are not invested in either Gold Fields or Yamana. Moreover, no Canadian or Australian domiciled mining company has yet been crazy enough to adopt a prohibition on non-executive-director share ownership like the South African domiciled Gold Fields. That said, we’ve seen a troubling deemphasis of financial alignment amongst these mining companies as well. Since 2015, the insider ownership amongst the gold mining companies that make up the GDXJ index has fallen by 22%. The proximate cause of this decline is board turnover driven by passive investors. Unlike activists who propose specific directors, large passive mangers propose categories of directors rather than individuals. Corporate insiders have largely acquiesced to these demands by nominating new directors that fit the passive investors’ criteria but are unlikely to rock the boat.

One way in which boards have solved for docility when nominated new non-executive directors is by targeting minimal financial alignment with shareholders. By elevating individuals who do not own stock and are unlikely to acquire a significant financial interest in the company they oversee, the board is adding colleagues who will tend to prioritize collegiality and reputation over the company’s financial interests. Accordingly, the new directors tend to be highly credentialed, but also tend to be process rather than outcome oriented. In our opinion, these less-aligned directors will be a disaster over time for shareholders.

Lest gold mining companies complain that our bar is too high, we offer the Canadian E&P industry as an example of a more responsible approach to director alignment. It is common for Canadian E&P companies to mandate that board members own at least three years of directors’ compensation in stock. Not coincidentally, the Canadian E&P industry has turned into a sector which prioritizes returns on and of owners’ capital. Here’s an example from Crew Energy’s proxy:

“Each non-management director is required to own and maintain, directly or indirectly, a minimum number of Common Shares having a value of not less than five (5) times the annual cash retainer payable to such directors for services rendered to the Corporation. Newly appointed directors and officers are given three (3) years to meet the guidelines. In the event that an individual who has achieved the target ownership level subsequently falls below such target ownership level due solely to a decline in the market price of our Common Shares, such individual will be considered to be in compliance with the ownership guidelines as long as the adjusted cost base of his or her Common Shares exceeds the target ownership level.”

Sincerely,

Equinox Partners Investment Management

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 6.30.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q2 2022 Letter

Thu, 28 Jul 2022 20:18:25 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

In the second quarter of 2022, Equinox Partners, L.P. declined -13.3%. For the year to date through June 30th, the fund gained +14.9%. The fund’s second-quarter pullback was driven by a selloff in both E&P and precious metals mining.

Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail. [1]

oil in a recession

After peaking on June 8 ^th , our E&P companies fell 35% in aggregate before bottoming on July 14 ^th . This precipitous, five-week decline was driven by growing expectations of a recession. While the drop unsettled many E&P investors, long-term investors in the sector should keep the following ten points in mind:

Low Long-Term Oil Price: The long-term WTI prices of $67 suggest that oil supply will grow more quickly than oil demand. Given global supply constraints, this implies an incredibly pessimistic view of global demand growth.
Global Demand in a Recession: Historically, recessions have reduced oil demand in OECD countries but not in emerging markets. This distinction is more important than ever with emerging markets now accounting for roughly 60% percent of global oil demand and 80% of global oil demand growth .
Strategic Petroleum Reserve: The U.S. has been supplying the market with 1mb/d from the SPR since March 31 ^st . This unprecedented depletion of America’s SPR will end this fall and be reversed after the midterm elections.
Government Hostility: The Biden administration’s regulatory hostility towards the E&P sector continues to weigh on new upstream supply in America.
Capital Allocation: In the previous energy cycle, North American E&P companies invested 100%+ of annual cash flow back into new production and relentlessly drove down energy prices. Today, these same companies are reinvesting less than 50% of annual cash flow and returning the balance to shareholders.
Long-Term Underinvestment: Since the sharp oil price declines of 2014, the global upstream oil industry has underinvested in capacity. This underinvestment which was initially due to lower oil prices has been prolonged by ESG and shareholder pressure to return capital.
OPEC: Since its founding in 1960, OPEC has generally sought to smooth fluctuations in the global oil market when excess capacity was modest. With only 2.5 mb/d of spare capacity , OPEC is more than capable of stabilizing the market if they so choose.
Petro Dollar Demise: In the mid-1970s, a number of oil exporters agreed to sell their oil in US dollars. These agreements, which have helped contain the oil price in dollar terms, are losing their force in an increasingly multipolar world as evidenced by recent transactions in yuan and rubles.
Russia: The market-share dispute between Russia and Saudi in 2020 was both unprecedented and unlikely to reoccur.
Valuation: Our E&P companies are generating ~20%+ FCF yield on the one-year futures strip.

In our opinion, despite the pullback in the oil price and shares of E&P companies, the long-term, positive fundamentals of the oil industry remain in place. We expect upstream supply response to remain muted, global demand for oil to continue to grow, and our companies to continue to produce enormous amounts of free-cash-flow.

the scourge of misaligned DIRECTORS

[1] Page 25 King IV report

As impressive and diverse a group as they are, Gold Fields non-executive directors all share one important trait. They lack any financial alignment with the shareholders of Gold Fields.

Name: S hares Owned / Options Owned

Yunus Suleman: 0 / 0

Steven Reid: 0 / 0

Alhassan Andani: 0 / 0

Peter Bacchus: 0 / 0

Maria Christina Bitar: 0 / 0

Terence Goodlace: 0 / 0

Jacqueline McGill: 0 / 0

Philisiwe Sibiya: 0 / 0

Sincerely,

Equinox Partners Investment Management

^[1] Sector exposures shown as a percentage of 6.30.22 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 6.30.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

"Forward Guidance" Interview

Fri, 03 Jun 2022 14:22:22 GMT

jack Farley, Forward Guidance Interview

Jack Farley with the Blockworks podcast, Forward Guidance , interviews our CIO, Sean Fieler.

"Sean Fieler, chief investment officer at Equinox Partners, joins Jack Farley to discuss his views on gold, mining, inflation, the and Federal Reserve’s continued tightening efforts, and the sell-off in long-duration tech stocks, diving into everything from ESG investing to a mine's lifecycle and lifestyle..."

WSJ: ESG Opinion Piece

Fri, 03 Jun 2022 13:57:56 GMT

The ESG Movement Is a Ripe Target for Antitrust Action - Sean Fieler

"Russia’s invasion of Ukraine calls into question the wisdom of the environmental, social and governance movement’s policy centerpiece: restricting oil and gas investment. In addition to causing hydrocarbon shortages and strengthening the Organization of the Petroleum Exporting Countries and Russia, the coordinated effort to depress oil and gas production is potentially a violation of American antitrust law. This combination of bad policy and legal risk will likely prove too much for profit-minded ESG supporters, and the movement will lose much of its support..."

Equinox Partners, L.P. - Q1 2022 Letter

Mon, 02 May 2022 16:47:42 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners gained +32.4% in the first quarter of 2022.}

^{Our E&P holdings accounted for almost 90% of our gains during the quarter. Our gold miners, fixed income shorts and equity shorts were small, positive contributors, while our operating companies declined.}

^{Visit our performance page to view the Equinox Partners, L.P. fund summary in more detail.} ^[1]

INVESTING THROUGH A GLOBAL REALIGNMENT

Two news stories dominated the first quarter of 2022: Russia’s invasion of Ukraine and inflation. How these two events are interpreted should have an overwhelming influence on how investors allocate capital. If inflation and the war in Ukraine are disruptions that markets will eventually move beyond, then investors need not necessarily change how they invest. If, however, these two events are surface expressions of larger structural changes in geopolitics and economics, then investors need to prepare for a future that does not resemble the recent past.

The mainstream financial press is firmly in the temporary disruption camp. The thinking goes that while the war and inflation are serious threats to capital markets that need to be addressed, they will not force a restructuring of the global financial architecture. The Financial Times has been at pains to point out that the dollar-centric global financial system remains stable. On April 5 ^th , the editorial board of the Financial Times concluded that “The US dollar’s status is safe for now.” The Wall Street Journal has taken a slightly different tact, publishing a series of pieces calling for tighter monetary policy and fiscal policy. On February 23 ^rd , the Journal published Steve Hanke’s and Nicholas Hanlon’s piece that criticized only the past two years of monetary policy: “The money supply as measured by M2, which is the Fed’s broadest measure of money in the economy, has been growing at record rates—with 39.9% cumulative growth since February 2020.” And, on March 3 ^rd , the Journal published Thomas Sargent’s and William Silber’s argument that fiscal deficits need to be controlled in order to give the Federal Reserve a better chance of controlling inflation: “Without decreasing the budget deficit, combating inflation with monetary policy is like entering a heavyweight championship competition with one hand tied behind your back.”

For self-evident political reasons, we expected Secretary Yellen to stick with the same talking points as the Financial Times. She cannot very well call for tighter fiscal policy while she is championing Build Back Better, nor can she criticize the policies of her successors at the Federal Reserve. Her lane is the boring defense of the status quo—all of which makes her speech at the Atlantic Council on April 13 ^th particularly noteworthy. While Secretary Yellen did offer a de rigueur defense of the dollar (“[I]t will be a long time, if ever, before the dollar is replaced as a key reserve currency in the global economy”), she also called for a fundamental reordering of the global financial architecture. Secretary Yellen’s overarching point was clear enough that the reporter conducting the Q&A penned an op-ed in the Financial Times the following week entitled , “It’s time for a new Bretton Woods.” This conclusion follows directly from Secretary Yellen’s closing remarks at the Atlantic Council on April 13 ^th :

“Treasury officials began crafting proposals for the IMF, the World Bank, and the post-war international financial architecture in 1941, as World War II raged in Europe. Three years later, in the opening to the Bretton Woods Conference—occurring as the Allied invasion of Normandy was still underway—President Roosevelt said, “It is fitting that even while the war for liberation is at its peak, we should gather to take counsel with one another respecting the shape of the future which we are to win.” As then, we ought not wait for a new normal. We should begin to shape a better future today.”

- Secretary of the Treasury, Janet Yellen, April 13, 2022

Having served as the Chair of the White House Council of Economic Advisors, President of the San Francisco Fed, Vice Chair of the Fed, Chair of the Fed, and now as Secretary of the Treasury, no one is more responsible for the status quo than Secretary Yellen. As such, what she is saying is not significant because it is insightful. It is significant because it presumably reflects an appetite on the part of both the Fed and the Treasury to make significant changes to the global financial system.

Specifically, Secretary Yellen is proposing the creation of an American supply chain and trading block consisting of exclusively of friendly countries. Friend-shoring, she calls it. Lest there be no doubt, this policy would exclude unfriendly countries from our supply chain. Neutrality is not an option. Every country will have to choose sides:

“[L]et me now say a few words to those countries who are currently sitting on the fence, perhaps seeing an opportunity to gain by preserving their relationship with Russia and backfilling the void left by others. Such motivations are short-sighted. The future of our international order, both for peaceful security and economic prosperity, is at stake.”

- Secretary of the Treasury, Janet Yellen, April 13, 2022

Our takeaway from Secretary Yellen’s speech is that the deflationary era of free-flowing goods, services, and capital is sunsetting. Not only is Russia going to be shunned for the foreseeable future, but trade with countries that won’t take sides will be more complicated and more political. The likely outcome of this policy is not a world united against Russia, but a world economic order that begins to reverse the deflationary globalization of the past four decades.

To our mind it is fitting that this watershed moment in the free flow of goods and capital is being advanced by Secretary Yellen. After all, it was her tenure as Federal Reserve chair that normalized radical monetary policy during an economic expansion and created many of the unmanageable imbalances with which the world economy is currently grappling. If her proposal to exclude unfriendly nations from global trade and capital flows is even partially implemented, the results will likely prove equally significant to the world’s financial order. We recommend that everyone invest accordingly.

A REALITY CHECK FOR THE ESG MOVEMENT

The ESG movement is in crisis. Russia’s invasion of Ukraine has called into question the wisdom of the movement’s policy centerpiece: restricting oil and gas investment. In addition to causing hydrocarbon shortages and strengthening OPEC and Russia, the coordinated effort to depress oil and gas production is potentially a violation of American antitrust law. We expect this combination of bad policy and legal risk will prove too much for the profit-minded supporters of ESG and the movement will lose much of the support it currently enjoys.

ESG standards have always been top-down and coercive rather than grassroots and democratic for a simple reason: suppressing oil and gas consumption is unpopular. Given this political constraint, the ESG movement has eschewed straightforward hydrocarbon taxation and focused on undemocratic efforts to restrict the supply of oil and gas via elite institutions, specifically corporate boards. Regardless of our opinion about these tactics, this board-focused strategy has delivered spectacular results as best exemplified by the movement’s victory over ExxonMobile last year.

It is, however, no coincidence that the ESG movement’s string of successes in the boardroom coincided with years of depressed energy prices. ExxonMobil’s board, for instance, only succumbed to the ESG onslaught after posting a $22 billion loss in 2020. Given the persistently low energy prices at the time of the campaign targeting ExxonMobil, a painless transition away from oil and gas seemed possible in the eyes of capital markets. ExxonMobil’s stock actually rallied on the news that the company’s largest shareholders had forced three directors on to the board to ensure the company’s eventual divestment from hydrocarbons.

Following Russia’s invasion of Ukraine, the ESG movement’s attack on ExxonMobil now looks imprudent. Not only are hydrocarbon investments significantly more profitable than they were last summer, but the strategy of deliberately underinvesting in oil and gas production is obviously jeopardizing the world’s energy security. While the ESG-influenced shareholders of ExxonMobile couldn’t have known that Russia would invade Ukraine, they should have known that eventual tightness in the oil and gas market was the likely, if not inevitable, outcome of long-term underinvestment.

A decarbonization strategy that does not threaten the world’s energy security would have done the opposite of what the ESG movement has done, i.e. reduce demand while continuing to invest in exploration and production outside of OPEC and Russia. By boosting our energy exports and taking share from OPEC and Russia, America could have achieved a real geopolitical advantage. The problem with this strategy is that it concedes the obvious truth that global fossil fuel consumption is neither declining nor about to decline. Given this unpalatable alternative, the ESG movement opted for the top-down, undemocratic route instead.

Unfortunately for the ESG movement, the coercive tactics they’ve employed to suppress the supply of oil and gas are possibly a violation of America antitrust law. The centerpiece of the ESG effort involves “the collusion of owners of capital to restrict the supply of a good or service”. Regardless of the colluding parties’ motivations, this is a textbook definition of an antitrust violation.

Given this legal vulnerability, it was only a matter of time until action was taken. Last year, Mark Brnovich, the Attorney General of Arizona, announced that he had subpoenaed the records of a large money manager in relation to an anti-trust investigation of their ESG practices. Even if the ESG movement is only engaged in a fraction of the activities that Climate Action 100+ takes credit for on its website, Attorney General Brnovich should not have to look too hard to find evidence of coordination and coercion.

The notion that ESG proponents are colluding solely to make the world a better place strikes us as neither completely true nor a particularly robust legally argument. No matter how noble the ESG movement’s intentions, the movement’s proponents are profiting from their efforts. First, to the extent that members of Climate Action 100+ continue to invest in oil and gas companies, they are benefiting from the higher profits that have resulted from their effort to restrict the supply of oil and gas. Second, by excluding non-ESG money managers from bidding on certain contracts, the members of Climate Action 100+ are reducing the competition they face in the marketplace.

While the impulse to do good which underlies the mainstream support for the ESG movement is not going away, the coercive and undemocratic tactics that characterize the push for decarbonization have likely peaked. We hope that as the ESG movement pivots, its proponents will recognize that prudent capital allocation decisions cannot be reduced to a reporting and box-checking exercise. For our part, we will continue to focus on the difficult, company-specific work of ensuring that our companies are operating to the highest ethical standards while being good stewards of their shareholders’ capital.

Sincerely,

Equinox Partners Investment Management

^[1] Sector exposures shown as a percentage of 3.31.22 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 3.31.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notic

Equinox Partners Precious Metals, L.P. - Q1 2022 Letter

Mon, 02 May 2022 16:46:42 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners Precious Metals Fund, L.P. returned +7.7% in the first quarter of 2022. By comparison the GDXJ index returned +12.5%, the HUI index was up +20.9%, and gold and silver metals gained +5.9% and +6.6% respectively.}

^{Visit our performance page to view the Precious Metals Fund summary in more detail.} ^[1]

INVESTING THROUGH A GLOBAL REALIGNMENT

- Secretary of the Treasury, Janet Yellen, April 13, 2022

A REALITY CHECK FOR THE ESG MOVEMENT

Sincerely,

Equinox Partners Investment Management

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 3.31.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notic

Kuroto Fund, L.P. - Q1 2022 Letter

Fri, 29 Apr 2022 16:56:04 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Kuroto Fund declined -3.0% in the first quarter of 2022. By comparison, the EM index declined -7.0% in the first quarter of 2022.} ^[1]

russo-ukrainian war impact

While we are not invested in either Russia or Ukraine, the invasion of Ukraine has had a material impact on our portfolio. On one hand, the war has resulted in a near-term risk premium in the oil price which has benefited our investments in oil and gas companies. On the other, the war has weighed on our investments in the Republic of Georgia, Russia’s neighbor in the Caucuses. Both of our Georgian investments, TBC Bank and Georgia Capital, saw share price declines in excess of 30% in the days following the invasion. TBC Bank now trades at 0.7x book, 4x earnings, and generates a 10% dividend yield, while Georgia Capital trades at ~50% of our sum-of-the-parts valuation and is actively buying back shares to take advantage of the discount.

It remains unclear what long-term impact Russia’s invasion of Ukraine will have on Georgia. Initially, the market perceived the invasion to be a negative for Georgia, both geopolitically and economically. With the war having gone poorly for Russia, however, it now appears unlikely that Putin will invade another neighbor and the economic impact on Georgia has been less than expected. Moreover, the government of Georgia is actively trying to not provoke Russia, a strategy evidenced by Georgia’s recent removal from Russia’s list of “unfriendly” countries.

our sizeable oil and gas investments

Two years ago, Kuroto Fund held no investments in oil and gas companies. As of the end of April 2022, oil and gas investments account for almost 30% of partners’ capital. We began making investments in emerging market E&P companies following the steep declines in sector that resulted from the spring 2020 global lockdown. Since then, we have made a series of investments in the oil and gas sector with two new holdings added in the first quarter of 2022.

In 2020, investors abandoned the oil and gas sector due to a combination of poor returns, demand destruction from lockdowns, and ESG-related pressures. To the extent that investors elected to remain in the sector, they preferred companies operating in the U.S. that were producing free cash flow, had large market caps and liquid shares. Companies responded to these investor preferences by halting growth investments, merging to get larger, and selling non-core foreign operations. As a result, even as the oil price rebounded, oil and gas assets in emerging markets continued to trade at incredibly depressed valuations. This was particularly true for foreign small-cap E&P companies not yet returning free cash flow to investors.

What large ESG-pressured oil companies have been selling, we have been buying at some of the lowest valuations we’ve seen in our careers. Over the past two years, we’ve invested in two Latin American and two West African oil and gas companies. While each company’s story is unique, all four share a similar heritage: they’ve purchased some if not all of their assets from larger companies looking to exit emerging markets E&P assets. And while none of our E&P companies is returning meaningful free cash flow to shareholders today, each is on pace to substantially increase free cash flow in one to three years.

One example is our investment in a Brazilian oil company that purchased several oil and gas fields from Petrobras that were perceived to be marginal. Petrobras sold these assets using a DCF valuation of less than $50 oil and, remarkably, did not attempt to renegotiate the valuation even as the price increased to over $100 prior to the deal closing. Petrobras is focused on oil wells that produce 50k bpd, whereas the fields our company bought will require hundreds of wells to produce 10-20k bpd. That said, even at these lower flow rates, these wells are highly economic. Moreover, we were able to purchase this business at a projected free cash yield of approximately 50%.

Another example of our E&P investments is an offshore oil and gas producer in West Africa which was able to increase its stake in its core asset via a distressed sale from a large U.S. independent refocusing its attention on Texas-based Permian assets. We bought this company at what we believe is north of a 50% free cash flow yield once an investment program is completed. This company also owns substantial undeveloped gas assets that make it well placed to sell into Europe in the coming decades.

In an environment where large-cap U.S. oil producers sell at a low-teens FCF yield, and their Canadian peers sell closer to a 20% FCF yield, the market’s valuation of oil and gas producers in Latin America and West Africa is extraordinarily low. As the majors continue to divest from their non-core emerging markets operations, we expect our companies to have even more opportunities to acquire high-return assets with little competition. And as our companies finish their growth programs and begin to return substantial cash flow to shareholders, we believe that their shares will rerate dramatically.

Sincerely,

Sean Fieler Brad Virbitsky

END NOTES

[1] Performance stated for Kuroto Fund, L.P. Class A on a net basis. An investor’s performance may differ based on timing of contributions, withdrawals, share class, and participation in new issues. Unless otherwise noted, all company-specific data is derived from internal analysis, company presentations, or Bloomberg. Company valuations and exposures are as of 3.31.22.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 3.31.22, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Business Insider

Mon, 28 Feb 2022 14:26:33 GMT

Commodity Hedge Funds gear up for gains tied to the Ukraine conflict

Friday, February 25, 2022

Business Insider

Alyson Velati

Excepted from article with CIO Sean Fieler interviewed in Business Insider about the Ukraine conflict and its impact on oil, gas, and E&P

Energy markets were rocked as Russia launched airstrikes in major cities across Ukraine on Thursday, leaving some hedge funds poised to benefit from the conflict. Oil surged to over $100 per barrel — the highest since 2014, even as stock markets plummeted. European natural gas jumped 30%. Hedge funds focused on commodities and energy stocks were already positioned for a resurgence this year since energy prices tend to rise during periods of inflation, and investments in oil and gas producers is considered an inflation hedge. The Russian invasion stands to result in even more investors piling into the space as they seek to benefit from a potential crimp on supply. Russia is one of the largest oil and has producers in the world...

For Equinox Partners, a $700 million hedge fund that invests in equities within commodity driven markets also expects to see flows improve as a result of the conflict, said Sean Fieler, president and chief investment officer of Equinox.

The firm declined to disclose inflows thus far, but Fieler said it's been beneficial to have had "long-term, limited partners over the cycle when our sectors were largely out of favor, to have built out new strategies that we hope are ahead of the curve, and to see more investor interest in this part of the cycle."

"We believe it's still early days for our holdings and for our funds which invest in them," he said.

Performance was up on Wednesday and down on Thursday, but "both moves were less than 2%," someone familiar with the fund's performance told Insider. The fund's largest weighting is in North American oil and gas companies, which have traded at a very large discount prior to the Russian-Ukraine war.

The geopolitical uncertainty should lead people to pay a premium instead of a large discount for those assets," he said. "I think it's going to take some time for markets to adjust to this reality. The assets we have, certainly in North American oil and gas assets, are worth a lot more than their current price."

Its long-short fund holds long positions in precious metals miners, energy exploration and production companies, and emerging market equities, and is short equities and fixed income.

"I think our investors, rightly, have assumed that being long in oil, gas, gold, and silver is not a bad thing," he said, noting that the fund has performed well so far this year."

Equinox Partners Precious Metals, L.P. - Q4 2021 Letter

Wed, 02 Feb 2022 16:00:35 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners Precious Metals Fund gained +14.1% in the fourth quarter of 2021 and lost -11.6% for the full year. By comparison, the GDXJ junior gold mining index gained +11.3% during the quarter and declined -21.3% for the year to date.}

mining in west africa

With over 15m ounces of gold mined annually, West Africa likely edged out China as the top gold producing region in the world last year. The rapid growth of gold production in West Africa over the past twenty years is due to companies bringing projects on time and on budget in the region. West Africa’s geology, topography, community support, and contractors have made mining in the region surprisingly predictable, as the following chart makes clear.

Source: Orezone presentation

Given the sizeable investment in the region, gold investors have been closely following the series of coups that have swept West Africa over the past nine months. Since May of last year, the governments of Mali, Guinea, and Burkina Faso have been removed in military coups. While the political situation in each of the three countries is unique, the coups are related. First, they are a result of waning resolve on the part of the French to provide a security guarantee in francophone West Africa. Second, the coups in Guinea and Burkina Faso are imitating the “successful” military coup in Mali. This second point is reinforced by the fact that the three coup leaders knew each other and trained together.

With West Africa accounting for 15% of all gold mined last year and about 30% of our gold mining portfolio at year end, we are closely following the facts on the ground. Thus far, the impact of the coups on our mines has been negligible. None of the mines in which we are invested were shut down, nor supply chains distrusted, or their expatriates evacuated. This initial operational continuity is not surprising. Gold is the largest tax generator and foreign currency earner for these countries. Moreover, the new governments are in real need of financial resources, especially Mali and Burkina Faso where they are engaged in a fight with Fulani Jihadists based in the Sahel.

As France and the United States have taken a step back in the region, Russia has become more active. Russians are helping the Malian government through the deployment of the Wagner Group, and Russia is also making a similar play for more influence in Burkina Faso. Russian involvement in the region raises a series of important geopolitical questions as well as operational questions for mining companies.

At this point we still don’t know the extent to which the French and Americans are willing to cede influence to the Russians in West Africa. There is, however, good reason to believe that the Russians will be more successful than the French were at fighting the jihadists. We are also encouraged by the shared interest of the mining companies, citizens, and governments in both Mali and Burkina Faso. Given this alignment of interests, the possibility that our mines are shutdown or expropriated remains remote in our opinion.

top 5 Year-End holdings

West African Resources

In each of the second, third, and fourth quarters of 2021, WAF increased production and lowered its all-in-sustaining cost per ounce (AISC) sequentially. This resulted in strong free cash flow generation and reduced debt. By the end of Q3 ‘21, WAF’s debt balance was down to $65m and the company was in a net cash position. This operational success was not lost on the market as the stock ended the year up 20%.

On October 25 ^th , WAF announced the acquisition of the nearby Kiaka deposit from B2 Gold for $100m in cash and a royalty on the first 4m ounces of production. This attractively priced acquisition adds ~6m ounces of resources to WAF’s assets. While Kiaka’s head grade is much lower than the company’s Sanbrado project, the two assets are only 45km away. When Kiaka goes into production, WAF will be the second largest gold producer in Burkina Faso. Specifically, the Kiaka acquisition, along with the previously purchased Toega asset, has positioned WAF to be a ~400,000 oz per annum producer by 2025.

To finance the acquisition of Kiaka and to start the construction of the necessary roads and camps, WAF raised $90m in the fourth quarter of 2021. The largest single factor weighing on WAF’s share price is West African politics, as we detailed earlier in this letter.

Endeavor Mining

Endeavour produced ~1.5m ounces of gold from seven West African assets at an ASIC of less than $900 per ounce in 2021. With a 25m ounce resource base and a successful brownfield exploration program, we expect Endeavour’s production and resources will continue to grow over the balance of this decade.

The company’s strong FCF generation is being used to simultaneously finance share buybacks, dividend growth, debt reduction, and production growth. Naguib Sawiris, who owns 19% of the company and sits on the board, deserves much of the credit for Endeavour’s capital allocation strategy. He pushed the company to make countercyclical acquisitions in 2020 and then allowed the return of capital as the environment normalized.

Last November, the management team outlined their 5-year exploration objective of discovering another 15-20m ounces at a cost of less than $25/oz. If Endeavor can deliver on this goal, the company will have a reserve base to comfortably support 3m ounces of annual production—twice its current production.

During 2021, the company generated $586m in FCF and achieved a positive net cash position. With 2022 capital expenditures projected to fall, Endeavor’s FCF should surpass $800m this year. Despite the strong operational and financial performance, the company continues to trade at 0.9x P/NAV. The largest single factor weighing on WAF’s share price is, again, West African politics.

K92

K92’s deposit in the highlands of Papua New Guinea just keeps getting better. In 2021, K92 set a production record of 100,000 ounces and achieved a run-rate of 120,000 ounces in the fourth quarter. These figures, while impressive, reflect just a fraction of the property’s long-term potential.

In 2021, the company discovered completely new mineralization with similar grade and continuity to the high-grade zones which it is currently mining. We expect the company will soon put out a new resource that will reflect these excellent drill results. This positive reserve update will not include the early-stage exploration of its Blue Lake porphyry-style mineralization, which provides additional upside optionality.

The company is aware that its production run rate is far too low given the size of the orebody it is mining. Accordingly, K92 is expanding its mill with the goal of operating at 1,400 tpd in Q3 of 2022. If and when the company receives additional permits, it is in a position to quickly double its operations to 2800 tpd.

The property which K92 is mining was originally owned by Barrick. Barrick sold the property because it didn’t believe the mineralization was sufficient to support a world-class orebody. That assessment looks increasingly mistaken, and K92’s share price has just begun catching up to the company’s enormous potential in our opinion.

MAG Silver

MAG Silver is the 44% owner of the high-grade, large-scale Juanicipio silver project in Zacateca, Mexico. The quality of the Juancipio project is beyond dispute, and Fresnillo—one of the world’s largest silver producers—is a proven operator. That said, the Juancipio JV has been plagued by a series of delays that have weighed on MAG’s share price over the past 18 months.

The Juancipio mine was scheduled to begin production in late 2020. Management now anticipates commissioning to start in mid-2022, bringing the project delay to over a year and a half. The latest setback is a result of the state-owned electric monopoly notifying Fresnillo that it was delaying the mine’s grid tie-in for six months.

While the JV is awaiting approval for the grid tie-in, Fresnillo has been processing a limited amount of material at two of its nearby mills. The cash flow generated from the milling will help mitigate additional costs from the delay. MAG still had to raise $46m of additional equity as well as take out a revolving debt facility in the fourth quarter to offset the delay. Post the capital raise, MAG has $75m in cash. This should be sufficient to fund the company through 2022, but the additional dilution was an unwelcomed surprise.

Despite the growing number of setbacks, the Juancipio JV remains a top-tier silver asset that has the ability to increase production to 8,000 tpd within a few years of initial production. During 2021, the company released a few exploration holes on the JV property from its 2020 exploration program that confirmed the continued depth of two of the asset’s major veins. The JV has historically been very frugal with exploration dollars, but we expect the JV to continue to outline a pathway to a larger reserve base in order support an expansion to 8,000 tpd. At this point, we believe the JV’s mill must reach commercial production for the shares to rerate.

Bluestone Resources

Bluestone’s Cerro Blanco is a highly economic open-pit project in the south of Guatemala with 3.3m ounces of gold equivalent at 1.6 grams/tonne. We expect the $300mm project to generate an IRR of more than 40%.

The obstacle for this project to move forward is permitting, not financing. Bluestone’s largest investor, the Lundin family, has made it clear to the market that if the permitting is secured they will lead the financing. The Lundin’s support is particularly valuable given their impressive track record of delivering projects in difficult jurisdictions. They were, for example, recently able to finance, build, and put into production the relatively larger Fruta del Norte project in Ecuador.

Trading at approximately a third of NAV, the market is clearly not anticipating the near-term permitting and financing of the project. Nor is the market giving Bluestone credit for exploration upside at Cerro Blanco. If and when the permits for an open pit at Cerro Blanco are secured, we expect Bluestone to rerate quickly. Given the level of support from Guatemala’s Giamante administration and the local community, we think the permits are likely a 2022 event.

Sincerely,

Equinox Partners

^[1] Sector exposures shown as a percentage of 12.31.21 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 12.31.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q4 2021 Letter

Tue, 01 Feb 2022 18:24:21 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Kuroto Fund declined -3.7% in the fourth quarter of 2021 and was up +22.1% for the full year. By comparison, the EM index declined -1.3% in the fourth quarter of 2021 and -2.2% for the full year.} ^[1]

Our 2021 gains were primarily driven by FPT and MTN Ghana, with 18 companies overall delivering positive contributions. Five of our companies posted a loss during the year, Guaranty Trust and our Turkish investments most notably. At 5.6x earnings, 23% earnings growth, 19% ROEs, and a 6.4% dividend yield in 2022, our portfolio continues to combine value and quality.

yearend Top-five holdings

Our five largest investments going into 2022 are MTN Ghana, FPT, Georgia Capital, TBC Bank, and Guaranty Trust. While that remains largely unchanged year over year, Logo Yazilim was replaced by Georgia Capital as its shares declined and Georgia Capital's gained in 2021. Logo remains our sixth largest position.

MTN Ghana

MTN Ghana, the country’s dominant telecom and mobile-money platform, had a strong year operationally and a tough year politically. Through September, revenues grew close to 25% year over year and earnings grew 34%. This strong growth was driven by data and mobile-money revenue, both of which likely grew over 40% for 2021. Unfortunately, MTN’s success attracted the attention of the Ghanian government which is desperate for tax revenue. The government’s proposed 1.75% transaction tax on mobile money transactions will, if passed, impair MTN’s mobile-money business which accounts for 20% of its revenues.

MTN Ghana drew the government’s scrutiny because of its dominance. The company’s high revenue market share generates an even higher profit share. This allows MTN to re-invest into its network at significantly higher rates than its competition which in turn reinforces its competitive advantages. The company’s mobile-money business, MOMO, is particularly strong. MOMO has an estimated market share north of 80% despite competitors offering the service for free. MTN is able to maintain this position due to the large network effect that emerges from the company’s large installed base, large agent network, and deep integration into merchants. Over half of the country’s adult population are active users of the service and its agent network and integrated merchants both number over 200k.

We expect strong growth in MTN’s telecom business to continue while the fate of MTN’s mobile money business depends on the transaction tax. If implemented, the 1.75% transaction tax would drive a precipitous decline in mobile-money usage. Several years ago in Uganda a similar tax was implemented and usage dropped 38% before it was repealed. That said, mobile-money is much more integrated into Ghanaian society today than it was in Uganda at the time.

Assuming the 1.75% transaction tax is implemented and MTN’s mobile-money service falls by half, we estimate that the company’s overall revenues would be flat for a year and earning would decline 10%. In this scenario, the stock would trade around 9x earnings in ’22, 7x in ’23, and would still generate a 38% ROE. If the tax does not pass, MTN is trading at closer to 6x earnings with a mid-to-high teens dividend yield. In sum, MTN remains an attractive investment but is obviously less attractive if the 1.75% transaction tax passes.

FPT

The dominant Vietnamese tech company, FPT went from strength to strength in 2021. The company’s revenue and profits grew ~20% for the year. This growth was in large part driven by FPT’s global IT services business. The high value-add digital transformation portion of its global IT services business grew 76% for the year and now makes up almost 40% of its global IT revenue.

IT spending continues to increase globally and Vietnam’s position as a global, low-cost leader continues to improve as wage inflation in India and China remain faster than wage inflation in Vietnam. This wage inflation advantage, combined with FPT’s efforts to move up the value chain, should provide a tailwind to growth in 2022. In addition to its export business, FPT is making sizable investments into cloud-hosted software and services for Vietnam’s small and medium-sized enterprises.

FPT’s financial results have been consistently strong. The company has no debt, generates a 20% ROE, and has had little trouble maintaining margins. Over time as FPT’s software business grows, we believe the company’s financial characteristics will improve. Margins and cash generation should both grow faster than the top line. Despite all these strengths, FPT is trading at 17x 2022 earnings. The company has a long runway of growth ahead of it and remains a sizeable holding in the fund.

Georgia Capital

By selling its water-utility business in 2021, Georgia Capital proved that it can monetize its investments and took a huge step to close its holding company discount. Georgia Capital trades at roughly 50% of the SOTP, and the water business sale will generate almost half of the market cap in cash.

Each of Georgia Capital’s core businesses performed well in 2021. The bank is on pace to generate a 20%+ ROE for the year, grow loans double digits, and to pay a dividend. The healthcare business, which controls roughly 40% of the country’s hospital system, recovered in 2021 after the pandemic caused many elective visits to be deferred. Revenue was up 49% in the first 9 months of the year and EBITDA was up 78%. The healthcare business has completed its capital buildout and is contributing dividends to the holding company. The pharmacy business—a beneficiary of the pandemic—continued to grow in 2021, with EBITDA up 7% in the first 9 months of the year. Finally, the water-utility business saw a strong recovery from last year when a drought limited its ability to sell excess electricity. Most importantly, Georgia Capital sold the water utility business to a strategic buyer on the last day of 2021.

FCC Aqualia, a Spanish water company, agreed to pay $180m for 80% of Georgia Capital’s water utility. This $225 valuation represents a 30% premium to the $173m valuation applied by Georgia Capital. This sale is beneficial to the holding company for three reasons. First, it proves the merits of its overall PE-like investment model. Georgia Capital made 2.7x its money in USD terms and generated a 20% USD IRR on its investment in the business. Second, it shows that there is interest from outside parties in its Georgian assets at valuations near or above the company’s internal valuations. Finally, it gives the company liquidity to buy back shares at what remains a large discount to the sum of the parts.

TBC Bank

TBC maintained its market position, returned to peak profitability, and reinstated its dividend. In addition to its participation in Georgia’s profitable banking duopoly, TBC doubled down on its investment into Uzbekistan. In our opinion, TBC’s stock remains meaningfully undervalued at 0.8x book value, 4.4x earnings, and an 8% dividend yield for 2022.

TBC and Bank of Georgia control over 70% of the market for banking services in Georgia. Both banks earn over 20% ROEs and grow loans double-digits. TBC took a large provision in 2020 at the start of the pandemic in an attempt to frontload the impact of the crisis. As it turns out, the provisions were overly conservative and the bank was able to earn extraordinary profits in 2021 as a result of this over-provisioning. Going forward, TBC expects provisioning to normalize around 1% and its ROE to remain over 20%. In the second half of 2021, as it became clear the pandemic-related provisioning was sufficient, the bank reinstated its dividend.

TBC’s entry into Uzbekistan is going better than expected. The opportunity is large with a sizeable underbanked population in a nation that is over 8x the population of Georgia. TBC has two businesses in the country, one is a leading mobile-money transfer business and the other is a digital bank. The money transfer business already has one million active customers and is growing revenue/transactions over 50% per year. The digital bank is the bigger opportunity in Uzbekistan, and they have an offering that is unmatched in the country. Despite having just launched the digital bank this year, it already has over one million downloads.

Guaranty Trust

Guaranty Trust is a solvent, trustworthy, professional financial institution in Nigeria. As a result of this unique position, Guaranty Trust is able to generate excellent returns while taking very little credit risk. The bank has consistently achieved 20%+ ROE.

In 2021, Guaranty Trust successfully converted into a holding company and separated its bank from its digital payments business, wealth management, and insurance businesses. Guaranty Trust’s digital payments business is doing particularly well, having grown revenue 91% YOY in Q3 '21.

Despite having much potential, Nigeria continues to disappoint investors. The Nigerian Central Bank’s policy of holding the country’s currency at an artificially high rate vs. the USD and keeping interest rates far below inflation has scared off all but the most intrepid of foreign investors. Local conflicts have further damaged the country’s attractiveness as an investment destination by taking oil production offline and limiting the country’s ability to generate foreign exchange revenues.

The situation in Nigeria should improve some in 2022. After years of delay, a massive refinery is expected to come online late this year. Once at full capacity, it should alleviate the country’s need to import refined fuel. Further new investment into the country’s oil sector should help the country’s domestic oil production and its foreign exchange reserves to recover. On the other hand, the current administration’s unfortunate set of macroeconomic policies are likely to persist until the elections of 2023.

GT Trust trades at 0.7x book and 3.6x earnings while paying an 11% dividend yield. Even if Nigeria remains a political mess, GT Trust is positioned to generate excellent returns for years to come in our opinion.

Sincerely,

Sean Fieler Brad Virbitsky

END NOTES

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 12.31.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notic

Equinox Partners, L.P. - Q4 2021 Letter

Tue, 01 Feb 2022 18:24:18 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners rose +7.3% in the fourth quarter of 2021 and gained +57.0% for the full year.} ^[1]

CENTRAL BANKS KEEP BUYING GOLD

2021 was a confounding year for gold investors. A forty-year high in inflation translated into a 3.6% decline in gold and 21.3% decline in the GDXJ gold mining index. In early January, The Economist declared that gold had not just lost some of its investment allure but was at risk of becoming irrelevant ^[ ^1] . In reaching this conclusion, The Economist completely ignores one of the most bullish long-term factors in the gold market, the ever growing list of central banks buying gold.

The gold market simply cannot be understood without accounting for central bank participation. In 2021, central banks bought 463 tonnes of gold—13% of the 3,561 tonnes mined. ^[ ^2] And 2021 was not an outlier. Over the past decade, central banks have purchased over 5,000 tonnes of gold—a total that understates the gold accumulation by Russia and China. The cumulative total also fail to capture the nascent trend of developed world central banks buying gold. Last year, for example, witnessed purchases by the likes of Singapore and Ireland. The question is, why are so many central banks buying gold?

In June of 2021, the World Gold Council conducted a surve y asking central banks exactly this question. The responses were intuitive. Central banks are buying gold because of gold’s unique financial characteristics. Specifically, gold is the one asset on central banks’ balance sheets that is no one else’s liability. Consequently, gold may perform particularly well when their other assets do not. Left unsaid but implicit in the World Gold Council’s survey results is a concern that foreign central bank’s largest asset, the U.S. dollar, has lost some of its safe-haven status. According to some particularly astute market participants, the price action of U.S. Treasuries has been reflecting this concern since the spring of 2020:

[F]or 20 years, USTs have been the go-to asset of foreigners to hedge global portfolios with. In every case, whenever you had a problem in the equity market or in the world economy, they fled to USTs and they fled to the USD. Last spring, that was violated. Since then, they’ve continued to sell USTs.

- Stanley Druckenmiller on CNBC 5.11.2021

From America’s trillion-dollar trade deficit to the Fed’s loose monetary policy, there is good reason to be concerned about the dollar’s fundamentals. The mere possibility of dollar flight should be particularly worrying given the rapid deterioration in the U.S. net international investment position over the last decade. According to the Bureau of Economic Analysis, the U.S. net international investment position has deteriorated by $11.5 trillion since 2011. This massive deterioration in the U.S. net international investment position would make managing foreign capital flight a near impossible challenge.

Proliferation of foreign central bank gold purchases suggest growing central bank concern about the dollar. That said, what these foreign central banks will eventually do with the gold they are accumulating remains a mystery. No foreign central bank has announced any plans to use their gold for monetary purposes despite having accumulated several hundred billion dollars of the metal since 2008. Regardless as to what they eventually do with the gold they are accumulating, central banks certainly aren’t behaving as if gold may become irrelevant as The Economist suggests.

yearend Top-five holdings

The outperformance of our E&P companies and declines in our gold miners led to two changes in our top-five holdings. NuVista Energy and IPCO both became top-five positions as their share prices more than doubled in 2021. RTG and Bear Creek, on the other hand, both dropped out of the top-five after a year of disappointing results. Specifically, RTG’s continuing legal problems in the Philippines prevented the company from transitioning from an exploration company to a developer. RTG has a shovel-ready project with a high IRR. But until they resolve a legal dispute with their local partner the company cannot move forward. We remain optimistic that 2022 will be the year RTG begins mining, but this is not a foregone conclusion. Bear Creek’s Corani mine was a causality of the Peruvian presidential election. When Pedro Castillo was elected in July, Bear Creek’s Corani mine became unfinanceable. Peru will eventually recover from the Castillo presidency, but it may be several years.

Paramount Resources

In 2021, Paramount Resources put to rest any lingering questions about its financial stability. As of year-end 2021, the company had conservative leverage ratios. Specifically, the company’s net debt to cash flow declined from ~5x as of December 2020 to 1.3x in December 2021. The stock responded favorably to this deleveraging, increasing almost five-fold last year.

During the year, Paramount generated ~$450m of cash flow. This compares favorably to the ~$170m of cash flow it generated in 2020. After interest expense and cap ex, the company generated more than ~$100m of free cash flow from operations. The company also sold several non-core assets in the year to help lower its debt and fund production growth. Proceeds from these sales were $165m, allowing the company to decrease net debt by almost $300m.

In addition to lowering its debt, Paramount grew production 20% last year and is on track to grow production double digits again in 2022, from 82k boepd to 92k boepd. Paramount’s growth is coming from Karr and Wapiti, assets which comprise the vast majority of the company’s production and are among the highest returning energy assets in North America. At current energy prices, both Karr and Wapiti have paybacks for new wells in less than a year.

In 2022, we expect Paramount to generate over $1,000m of cash flow and over $500m of FCF at current energy prices. With a market cap of $3.5b, $300m liquid investments and $300m of net debt, the company trades at a depressed EV/CF multiple with a mid-teens free cash flow yield. We expect energy prices to stay strong and Paramount to continue to rerate.

Crew Energy

Crew Energy demonstrated its ability to rapidly deleverage its balance sheet in 2021 and is on the cusp of normal financial ratios. The company’s leverage ratio fell from 5x to 2.5x in 2021. With production up and cap-ex declining, we project Crew’s leverage will fall to close to 1x by the end of 2022. We believe that delivering a de-risked balance sheet will trigger a further rerating of the company’s shares. As it is, the company’s stock climbed five times in 2021.

Rather than shrink its production during the crisis of 2020, Crew Energy boldly adopted a plan to grow into its balance sheet and infrastructure. In the spring of 2020, CEO Dale Shewd announced a plan to grow production by 50% over the following 18 months. This countercyclical move came as commodity prices had barely recovered from their historic lows and most of Crew’s peers were still paralyzed by the volatility in the oil and gas markets.

Crew achieved its production goals at the end of 2021 and the rising commodity prices provided a welcomed tailwind. In 2022, the company expects to hold production flat around 32k boepd and generate $200m in cash flow while spending just $85m in cap-ex. The resulting $100m+ in FCF will be used to pay down debt and return Crew to financial normalcy. The continued deleveraging should also put Crew in a good position to refinance its $300m bond due in 2024. The bond currently trades at 99.6 on the dollar and suggests smoothing sailing.

Assuming $125m of FCF in 2022, Crew is trading at a 25% FCF yield. Moreover, the company holds several strategically important assets that generate little to no free cash flow. One of these assets is Groundbirch, a sizable natural gas play adjacent to Shell’s natural gas fields that will be needed to support the massive LNG Canada project. Crew drilled wells in Groundbirch in late 2021 with encouraging results. This asset can support growth for the company for many years into the future.

NuVista Energy

NuVista exited 2021 with strong free cash flows and reasonable leverage ratios. The company’s leverage ratio declined from ~4x in December 2020 to 2.5x at the end of 2021. With production up 20% in 2022, that ratio should fall to less than 1x by the end of 2022. The stock responded very favorably to this deleveraging, increasing over seven-fold in 2021.

We purchased NuVista in the fall of 2020 shortly after Paramount announced that it had acquired a 20% position in the company. It seemed to us that Paramount was angling to buy 100% of NuVista. The possibility of a bid from Paramount put a floor under the stock price despite the company’s leveraged balance sheet. To our surprise, the market did not react to the news of Paramount’s purchase, and we were able to build a position at very attractive prices.

Paramount knew exactly what they were buying when they acquired 20% of NuVista because the two companies have adjacent land packages. The Wapiti play which constitutes the majority of NuVista’s value is geologically identical to Paramount’s best asset. In addition to being a highly-informed buyer, Paramount’s investment all but guaranteed that John Wright and the management team at NuVista would stay on the straight and narrow to fend off a potential takeover bid from Paramount.

Since the summer of 2020 NuVista’s management has behaved exactly as we expected. They grew production and refinanced their debt, giving shareholders no incentive to sell to Paramount at a discounted price. The stock is up close to ten-times over the past 18 months but the company is still trading at a 20% FCF yield. When NuVista finishes growing into its delivery commitments next year it will have a FCF yield north of 30%.

MAG Silver

IPCO

An oil and gas company listed in Sweden, headquartered in Switzerland, and with most of its operations in Canada, IPCO is an odd duck. The company’s unique combination of attributes has all but assured that it gets overlooked by most investors. Even so, the stock was up over two times in 2021.

We are attracted to the company’s strong track-record of execution, high-quality asset base, and well-aligned management team. IPCO is a Lundin company, with the family owning close to 30% of the company’s shares. The Lundin family has a long history of investing in resource businesses, and we have invested alongside them as a minority investor in several other mining investments. As a result of the Lundin influence, IPCO has been a disciplined capital allocator. They have purchased assets counter-cyclically at attractive multiples and bought back shares when the price warranted it. Today, the share price is such that they can buyback the entire market cap in less than five years from its FCF. While they are unlikely to do this, the company has commenced a share buyback program in Q4 ’21 and is continuing it into 2022.

In addition to its FCF generation and prudent capital allocation, there is further upside in the stock in the form of an undeveloped but fully-permitted oil-sands asset. This asset has 1b barrels of resource vs. 300m for the rest of the company. Developing a greenfield oil-sands asset in today’s political environment is a nonstarter, but at the current valuation shareholders are not paying for this potentially significant upside.

Sincerely,

Equinox Partners Investment Management

^[1] Sector exposures shown as a percentage of 12.31.21 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 12.31.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notic

The Hill

Tue, 04 Jan 2022 16:01:03 GMT

The Politics of an Independent Fed

"Biden has made it clear what he wants from the Fed: easy money and an expansion of the Fed’s mandate to include climate change, among other progressive priorities. He left little to the imagination when announcing Powell’s renomination. After giving short shrift to the Fed’s mandate for price stability, he proclaimed Powell a maximum-employment man willing to use the Fed’s power to address the financial and economic risks associated with climate change. Biden then added insult to injury by giving Brainard equal billing and fawning over her credentials."

Sean Fieler's opinion piece in The Hill outlining the politics in play at the Fed amidst the current, historical surge in inflation.

The Future of Gold Mining - Sean & Ronnie

Fri, 03 Dec 2021 16:35:13 GMT

Ronnie Stöferle, EU Precious metals Summit Interview

Our friend, Ronnie from Incrementum, producer of the excellent In Gold We Trust annual report, interviews our CIO, Sean Fieler, at the Precious Metals Summit on The Future of Gold Mining

HFM Performance Award - Win

Mon, 08 Nov 2021 20:48:16 GMT

Equinox Partners Wins back to back performance award

Equinox Partners, L.P. won the 2021 HFM U.S. Performance Award for "Specialist Equity" manager. Our Gold Mining strategy won the same award in 2020. Congratulations to our team for back-to-back wins.

"The HFM US Performance Awards 2021 took place on the evening of November 4 at the stunning Gotham Hall, New York, bringing together the US hedge fund industry to connect, socialize and celebrate together once again after last year’s virtual ceremony."

The Assay Live - 121 Mining Investment TV

Sun, 07 Nov 2021 18:34:34 GMT

Adam Thompson, 121 Mining Investment interview

"We caught up with Sean Fieler who is President and CIO of Equinox Partners, the Connecticut based hedge fund with a pedigree in value creation within the precious metals mining sector. We learn about the successful strategy Equinox applies to selecting mining equities, investing for value creation and delivering above index returns. Sean took us through the state of play across global financial markets, noting the strong and sustained performance of US stocks has eroded the conventional appeal for generalists to own precious metals to hedge against current high inflation. Insight is given on some of the excellent performing West African projects they hold and some challenges to be aware of when looking at LATAM or Australian projects. Crucially Sean reveals he is most interested in finding rational full cycle capital allocators with the right management philosophy to invest in."

Cambridge House

Tue, 26 Oct 2021 17:34:36 GMT

Jay Martin interviews Sean Fieler

Sean Fieler speaks to Jay Martin from Cambridge House on Equinox Partners' contrarian "best ideas": gold miners, E&P, and emerging markets small cap. Jay digs into our approach to governance, process, and several ideas.

Mines & Money Conference - Fireside

Mon, 25 Oct 2021 14:29:50 GMT

Neils Christensen, Mines and Money interview

Neils Christensen, Editor of KITCO News, interviews Sean Fieler at the at Mines and Money Online Connect @ IMARC in October 2021.

Equinox Partners Precious Metals, L.P. - Q3 2021 Letter

Fri, 22 Oct 2021 18:04:49 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners Precious Metals Fund declined -17.3% in the third quarter of 2021. The fund declined -22.5% for the year to date through September 30th, 2021. By comparison, the GDXJ junior gold mining index declined 18.0% during the quarter and -29.3% for the year to date}

senior gold miners

For the first time in our firm’s history, we own a handful of miners that produce more than one million ounces of gold per year. To be precise, 23.8% of Equinox Partners Precious Metals Fund, L.P. is invested in such companies. The reason for our decision is simple: valuation. As a group, senior gold miners trade at NAV (graph below). The four, million-plus-ounce producers we own trade at just .7 NAV, pay a 3% dividend, and are buying back 1.3% of their stock per year. Large mining companies, such as Endeavour Mining, offer a different investment proposition than their smaller brethren. On the one hand, they have real advantages in terms of diversification and technical expertise. On the other hand, they face real challenges with respect to growth and capital allocation that continue to make them, on average, less attractive investments than the well-run juniors that constitute the majority of our gold-mining weighting.

Source: BMO, through October 2021 using spot metals prices and 5% discount rate

Senior gold miners offer investors several obvious benefits, chief among them liquidity and diversification. Endeavour Mining’ stock trades $50m+ on average per day and has operations in three countries. The stocks of the largest seniors, Barrick and Newmont, trade $250m+ per day and operate in more than eight countries. In addition to liquidity and geographic diversification, there are numerous more subtle benefits to owning larger gold mining companies, most notably their: 1) ability to negotiate stability agreements with their host countries; 2) control of world class assets; 3) deep bench of technical talent; 4) and most importantly in our opinion, the incentive to be honest in their assessment of their assets. We’ll address each of these points before turning to their equally important disadvantages.

Prior to making a multi-decade commitment to build and operate a mine, large mining companies typically negotiate stability agreements with their host countries. The logic of the negotiation is simple: before making a twenty-year commitment, a mining company needs a legally-binding assurance that the tax rate on their assets will not change over the life of the investment. Junior mining companies would love the same assurance, but as a practical matter they lack the negotiating position necessary to secure it. As a result, the largest projects are often insulated from increasing royalty rates in a way that smaller projects are not.

Large companies are built around world-class assets, i.e. mines that produce more than 500,000 ounces of gold per year, have all-in-sustain costs (ASIC) of less than $1000 per ounce, and have at least a 10-year mine life. World-class assets are not just larger versions of the smaller assets. These larger assets are, by and large, actually better assets. While there is a great deal of variation from asset to asset, larger deposits resulted from larger geological events and have a coherence that smaller deposits often lack. This superior consistency, in turn, makes larger assets on average more economic to exploit.

In addition to their more predictable deposits, larger companies have a deeper bench of talent. As such, large mining companies are unlikely to be lead astray by a single person with an errant technical opinion. Their committee approach leads to predictable behavior as they build an internal technical consensus before moving forward. While this consensus approach on technical matters generally works well, it makes change difficult. For instance, it took an outsider, Peter McGaw of MAG Silver, to interpret Fresnillo’s silver district properly.

Finally, and most importantly, larger mining companies tend to be realistic about the economics of their operations. Unlike juniors, large mining companies aren’t interested in pumping up their share price to raise money. Rather than hyping their valuation into a liquidity event, large gold mining companies seek to garner a higher valuation by putting together years of predictable performance. As a result, executives at large mining companies tend to be more honest about their operations.

One million plus ounce producers also face serious challenges that junior mining companies do not encounter. The most basic of these challenges is finding the large assets they need to sustain and grow production. Gold is scarce and large, economic deposits have always been rare. That said, the recent dearth of world-class discoveries suggests a serious geologic constraint. Despite spending over fifty billion dollars on exploration this past decade, the aggregate exploration results are clearly getting worse (see graph below). The prolonged dry spell of exploration success is making it difficult for large gold mining companies to grow.

While geology is a significant factor limiting the growth of senior gold miners, the next largest factor is their leaderships’ conservatism (read pessimism) about future gold prices. With spot gold prices at ~$1,800 per ounce, most seniors are using ~$1,300 to evaluate their projects. Corporate insiders in the sector who have no conviction that gold prices will be stable are planning for the worst. Their attitude calls to mind Don Coxe’s famous quip about historic turning points in markets: “The most exciting returns are to be had from an asset class where those who know it best, love it least, because they have been hurt the most.”

Having properly deduced that they cannot grow at a gold price of ~$1,300, seniors have begun aggressively distributing their free cash flow. Dividends from senior gold miners have almost doubled year on year, from $2.6b to almost $5b USD. As a group, the larger gold mining companies offer investors a collective dividend yield of 2% with two companies approaching 4% ^[1] . A handful of seniors are even buying back meaningful amounts of their own shares for the first time ever. While these distributions are laudable given these companies’ pessimistic assumptions about the gold price, it is clear to us that these corporations are fighting the last war. Their insiders are protecting their reputation by ensuring they don’t make bad investments, but are not acting like long-term shareholders who have confidence in their companies’ output. This attitude is not particularly surprising given that the share ownership of their many non-executive directors is arguably less relevant to them than their recurring director fees.

^[1] Canaccord, August 31, 2021, “Precious Metals – Producer: Record return of capital and building cash”

The obvious exception to the alignment problem is Endeavor. ^[1] Endeavor’s founding and controlling shareholder, Naguib Sawiris, has an excellent record of shareholder value creation. Having invested hundreds of millions of his own money into Endeavor, he has pushed the company to make sound counter-cyclical capital allocation decisions such as the recent acquisitions of Semafo and Teranga. The above table excludes Russian and Chinese companies, some of which have substantial non-executive board ownership. The Russian- headquartered Polyus Gold offers a case study as to why we have opted for these exclusions. Polyus is 77% owned by Suleiman Kerimov, a Russian oligarch who borrowed billions from Russia’s VTB bank to acquire his stake at a time when he was in personal financial distress. As such, we don’t believe we’ll ever understand his financial motivations and obligations.

For those one million plus ounce producers growing production, the ability to find economic ounces cheaply is absolutely critical. Producers spending $300 to find an ounce of gold shouldn’t grow organically even if they want to. Conversely, for producers finding ounces for $25, the only real question should be the scalability of the company’s exploration program. On this measure, Endeavor is once again the outlier. The company is unique amongst the one million plus ounce producers in its ability to find ounces economically, and the company has done so at scale. Over the past five years, Endeavor has found twice the ounces it has depleted. As a result of this success, Endeavor can distribute a large fraction of its FCF while the company continues to grow production at a meaningful rate. ^[2] (Endeavor Mining’s recent hour-long video detailing their exploration success can be found here .)

^[1] Our table excludes Polyus Gold.

^[2] Endeavor presentation , page 15, September 30, 2021.

Source: S&P Global Market Intelligence, “Major gold producers’ reserves development through exploration 2010-2019”, May 1, 2020. Endeavor data from company.

To be fair, Endeavor’s exploration success is not a result of its exploration team’s superior technical acumen. It is, rather, a result of the unexplored geography in which it operates and the prospectivity of the company’s existing mines. Prior to the turn of the century, little money was spent exploring for gold in Francophone West Africa. This history makes large-scale, grass-roots exploration in Francophone West Africa remunerative in a way that is not true in much of the rest of the world. The second key to Endeavor’s exploration success is the relative youth of its producing assets. They are exploring attractive targets at recent discoveries rather than the picked-over targets at older mines. As a result, Endeavor’s lowest-cost exploration ounces are at its existing operations: Fetekro, Ity and Hounde. The associated costs of finding ounces at these three properties are $14, $17 and $19 respectively. ^[1]

^[1] Ibid, page 2 3

While a handful of one million plus ounce producers check our value box, Endeavour stands out as the one to own in size. More broadly, despite the attractive valuations of the larger gold mining companies, we still prefer the lower valuation multiples and alignment of smaller and mid-sized mining companies where insiders are focused on progressing an asset or two into production and not the perpetuation of a large corporate structure. Accordingly, the vast majority of our mining portfolio is invested in companies that are either producing less than a million ounces or are earlier stage developers and explorers.

Sincerely,

Equinox Partners

^[1] Sector exposures shown as a percentage of 9.30.21 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 09.30.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 6.30.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q3 2021 Letter

Fri, 22 Oct 2021 18:04:41 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners rose +0.3% in the third quarter of 2021. The fund gained +46.7% for the year to date through September 30th, 2021. Visit} ^Performance ^{for the fund's up-to-date statistics.}

our extraordinary concentration in E&P companies

Equinox Partners’ portfolio has never been as concentrated as it is today. Over the past 26 years, our top-ten holdings have typically constituted half of our fund. Today, our top-two holdings account for almost half of Equinox Partners’ capital. Moreover, both of these companies are Canadian, oil and gas companies. According to conventional portfolio theory, this level of concentration is folly: we’re losing the benefits of diversification by investing almost half of our fund in two companies and nearly sixty-percent of the fund in one sector. We fully concede the point about diversification and recognize that our returns will be highly correlated with the performance of Crew Energy and Paramount Resources.

That all said, we believe our E&P investments are in the midst of a once-in-a-life-time rerating, and we intend to optimize our return on that process. In the spring of 2020, our E&P companies traded as if they were going bankrupt. We bought more near the lows, confident that these companies were not going out of business and that the world’s hydrocarbon demand would grow for decades to come. We appear to be right on both counts, and some of the shares we purchased are up 20 fold in the last 18 months.

The spiral of factors that sent these companies’ stock down 98% from their peaks is now playing out in reverse. Not only are our E&P companies’ cash flows improving, but their balance sheets have gone from fragile to sound. Our E&P companies—which will exit 2021 with a debt to cash flow ratio of less than two times—are enjoying the rerating that comes with financial stability and leverage to the increasingly obvious problem created by underinvesting in hydrocarbons in recent years.

Assuming historical valuation multiples, we believe our E&P companies are worth multiples of their current price. Specifically, in a bullish, but by no means outlandish, scenario of $80 oil and $4 natural gas, our portfolio of E&P companies will generate free cash flows equivalent to 40%-60% of their enterprise values in 2023. Under more conservative $65 oil and $3 natural gas assumptions, our portfolio of E&P companies would still generate impressive 20%-25% free cash yields in 2023.

The ongoing massive underinvestment in the oil and gas sector is the result of the Western World’s political preferences, not a rational calculation of supply and demand. The resulting imbalance which was not produced by market forces is not likely to be remedied by market forces. We may never again experience an imbalance of this magnitude and duration in the course of our careers, and we intend to hold our energy companies until they get much closer to fair value. We expect our decision to generate large but volatile returns for our fund.

senior gold miners

For the first time in our fund’s history, we are invested in a senior gold miner that produces more than one million ounces of gold per year. The reason for our decision is simple: valuation. As a group, senior gold miners trade at NAV (graph below). Endeavor Mining, the senior producer we own trades at just .8x NAV, pays a 2.3% dividend, and will likely buy back 5% of their stock over the next year. Large mining companies, such as Endeavour, offer a different investment proposition than their smaller brethren. On the one hand, they have real advantages in terms of diversification and technical expertise. On the other hand, they face real challenges with respect to growth and capital allocation that continue to make them, on average, less attractive investments than the well-run juniors that constitute the majority of our gold-mining weighting.

Source: BMO, through October 2021 using spot metals prices and 5% discount rate

^[1] Canaccord, August 31, 2021, “Precious Metals – Producer: Record return of capital and building cash”

^[1] Our table excludes Polyus Gold.

^[2] Endeavor presentation , page 15, September 30, 2021.

Source: S&P Global Market Intelligence, “Major gold producers’ reserves development through exploration 2010-2019”, May 1, 2020. Endeavor data from company.

^[1] Ibid, page 2 3

While a handful of one million plus ounce producers check our value box, Endeavour stands out as the one to own. More broadly, despite the attractive valuations of the larger gold mining companies, we still prefer the lower valuation multiples and alignment of smaller and mid-sized mining companies where insiders are focused on progressing an asset or two into production and not the perpetuation of a large corporate structure. Accordingly, the vast majority of our mining portfolio is invested in companies that are either producing less than a million ounces or are earlier stage developers and explorers.

Sincerely,

Equinox Partners

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 6.30.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q3 2021 Letter

Fri, 22 Oct 2021 17:39:40 GMT

Dear Partners and Friends,

performance & portfolio

^{Kuroto Fund gained +1.6% in the third quarter of 2021 and was up +26.5% for the year to date through September 30th. By comparison, the EM index declined -8.0% in the third quarter and -1.2% for the year to date through September. We estimate that our portfolio is trading at 5.9x earnings, generating a 19.5% ROE, growing earnings 16.6% YoY, and generating a 6.3% dividend yield on a look-through basis for 2022. [1]}

In the past quarter, we sold a small portion of our position in FPT as well as our entire stake in Pakistan Stock Exchange in order to make several new investments. FPT remains a very attractive investment in our opinion, but some of our new investment opportunities were too good to pass up. One of our new holdings was trading below its net current assets when we purchased it: a classic net-net. In addition, the company came with a great management team and a well-aligned and experienced board. Another new investment we made during the quarter is a market-leading business whose true earnings power is masked behind temporary financial expenses.

During the quarter we added to Kuroto’s modest energy exposure as well. Our fund now has an 8% exposure to oil and gas through two investments. The Western World seems determined to end oil and gas production before the world has a viable alternative. This decision risks creating an energy crisis that will hurt poor countries the most and has created a particularly attractive investment opportunity in emerging market E&P companies. Both E&P companies we own are trading in excess of 30% free-cash-flow yields, and hence could buy back all their shares in 3 years or less. Overall, we are pleasantly surprised to be finding such attractive investments while many of our core markets—Brazil, India, and Southeast Asia—are trading at or near all-time highs.

Pakistan stock exchange

We’ve owned several stock exchanges over the years as we find the business model inherently attractive. Exchanges are monopolistic, particularly in emerging markets where dark pools are often not present. In addition, the financial structure of these businesses is such that the marginal cost of an extra dollar of revenue is usually close to zero. Once set up, these businesses can grow without investing much incremental capital. Furthermore—for reasons that prove markets are sometimes inefficient—they tend to trade at low valuations when stock markets are doing poorly and at high valuations when the market is hot. As a result, an exchange can be purchased at the bottom of the cycle with depressed earnings and a compressed valuation. When the cycle turns, earnings rise thanks to increases in trading volumes and price while the valuation on earnings expands. We keep a target list of exchanges in developing markets and monitor them should their valuations become attractive.

Last year, Pakistan’s stock market was struggling due to both the pandemic and the knock-on effects of an IMF package. As a result, Pakistan’s stock exchange was doing poorly as volume and average-daily-value traded was down. Unsurprisingly, the stock exchange was also trading at a cheap valuation. Even beyond these basic facts there were special circumstances that made the exchange particularly attractive last year. To understand them, it is necessary to understand a bit of the history of the exchange.

Prior to 2016, each of the major cities in Pakistan—Karachi, Lahore, and Islamabad—had distinct exchanges. As part of the China-Pakistan investment project, the Pakistani government encouraged the three regional exchanges to merge and brought in Chinese exchanges as outside investors. Together, they listed the resultant exchange and brought in ex-pat management. This management established best practices and significantly upgrading the technology of the exchange, but ultimately was unable to unlock the exchange’s full value.

The upside of the exchange was its latent assets. The first such asset was latent pricing power. The price Pakistan Stock Exchange charged for trades was far below that of neighboring countries’ exchanges. Raising prices would be an easy win for management, but they were unable to get the regulator and its partnering brokerage firms to agree. The second latent asset was establishing online retail stock trading in the country for the first time. There are 220 million Pakistanis but only about 1% have retail brokerage accounts. The third avenue to unlock was Pakistan Stock Exchange’ stakes in both the country’s clearing and depository businesses. These two monopolistic businesses are quite profitable, but the rules restricted the amount of dividends they could pay to the exchange. Finally, the fourth asset to surface was the exchange’s real estate value. The original exchanges were set up decades ago in prime real estate within the country’s three major cities. The real estate around the exchanges remains undeveloped but valuable. A third party assessed this real estate at a price that was worth approximately half of the exchange’s market value when we purchased it.

Last year, the board at the Pakistan Stock Exchange decided to replace its ex-pat manager with Farrukh Khan, the former CEO of one of the country’s largest brokerage firms. At that time, we participated in a call Farrukh held with investors. He struck us as an executive that understands his home country of Pakistan and would unlock value at the exchange. Moreover, Farrukh articulated the four right priorities: raise prices, build online stock trading, unlock dividends at the subsidiary levels, and monetize the exchange’s real estate.

While verifying what Farrukh said on the call, we immediately set about finding stock to purchase as we felt this opportunity would not last. We had never previously invested in Pakistan, but we had researched Pakistani companies for years and had an account already set up to trade. It’s fortunate that we were able to act quickly, because Farrukh did not waste any time executing his plan. In his first year as CEO, he accomplished three of his goals, even though they have yet to show up on the company’s financials. The pandemic also provided a nice online trading tailwind.

As in every other global markets, online retail trading of stocks proved very popular in Pakistan during the pandemic. Brokerage accounts have more than doubled in the past year in Pakistan. Combined with higher pricing and improved performance of businesses as they exited the pandemic, revenue grew almost 50% in the full year ended June 30, 2021. Due to the fixed cost nature of Pakistan Stock Exchange, profits grew over three times. Unsurprisingly, as the market realized what was happening the stock of the company doubled, and its valuation increased from a low double-digit P/E multiple to over 30 times. At this higher valuation, we decided to exit the investment. While there is certainly a long runway for online retail stock trading in Pakistan, at that multiple we were happy to move on to green pastures.

Sincerely,

Sean Fieler Brad Virbitsky

END NOTES

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, and other independent sources. Values as of 06.30.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kitco 4: Precious Metals Summit Beaver Creek

Tue, 14 Sep 2021 16:56:04 GMT

Beaver Creek: Precious Metals Summit

Sean Fieler speaks to David Lin from Kitco News at the Precious Metals Summit in Beaver Creek, CO covering risks to the US economy, equity overvaluation, and the "bubble free" zone of precious metals miners.

Equinox Partners Precious Metals, L.P. - Q2 2021 Letter

Mon, 02 Aug 2021 16:17:53 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners Precious Metals Fund rose +9.6% in the second quarter of 2021. We estimate the fund is down -6.3% for the year to date through June 30th, 2021. By comparison, the HUI seniors index is down -10.0% and the GDXJ juniors index is down -13.8% for the year to date through June 30th, 2021.}

NET ASSET VALUE MATH

In our opinion, Net Asset Value (NAV) is the best tool for valuing gold mines and advanced mining projects. NAV is the sum of all future free cash flows from an asset discounted back to the present. Unlike valuation ratios such as enterprise value to cash flow, NAV attempts to capture the economic value of a mining project over its entire life. As such, NAV allows for true apples-to-apples comparisons across companies. The problem with NAV calculations is that they tend to incorporate assumptions that are unrelated to the specific project under evaluation.

In an ideal world, variations in NAV would hinge on the well-informed differences of opinion of mine engineers and geologists. Will a mine take 18 months and cost $300m to build or 24 months and $400m? The difference matters, and well-informed analysts will have differing estimates of a project’s build time and cost. This, unfortunately, is not the type of difference of opinion that tends to drive the variance in NAV estimates. Instead, the variance in NAV calculations tends to hinge on: 1) commodity price assumptions; 2) assumed discount rates; 3) assets included/excluded; 4) NAV multiples; 5) estimated future dilution.

Commodity Price Assumptions

Each sell-side firm makes its own gold and silver price forecasts. This is useful. What is not useful is that each sell-side firm incorporates their metals price forecasts into their NAV calculations. As a result, two sell-side firms can arrive at the same NAV estimate for the same mine with one model assuming higher production and lower costs, while the other model assuming higher metal prices. To be fair, some sell-side firms also offer NAV calculations at spot pricing, but most sell-side NAV calculations incorporate disparate metal price estimates. This point merits special attention because, at the moment, sell-side gold price projections not only vary widely from firm to firm but may reflect a very pessimistic view of gold's future value.

Assumed Discount Rates

Discount rate assumptions are another critical aspect of NAV calculations that often prevent like-for-like comparisons. During the last bull market in gold mining stocks, the sell-side convention for gold miners was a 0% discount rate, i.e. future free cash flows were equal in value to present free cash flows. This assumption which makes theoretical sense if metals prices keep pace with discount rates, makes no distinction between current and distant free cash flow. As a result, two development projects could have the same NAV but drastically different internal rates of return based on the timing of the capital expenditures and cash flow. After the global financial crisis, the sell-side changed their convention to a 5% discount rate. The 5% rate strikes us as a more useful starting point for cash flow analysis even though it punishes long-lived assets. Under a 5% discount rate convention, an ounce of production thirty years in the future is worth less than a quarter of an ounce produced today.

While 5% is a reasonable norm, sell-side models do not employ it uniformly. Even within the same company’s NAV calculation, some assets may be discounted at 5% while others are discounted at 8%. A recent sell-side report on Sandstorm is a case-in-point. Sandstorm’s assets in better jurisdictions are discounted at 5% while their assets in more challenging jurisdictions are discounted at 8-10%. This distinction reflects the price at which the royalties would trade in the marketplace but creates the risk of double discounting: NAV calculations are lowered and then the companies in more challenging jurisdictions trade at large discounts to those already reduced NAV calculations.

(source: RBC, June 28, 2021)

Excluded/Included Assets

The principal flaw in many NAV calculations isn’t the math but what is and what isn’t discounted. Imagine two companies with the same costs, the same reserves and resources, the same production profile, and very different exploration potentials. Their NAV calculations would be identical, while one of the two companies is obviously more valuable. NAV calculations struggle to incorporate value that is indeterminate or contingent.

A similar problem arises when a new discovery lacks a resource or feasibility study. Pan American’s La Colorada Skarn is a case in point. We are confident that the company’s 2018 discovery will be a mine. However, putting a value on this asset is far from straightforward. On the other hand, excluding an asset likely worth $1b doesn’t make sense either. MAG Silver’s largely unexplored joint venture license with Fresnillo poses a similar problem. It’s a near certainty, in our opinion, that the veins on Fresnillo’s ground extend onto the JV’s land. These veins, however, have not been drilled on the JV property. So, what are these likely ounces worth? Assets that require such assumptions and lack clear economics are more often than not omitted or severely discounted from sell-side models because the underlying math is impossible to defend.

(source: RBC, June 1, 2021)

NAV Multiples

While NAV captures the sum total of discounted free cash flow, all free cash flow is not created equal and different assets should trade at different NAV multiples. Most obviously, royalty companies should receive higher NAV multiples than mining companies, and, generally speaking, high-quality ounces should receive higher NAV multiples than low-quality ounces. That said, it makes no sense to pay more than 2x NAV for royalty companies that do not have a growth pipeline. In particular, we do not think large NAV premiums makes sense for very large royalty companies that will struggle to grow their attributable ounces of actual gold production.

(source: BMO, July 26, 2021)

Estimated Future Dilution and Timing

At the other end of the NAV valuation spectrum from royalties are projects that require equity financing. Given the uncertainty of equity dilution and the timing of project commencement, some additional discount makes sense. The extent of the discount, however, is often extreme. It is not uncommon to find unfinanced projects valued at 0.2x NAV. This 10-fold difference in valuation versus mature royalty companies is based on the certainty of the royalty companies’ free cash flow verses the uncertainty that an unfinanced project will proceed at all and at what dilution will be incurred. While the distinction makes sense, the extent of the variance in the valuation often doesn’t make sense. Accordingly, well-informed judgement calls about the instances in which these discounts and premiums get out of line with the likely underlying economic reality of various projects are particularly valuable in today's market.

Conclusion

We continue to find good opportunities amongst gold and silver miners in the development. The process through which an ore body goes from a project that requires financing to a producing asset spiting off free cash flow tends to coincide with a substantial revaluation. The risk of owning a company during construction is that a project suffers cost overruns or fails to achieve its name-plate capacity. These risks are highest when the cycle is at its peak and lowest when the mining cycle is troughing.

That said, we are also just beginning to see real cost pressure creep into construction projects. While it is difficult to generalize across geographies, we estimate that over the last two years the cost to bring a mine online has risen ~30%. Most sizable builds are still able to attract good EPC talent, and we are far from the overheating phase of the last cycle during which costs and timelines blow out. That said, as the cycle progresses, the math of building a mine will become dicier and developers will be met with much more skepticism.

Organization

Effective January 1, 2021, the fund engaged Eisner Amper LLP as its auditor and Andersen Tax LLC as its tax advisor. We have shifted from a bundled audit tax provider to two separate service providers that will provide a wider range of tax expertise, additional oversight, and a more competitive fee structure. Our intention is always to provide our partners with the best service-provider at the best value.

Sincerely,

Equinox Partners

^[1] Sector exposures shown as a percentage of 6.30.21 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 06.30.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 6.30.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q2 2021 Letter

Fri, 30 Jul 2021 19:14:46 GMT

Dear Partners and Friends,

performance & portfolio

^{Kuroto Fund gained +13.7% in the second quarter of 2021 and was up +24.5% for the year to date through June 30th. By comparison, the EM index gained +5.1% in the second quarter and +7.4% through June. We estimate that the portfolio is trading at 6.4x '22 earnings, growing earnings 19% year over year, generating 19%+ unadjusted ROEs, and returning a 4.7% dividend yield .} ^[1]

turkey: revisited

In the summer of 2018, we invested 7% of partners’ capital into Turkey. That fall, we wrote the following: “As capital allocators to undervalued, better businesses in emerging markets, we are always looking for instances in which negative market sentiment overwhelms underlying financial and political reality. This past summer [2018], as Turkey fell squarely into that category, we made our first investment there in more than a decade.”

At the time, investors were concerned that foreign banks would stop rolling over their lines of credit to Turkish banks and that Turkey would impose capital controls. We traveled to Turkey several times that year and became convinced that this worst-case scenario was extremely unlikely. European banks had verbally committed to rolling over their credit lines to Turkish banks, and the Trump administration, while publicly criticizing Erdogan, was working closely with him behind the scenes. Convinced that the worst-case scenario was off the table, we purchased shares in a handful of Turkish companies.

Our spring and early summer 2018 investments in Turkey did not go well. Turk Tractor and Akbank each declined more than 30% in USD terms by mid-August. We realized our losses on Akbank and bought Garanti Bank at a similar valuation. We then sold Turk Tractor, made a substantial investment in Logo Yazlim, and added to our position in Garanti Bank. As the Turkish economy began to normalize that fall, our companies thrived. We exited Garanti Bank in relatively short order with the shares up over 50%, and we continue to own Logo. In dollar terms, Logo is up three-fold since our initial purchases despite a 30% decline in the Turkish lira.

Since our first purchases in May 2018, Turkey has been our best contributing country outside of Vietnam, yielding Kuroto Fund a $10m return and a 33% IRR. Our experience, however, has been the exception rather than the rule for Turkish equity investors in recent years. Over the same period, the Turkish MSCI index declined 32% in dollar terms. Our outperformance highlights our ability to differentiate ourselves from broad equity indices and the opportunities that a rifle-shot approach to investing can generate in challenging geographies.

From a company-specific perspective, Turkey remains an incredibly attractive investment destination: 1) Turkish stocks are cheap at a time when stocks globally are not; 2) The Turkish Lira is cheap; 3) the best Turkish companies are run to global standards. The resulting company-specific combination of value and quality remains particularly appealing to better-business value investors like us.

That said, today’s equity investors in Turkey are signing up for political instability. The deep divisions in Turkish society are not compatible with smooth transitions of power. In the words of an American military analyst, “There is no situation under which Erdogan will hold some kind of electoral process, lose and say, ‘Here are the keys to the country.’”[ 1 ] On the one hand, Erdogan knows that if he gives up power, he will spend the rest of his life in prison. On the other hand, there is no legitimate way for him to remain in power after an election loss.

Erdogan’s political calculation is complicated by his poor relations with the West. Europe and America would welcome his departure and are not going to “look the other way” if he rigs an election or imprisons his political opponents. Instead, the West will ratchet up the sanctions if Erdogan refuses to concede an electoral defeat. Accordingly, recent declines in public support for Erdogan’s AKP and a corresponding increase in support for the secular opposition, CHP, increases the likelihood of a political crisis in the short-term.

[1] Financial Times, November 18, 2020, Laura Pitel. “ Erdogan’s family drama and the future of Turkey ”

Given these constraints, Erdogan is actively trying to stay in power by winning at the ballot box. His strategy to date mainly entails an unending cycle of unorthodox economic measures aimed at boosting economic activity. If tourism returns, the Turkish Lira appreciates, and Turkish Central Bank lowers rates, Erdogan may just be able retain power through the ballot box. An election must be called in Turkey by June 18, 2023, so the window for this scenario to play out is incredibly tight. Moreover, after turning on the Gulenists following the 2016 coup attempt, Erdogan lacks the support of the technocratic elite. As such, he is relying on bureaucrats with less traditional resumes, most notably, Şahap Kavcıoğlu, the current head of the Turkish central bank. With inflation running at 18% per year, Sahap is going to have a tough time getting inflation expectations and rates down in time for Erdogan to call an election he is likely to win.

The aforementioned scenarios are further complicated by Erdogan’s lack of control over his own administration and his declining health. A recently released official video during which Erdogan dozes off makes clear that both factors are currently in play ( watch it here ). If Erdogan were unable to fulfil his duties as President, given the lack of an alternative leader within the AKP party, a smooth transition of power might actually unfold.

At today’s valuations in Turkey, an enormous amount of negative news is already in the price, and we are firm believers in entering markets when the price is right even when there is still uncertainty. That said, the current moment in Turkey is less predictable than 2018. There is a real probability that Erdogan’s efforts to stay in power will create an even better entry point than what is on offer today. Given the current valuations, we are keeping our Turkish weighting at ~10%.

Organization

Sincerely,

Sean Fieler Brad Virbitsky

END NOTES

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q2 2021 Letter

Fri, 30 Jul 2021 19:14:44 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners rose +29.6% in the second quarter of 2021. We estimate the fund is up +46.3% for the year to date through June 30th, 2021.}

NET ASSET VALUE MATH

Commodity Price Assumptions

Assumed Discount Rates

(source: RBC, June 28, 2021)

Excluded/Included Assets

(source 1: RBC, June 1, 2021. Notice $448m value for the La Colorada Skarn asset)

(source 2: BMO, July 28, 2021. Notice $25m Exploration for value for MAG’s Juanicipio JV)

NAV Multiples

(source: BMO, July 26, 2021)

Estimated Future Dilution and Timing

Conclusion

Organization

Sincerely,

Equinox Partners

^[1] Sector exposures shown as a percentage of 6.30.21 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 06.30.21 unless otherwise noted.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 6.30.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Real Vision "Live"

Tue, 15 Jun 2021 12:58:38 GMT

Max WiEthe interviews Sean fieler: why it's still early in E&P, EM, and Miners

"Many investors look at stocks, up multiples from their lows, and get a feeling that they have missed the boat. This is certainly the case in energy stocks, which have performed well alongside oil’s rally. Sean Fieler, CIO of Equinox Partners, returns to Real Vision to discuss this dynamic and opportunities that it provides in gold miners and Canadian E&P companies. Fieler cites the newfound capital discipline affecting these sectors, conservative commodity price estimates, and the fact that the market seems less than interested in both sectors as reasons why we are still very early in the cycle with many companies trading far below fair value and providing strong income in the form of dividends rather than reinvestment. Fieler will also touch on some of the unique opportunities they are finding in emerging markets." - Real Vision

Alternatives Watch

Mon, 07 Jun 2021 15:16:09 GMT

Can the Fed make tough decisions on inflation?

"In our estimation, the crazy combination of fiscal and monetary policy necessary to achieve policymakers’ desired inflation rate will be very hard to walk back. The Fed and Congress are addicted to massive money printing and spending, respectively.”

CIO Sean Fieler featured in Alternatives Watch discussing the current inflationary environment, the role of monetary and fiscal policy from the Federal Reserve, and how best to prepare for its effects.

Inflation & Gold Miners - Webinar

Fri, 04 Jun 2021 16:50:18 GMT

Our Team discusses the impact of inflation on gold mining companies

Content by minute:

1:30-10:50: Introduction on history, inflation, gold, the cycle
10:50-20:00: Sequence of mining cost inflation
20:00-29:00: Fundamentals of our mining portfolio
29:00-31:00: Conclusion
31:00-54:00: Q&A

Overview:

We discuss the investment opportunity in gold/silver mining companies as a follow up to our Q1 '21 letter on inflation. We believe tailwinds for gold, compelling valuations at today’s spot metals prices, and an inefficient market will make this next cycle a stock picker’s dream.

The Acquirers Podcast

Tue, 18 May 2021 15:35:39 GMT

Interview with Sean Fieler

In this episode of The Acquirers Podcast, Tobias chats with Sean Fieler, CIO of Equinox Partners. During the interview Sean provided some great insights into:

Value Investing In Gold Miners
Is It Better To Buy Gold Or Gold Miners?
The Impact Of Crypto On Gold
The Inflation Effect On Gold
Activism In The Gold Sector
Gold ETF’s Or Gold Mining Stocks?
Warren Buffett’s $GOLD Investment
Buying Gold As A Hedge To The Market
How To Uncover Gold Mining Companies
When To Sell Precious Metal Miners
The Fed’s Impact On The Gold Sector
Central Banks On Gold Buying Spree
Gold Mining & Geopolitical Risk
Choose Public Gold Miners Over Private

Barrons

Fri, 07 May 2021 15:44:22 GMT

Vietnam Has Big Plans for Infrastructure. Investors Have a Reason to Ease Back Into the Market

Sean Fieler on FPT: “Vietnamese engineers cost less than in India, and thousands of them are learning Japanese.”

Equinox Partners Precious Metals, L.P. - Q1 2021 Letter

Wed, 05 May 2021 18:00:06 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners Precious Metals Fund, L.P. declined -14.6% in the first quarter of 2021. By comparison the GDXJ index declined -17.0%, the HUI index fell -11.1%, and gold and silver declined -9.8% and -7.4% respectively. For the year to date through April 30th, we estimate the fund was down -5.9%, while the HUI declined -7.7%, the GDXJ fell -12.5%, gold declined -7.1%, and silver fell -2.5%.}

Inflation and gold

In the first quarter, inflation was up, concern about inflation was way up, and gold mining stocks were way down. At its March 30 ^th intraday low, the GDXJ junior gold mining index was down 20% for the year to date after having endured a cumulative $265m outflow. What gives? Rising inflation has historically been good for gold and negative for non-resource stocks and bonds.

Bond investors possess the type of complacency that can only be induced by an almost forty-year long bull market. The U.S. 10-year Treasury is not just yielding less than inflation but also less than the Fed’s inflation target. Investing in bonds has been described as “senseless” by Paul Singer and “stupid” by Ray Dalio. Fixed income investors’ concern about inflation eating into their real return is offset by their confidence that central bankers will protect them from losses. The consensus seems to be that even if the inflation picture deteriorates, fixed income owners will be given time to allocate their largely intact capital elsewhere. This reasoning does not, however, make bonds good investments; it only makes them less prone to collapse than equities.

Equity investors, by contrast, are acutely aware of the rapidity with which stocks can decline. They are simply not convinced that the coming inflation is going to be bad for stock prices. Many money managers are nonchalantly insisting that stocks are the best hedge against inflation. Part of this optimism stems from a healthy dose of recency bias. The last several inflationary episodes in the developed world have been associated with strong growth and a rising stock market. The 2005-2008 high-growth inflation uptick is a case in point. Over those three years, as the world went through a synchronized expansion, U.S. inflation averaged 3.3% and the S&P rose over 30% before the ’08 selloff.

^{While the 2005-2008 period proves that inflation need not be bearish for equities, it is equally true that the 1970s inflationary experience was catastrophic for equities. It is worth recalling the horrible details. From January 1970 to January 1980, the S&P lost 42% of its value in real terms. It took the S&P 14 years to permanently break through its late ‘68 peak in nominal terms. Even with dividends reinvested, in real terms the market did not exceed its 1968 peak until 1983, 15 years later!}

^{There are, of course, many differences between today and the 1970s. Most importantly, the 1970s lacked the trifecta of globalization, demography, and technology that has suppressed inflation for a generation. Central bankers believe that these forces are so deflationary that even if they can engineer 2% inflation it will be difficult to sustain. As such, central bankers reason that while consumers may face a loss in purchasing power associated with a bout of inflation, they should not get all worked up about the long-term consequences.}

^{We also appreciate the extent to which globalization, demography, and technology have made it hard to generate much inflation. It’s not, however, at all clear to us that when higher inflation does arrive it will be either benign or transitory. In our estimation, the crazy combination of fiscal and monetary policy necessary to achieve policymakers’ desired inflation rate will be very hard to walk back. The Fed and Congress are addicted to massive money printing and spending, respectively. We doubt either institution possesses the chops to change course when the time comes, and that question looks increasingly relevant given the recent data. Nominal GDP grew 10.7% in Q1, CPI ticked above 2.5%, personal incomes were up 21% month over month in March, this year’s budget deficit is running in excess of $2 trillion, and the Fed is still growing its balance sheet at $120 billion dollars per month} ^[1] ^.

^{With an inflationary wave fast approaching, it is clear to everyone that government policy is the underlying cause. Government culpability is critical, not because we are interested in assigning blame, but because government-led inflation mirrors the 1970s rather than the more benign bouts of growth-driven inflation since then. From the failure of the Russian wheat crop in 1972 to the chip shortages of 2021, inflation typically begins as a series of idiosyncratic events. Overconfident central banker invariable rationalize inaction at these critical moments. Herb Stein’s case for easy money in 1971 eerily echoes the Fed’s arguments today: “We’re a long way from full employment, we still have a lot of room for expanding the economy, and the inflation rate is low.” Herb Stein later added, “We misinterpreted.”} ^[2]

^{The Fed is, of course, not solely to blame for the building inflationary forces. Just as in the early 1970s, the underlying cause of inflation is government policy writ large. For over a year, both the expansions and contractions in the U.S. economy have been dictated by government action. Government mandated lockdowns of the entire service sector are clearly more disruptive than the wage-price controls of the early ‘70s. The stimulus checks are larger than any direct benefit the government has ever provided. As a result, we have an economy expanding and contracting because of government policy rather than market forces.}

^{Having assumed responsibility for the business cycle, the federal government will find it difficult to withdrawal its support. There is never a politically expedient time for a recession. Neither political party is going to subject the American electorate to a fiscal cliff prior to the 2022 mid-terms. The same will hold true for 2024. Monetary policy promises to remain equally feckless and accommodative. At some point, the Fed will have to choose between persistent inflation or taking a step back as markets find a lower level. Both scenarios will be made worse by a Fed Chairman who appears weak and unable to make tough choices.} ^[1] ^BEA

^[2] ^{Wyatt C. Wells. Economist in an Uncertain World: Arthur F. Burns and the Federal Reserve, 1970-1978. Columbia University Press, 1994}

^{As the graph makes clear, government-induced inflation has historically been good for precious metals and energy and disastrous for non-resource common stocks and bonds. We expect our portfolio to outperform as the government-led inflation cycle builds. Long-term investors who sense the status quo is changing should aggressively reduce their exposure to fixed income and growth stocks and reallocate their capital to commodities, generally, and precious metals equities, specifically.}

^Organization

^{In January, we welcomed Kieran Brennan to our investor relations team. A Williams grad, Kieran previously worked at First Eagle, Connor, Clark, & Lunn, and the MFA.}

^Sincerely,

^{Equinox Partners}

^[1] Sector exposures shown as a percentage of 03.31.21 pre-redemption AUM. Performance derived from Equinox Partners Precious Metals Fund, L.P. and is not indicative of an investment into the offshore fund nor gold and silver mining managed accounts managed by Equinox Partners Investment Management, LLC. Performance will differ based on the account and timing. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 3.31.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Equinox Partners, L.P. - Q1 2021 Letter

Wed, 05 May 2021 13:49:23 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners rose +13.0% in the first quarter of 2021. We estimate the fund is up +20.8% for the year to date through April 30th.}

THE POLITICS OF OIL & GAS INVESTING

Our oil and gas companies accounted for more than all of our first quarter gains. In our opinion, the majority of their recent performance is a retracement of an irrational sell-off that had more to do with the politics of fossil-fuel divestment than a clear-eyed assessment of the future demand for oil and gas. Institutional investors who should have been thoughtfully discounting future free cash flows last spring instead convinced themselves that divesting from oil and gas was the right thing to do both politically and financially. Their flawed logic created a spectacular opportunity for investors like us who take a fundamental approach to investments in the oil and gas sector.

Oil and gas have always been political. From Standard Oil’s early efforts to assert control over America’s nascent oil market to the formation of OPEC in 1960, efforts to control supply and distribution are intrinsic to the oil and gas markets. The ongoing fight between America, Germany, and Russia over Nord Stream 2 perfectly captures the range of economic and geopolitical interests that have long typified the sector. In recent years, however, these long-standing political dynamics have been frequently overshadowed by a powerful new political constituency: investors unwilling to own oil and gas companies at any price.

Given the ideological rigidity of the divestment movement, we mistakenly thought these ideas would be difficult to mainstream amongst institutional investors. We also wrongly believed that the 2014-2016 selloff in oil and gas marked the wholesale exit of such politically motivated sellers. Oil bottomed in 2016 at $26 per barrel and the price of many E&P companies were cut in half during that selloff. The 2016 decline, however, was a mere precursor of the more brutal rout in oil last spring. Not until late March 2020—when oil futures traded well below zero and our principal E&P holdings had declined over 95% from their 2011 highs—was it safe to say that there was not much exiting left to do.

As painful as the years of E&P losses have been for our partners and us, the sector’s 2020 capitulation created the perfect circumstances to buy more shares of these high-return companies. Four factors have aligned to make us wildly bullish about our E&P companies going forward: 1) consumption for natural gas and oil is increasing; 2) the oil and gas sector is taking a cautious approach to debt and growth; 3) egress issues in Canada’s Western Sedimentary Basin are improving, 4) small-cap E&P companies continue to trade at irrational discounts to their intrinsic value. While E&P companies have bounced sharply from their lows, our companies need to trade at multiples of their current prices before they approach fair value in our opinion. Using RBC’s price deck for oil and gas, the entire Canadian E&P sector trades at a 15% free cash flow yield this year and intermediate producers trade at an astounding 24% FCF yield. ^[1]

With over one-third of our partners’ capital invested in the E&P sector, we are mindful of the ways in which politics can continue to punish the sector. We would not be surprised, for instance, if commercial banks began restricting credit to E&P companies, central banks imposed higher risk weightings on the sector, and sector-specific taxes were enacted. That said, our E&P companies are busily preparing for these possibilities. Moreover, the logical result of these targeted attacks on the sector will be higher oil and gas prices which, of course, are a positive for our holdings.

^[1] RBC Capital Markets. Canadian E&P: Weekly Review and Valuation Tables. May 3, 2021. Note: “Intermediates” have production of >75k boe/d.

Inflation and gold

^[2] ^{Wyatt C. Wells. Economist in an Uncertain World: Arthur F. Burns and the Federal Reserve, 1970-1978. Columbia University Press, 1994}

^Organization

^{In January, we welcomed Kieran Brennan to our investor relations team. A Williams grad, Kieran previously worked at First Eagle, Connor, Clark, & Lunn, and the MFA.}

^Sincerely,

^{Equinox Partners}

^[1] Sector exposures shown as a percentage of 3.31.21 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.18 unless otherwise noted. MAG Silver valuation using first full year of production and estimatied 8,000 tpd throughput.

Endnote: Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, Bloomberg, or independent sources. Values as of 3.31.21, unless otherwise noted.

The information presented herein is current only as of the particular dates specified for such information, and is subject to change in future periods without notice.

Kuroto Fund, L.P. - Q1 2021 Letter

Fri, 23 Apr 2021 17:13:29 GMT

Dear Partners and Friends,

perormance & portfolio

^{Kuroto Fund gained +9.5% in the first quarter of 2021. By comparison, the EM index was up +2.2% in the first quarter. For the year to date through April 22nd, we estimate the fund was up +14%.} ^[1]

the software revolution & our portfolio

It has been almost 10 years since the publication of Marc Andreessen’s op-ed titled “Why Software Is Eating the World.” [1] Andreesen presciently predicted that almost every company would become a software company. At the time, the software revolution had just begun disrupting emerging markets businesses. Safaricom’s adoption of mobile payment technology is one of a handful of emerging market businesses that took advantage of the software revolution before developed market peers. With the exception of a few early adopters, however, broad swaths of emerging markets remained largely untouched by the software revolution in 2011.

Ten years later, the software revolution has touched every company in which we invest. As we made clear in our year-end letter, we invest based on fundamentals and not on tech-transformation hype. That said, it would be a mistake to conclude that our investments are on the wrong side of the software revolution. As better-business value investors, we partner with management teams that are constantly improving their competitive positions. In recent years, such improvements have increasingly meant aggressively embracing the software revolution. The balance of this letter will detail the extent to which tech is shaping our top top-five investments.

FPT – 22.7% of 3.31.21 capital

FPT is no longer the low-cost technology outsourcing business it was a decade ago. Through a combination of management ambition and meritocratic culture, FPT has moved up the value chain and now works with several of the world’s largest companies, like Airbus and Toyota. Going forward, FPT intends to secure more complicated software consulting work based on the company’s problem-solving expertise rather than its large workforce of software developers and integrators. In addition to its software and core broadband business, FPT is building data centers in Vietnam to support its domestic cloud and digital entertainment offerings. We expect these initiatives to generate years of 20%+ earnings growth for FPT. At less than 20x ’21 earnings, we continue to believe FPT is undervalued.

MTN Ghana – 16.2% of 03.31.21 capital

MTN Ghana copied Safaricom’s playbook and built a mobile payments business in Ghana on the back of its traditional telecom business. MTN’s management is taking this model a step further by creating a platform modeled after Tencent’s WeChat. Last year, MTN introduced a messaging and entertainment platform that allows connectivity between 2G and 4G users, an important step in a country like Ghana where only half the population has smart phones. The application has an open API ecosystem that encourages startups to develop applications and leverage MTN’s user base. If successful, MTN will become more than just a telecom or mobile-payments company; it will be the go to place for Ghanaians to access the internet. With rapid growth in its core businesses and a valuation of 7x ’21 earnings, the value of this initiative is clearly not priced into the stock.

GT B ank – 10.4% of 3.31.21 capital

GT Bank, like Safaricom in Kenya and MTN in Ghana, manages a digital payments business facilitated by mobile phones. Last year, GT Bank’s management announced plans to move its digital payments business into a separate subsidiary in order to free it from Nigeria’s cumbersome banking regulations. GT Bank estimates that its payments subsidiary already controls a mid-teens percentage of the payment ecosystem in Nigeria. Following the spinout of its payment business, GTB intends to push out point-of-sale devices to the thousands of small merchants that already bank with the group. The bank also wants to add an insurance, asset management, and a pension business to round out their payment ecosystem. As a sign of its seriousness, GTB’s celebrated CEO—widely considered one of the top bankers in Africa—is stepping down from the bank to head this new business. With the total business trading at book value on a sum of the parts basis, the digital payments business is currently being ascribed little value.

Logo Yazlim – 7.9% of 3.31.21 capital

Logo is a software business with the leading ERP market share amongst small and medium sized enterprises in Turkey. Logo is in the process of migrating its customer base from on-premise software to the cloud. Last year, Logo jumpstarted this initiative with the purchase of a human resources software application called Peoplise, as well as the roll-out of its low-cost micro-SME cloud-ERP offering, Isbasi. Peoplise is an application that customers can add onto their existing Logo ERP product. Isbasi is a new product akin to Quickbooks that targets the hundreds of thousands of Turkish SMEs that can only afford a SAAS solution. While Logo is trading at 20x ’21 earnings, the company gets cheap quickly given its earning’s growth.

TBC – 06.2% of 03.31.21 capital

TBC Bank launched Georgia’s first fully digital bank, Space, in 2018. Already a leader in mobile and internet banking, TBC went a step further and created a challenger bank to their own ecosystem. After testing and refining it in Georgia for two years, TBC is launching it this year in Uzbekistan, an underbanked country with 10x as many people as Georgia. Space, combined with TBCs recent purchase of Uzbekistan’s largest mobile money transfer and payments business, puts TBC in a perfect position to capture Uzbekistan’s large, unbanked population. Trading at 70% of book value, we believe the market has yet to recognize the bank’s long-term growth potential.

[1] Andreesen, Wall Street Journal, August 20, 201 1

Sincerely,

Sean Fieler Brad Virbitsky

END NOTES

Real Vision with Marcus Frampton

Tue, 06 Apr 2021 16:16:27 GMT

sean Fieler interviews CIO of $74b Alaska Permanent on his unique approach

Password: 2021Frampton0405

Fieler and Frampton "discuss why Frampton has allocated the APF in gold, active management, and macro hedge funds while resisting the urge to chase private equity like many of his peers."

Contrarian Investor Podcast

Thu, 04 Mar 2021 19:04:32 GMT

The CASE fOR PRECIOUS METALS MINERS - Sean Fieler

Sean Fieler joins the popular podcast to discuss:

The case for underlying gold and silver miners, including the compounding of fiscal and monetary policy. (3:03);
Why invest in miners rather than in the physical commodity, or futures contracts thereon? (7:26);
One concern with ETFs tracking prices of physical metals: the administrators are not necessarily reliable counterparties (9:00);
There are risks with owning miners as well, of course (11:41);
More information on the guest (15:17);
One surprising fact: West Africa is a good place to build a mine. Latin America is much more difficult (17:27);
Ghana’s fledgling securities market may be a good opportunity for investment (19:48);
One favorite stock: Endeavor Mining Corp (OTC:EDVMF) (21:35);
A microcap name to watch: RTG Mining (GREY: RTGGF), a copper and gold miner in the Philippines (25:19);
A little background on the fund, which predates the gym of the same name (27:52).

Equinox Partners Precious Metals, L.P. - Q4 2020 Letter

Thu, 14 Jan 2021 17:11:31 GMT

Dear Partners and Friends,

yearend Top-five holdings

MAG Silver

MAG’s Juancipio joint venture is one of the world’s highest-grade silver mine. At an eventual 8,000 tonnes per day of production, the joint venture will produce 10 million ounces of silver per year at a cash cost of less than zero. For Mag’s 44% net interest, the JV will generate 4.4 million ounces. With spot silver over $25 USD per ounce, that equates to ~$100m in pre-tax free cash flow for MAG. The JV can sustain this level of production for more than a decade based on the existing resource, and there is good reason to believe that the deposit will grow in size as the joint venture identifies other economic orebodies on the joint venture property.

Despite the quality of the Juancipio joint venture, MAG Silver has long traded at a discounted valuation because of Fresnillo’s bad behavior as the majority partner in the joint venture. Fresnillo’s decision to slow walk the investment decision at Juancipio as they pushed ahead with their 100% owned properties infuriated MAG shareholders. With production fast approaching, however, the concerns about the timeline have begun to recede and the value of MAG has increased accordingly. While there could be further delays to the timeline, given the decline in production elsewhere in the Fresnillo district, Fresnillio is as motivated as MAG at this point to bring the Juancipio joint venture into production.

More importantly, with MAG now fully financed and Peter Barns assuming the Chairmanship of MAG this past summer, the company is well positioned to demonstrate its credentials as a savvy capital allocator. The joint venture should enjoy many years of high free cash flow as well as high-return investment opportunities. Given Peter Barn’s background at Wheaton Precious Metals, we expect he will clearly communicate a sophisticated financial approach to develop the joint venture and thereby achieve a premium valuation.

West African Resources

Richard Hyde, a geologist, founded West African Resources in 2006 with the hopes of finding a deposit he could sell to a developer. After years of looking, WAF acquired what would become the Sanbrado gold project in January of 2014. In 2016, the company drilled discovery holes, and by 2018 Richard and his team were ready to sell the highly economic 2.8m ounce deposit that they had discovered. There was just one problem, there were no buyers. Despite the technical and financial merits of the project, no gold mining companies in West Africa made a bid. So, Richard and his team were left to develop the asset themselves.

The equity offering of West African Resources in December of 2018 was a disaster. The underwriters were unable to sell their shares to the market at the agreed-upon price, and they took a discount to get West African Resources’ paper off their books. The mining process was straightforward, the grade was high, Richard had a seasoned team, and the market wanted out.

Despite the cool reception from the equity market, Richard managed to hire Lycopodium to construct the mine with a fixed bid and finance the project without any hedges. This unencumbered exposure to higher metal prices has enabled the company to fully participate in rising metals prices. And, Lycopodium brought the project in on-budget and ahead of schedule. In commercial production since June of this year, the Sanbrado mine has exceeded its design capacity, and is on track to produce 300,000 ounces of gold at a cash cost of less than $500 USD this year. This first year of production will allow West African Resources to pay back the capital they raised to build the project ahead of schedule and begin paying a meaningful dividend.

Since making a production decision at Sanbrado in 2018, Richard and his team have grown West African’s Resources’ attributable ounces by 50% through the drill bit at Sanbrado and through the acquisition of the Toega project from B2 Gold in the summer of 2020. The Teoga project is particularly significant because it allows West African Resources to extend their production profile with high-grade ore from a deposit that is just 10 miles away from their Sanbrado mill.

Despite West African Resources’ three-year string of unmitigated success, the company still trades at a 50% discount to NAV. We find this surprising. Not only have Richard and his team proven themselves to be astute operators, but they are well aligned with their minority shareholders. Insiders own 2.5% of the company. The combination of patience and persistence that Richard and his team have shown over the past fifteen years should merit a premium not a discount to the market in our opinion.

Pan American Silver

With all of Pan American’s mines except for Timmins placed on care & maintenance due to the coronavirus in the second quarter, 2020 was a difficult year for Pan American. As of the middle of Q3, all the impacted mines were back up and running, though not all at the same rate as before the shutdown. In particular, the company’s underground operation in Canada and all its operations in Peru continue to perform at a higher cost and lower throughput than before the Q2 shutdowns. When the virus eventually blows over we expect these operations to return to normal, and we do not believe any of the impacted assets have been impaired.

Despite the headwinds of the coronavirus, Pan American continues to generate strong free cash flow in large part due to higher silver and base metals prices. Accordingly, the company will end of 2020 with a net cash position of more than $300m USD. This cash position gives Pan American the flexibility to easily internally finance the development of the La Colarda scarn deposit, make an acquisition, or develop another one of its portfolio assets.

Despite its well-regarded management team, long-term oriented board, successful track record, scale, and exposure to silver, Pan American trades right at our 5% NAV using spot commodity prices. This is surprisingly reasonable valuation for the third largest silver producer in the world. Going forward, we don’t expect any aggressive moves from the steady management of Pan American. We expect Michael Steinmann and his team to continue to compound the intrinsic value of the company and the shares to rerate as operations return to normal.

K92

K92 has been on a remarkable trajectory since acquiring the Kainantu project from Barrick in June of 2016. Having secured the property, John Lewins and his team promptly proceeded to bypass the geologically complex deposit that Barrick drilled and focus their attention instead on the adjacent Kora deposit. They raised $26m CAD in 2017 and began drilling into the Kora deposit. This decision quickly became financially self-sustaining as the development ore produced 10 g/tonne material.

In 2018, K92 built a plant out of its cash flows capable of processing 2,000 tonnes per day of underground ore. Over the past three years, not only has K92 developed the two high grade veins that they discovered in 2018, but they have also identified a third vein system capable of supporting much higher throughput. To develop phase three of the Kainantu mine, however, K92 needs a permit expansion and extension from the government of Papua New Guinea. Given the tensions surrounding the Porgera mine which is jointly controlled by Xijin Mining and Barrick Gold, the market is not giving K92 the benefit of the doubt with respect to this permit application. We think this pessimism is misplaced.

The Porgera mine is in a fundamentally different situation from Kainantu. First, Barrick was able to negotiate a very attractive tax break when they first invested in Porgera in 1997, and now the government of PNG is eager to renegotiate that agreement. Second, the Porgera mine has a substantial environmental clean-up coming at the end of the mine-life due to its tailings deposits in a local river. K92 doesn’t dump tailings nor do most other mining operations in the world today. This pending clean up, in addition to the modest tax receipts, has put Porgera squarely in the PNG government’s crosshairs. K92, on the other hand, is viewed as a model corporate citizen with a mine that predominantly employs locals while improving the community and paying taxes at the same time.

Finally, it is worth pointing out that if the government of PNG does not give K92 the permits to develop the third phase of its deposit, PNG cannot reassign that right to any other company. Phase 3 would just be an unexploited asset next to K92’s existing mining operations that K92 will retain ownership over. So, it is in the interest of K92 and PNG to come to a commercial agreement. This agreement will likely mean higher taxes, but given the success Barrick has had in the initial negotiations around Porgera, we expect this increase will be in the rage of 10%, increasing PNG’s total take to just over 40% of the mine’s economics. At this tax rate with Phase 3 going ahead, K92 trades at half of NAV. This is especially cheap for such a high grade mine with excellent exploration upside.

Bear Creek

Bear Creek is on the verge of financing its fully-permitted Corani project in Peru. The company has all its permits in place and has been working on a financing package for more than a year. If the company can secure 70%+ of the required $600m USD via an off-take agreement and debt package, its stock should rerate dramatically.

The project to be financed, Corani, is one of the largest undeveloped silver mines in the world. With 225m ounces of silver reserves, 2.7b pounds of lead, and 1.8b pounds of zinc, the contained metal value of the deposit exceeds $10 billion USD. Per the company’s December 2019 feasibility study, the project has an IRR of +20% and an NPV of $531m. With silver, zinc, and lead prices up substantially since late 2019, the project’s IRR and NPV have improved sharply.

There are two principal sticking points for the project: banks’ willingness to finance greenfield projects and Peruvian politics. The coronavirus downturn had clearly had a negative impact on the financial wherewithal of the banks that might finance such a project. Accordingly, good projects like Corani are being slow walked and then stuck in credit committees. With respect to Peruvian politics, the impeachment of President Vizcarra with just five months left in his term reminded investors once again that all is not well in Peru. As a result, lenders will likely want to wait until the after the presidential election of 2021 before extending a multi-year loan to Bear Creek.

For the company’s part, Tony Hawkshaw, Alan Hair, and Eric Caba are technically well qualified to negotiate and structure the necessary offtake agreements. We’ve also been pleased with the company’s prudence with respect to shareholder dilution. Bear Creek’s modest recent equity issuance is a case in point. This financial prudence, we believe, is a result of insiders’ ownership and a concentrated shareholder base.

Precious Metals Mining FUND

In order to accommodate more and varied onshore and offshore investors, we launched a precious metals mining fund on January 1 ^st called Equinox Partners Precious Metals Fund. The fund will mirror the investments in our dedicated mining managed accounts. We’d welcome inquiries into either vehicle.

Sincerely,

Equinox Partners Investment Management

Equinox Partners, L.P. - Q4 2020 Letter

Thu, 14 Jan 2021 16:29:44 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Equinox Partners rose +24.6% in the fourth quarter of 2020 and was up +33.1% for the full year} ^[1]

Our value investing discipline doesn’t protect us from being wrong, and we certainly made our share of mistakes in 2020. For example, we began 2020 short both Tesla and government bonds. Our value orientation did, however, prevent us from getting disoriented last spring. In March, it was obvious to us what we needed to do. We covered our shorts and bought companies at incredibly low prices. As a result of these actions, our fund more than recovered after having been down over 50% in late March.

While buying near the lows and covering most of our shorts during the market crash was obvious in hindsight, at the time, it took real conviction. Our timely purchases of Crew Energy and RTG Mining have proven particularly beneficial to the fund. Both companies are now top-five positions. With respect to our short covering, our decisions to cover Tesla and much of our fixed income short exposure were also critical to our fund’s 2020 returns. Given the financial significance of these decisions, each merits a fulsome description.

We increased our positon in Crew Energy by over 50% between March 12th and March 24th. We then topped up our holding when the opportunity presented itself again on April 20th and April 21st. At its lows, Crew Energy was trading as if it was bankrupt. It was not. The market failed to grasp the attractive nature of the Crew’s debt—a $300m bond due in 2024 with no covenants. Crew had the luxury to wait for oil and gas to rebound. Not only were we confident that the sector’s history of imprudent overinvestment was behind us and that hydrocarbon prices would not remain below replacement costs, but even in the unlikely case that energy prices remained depressed through 2024, we thought that Crew’s equity was worth substantially more than $15m USD.

The second critical purchase decision we made last spring was increasing our position in RTG mining. Like Crew, we had a small positon in RTG at the beginning of the year. Accordingly, when the company chose to raise a modest amount capital in the spring we were perfectly positioned. Given the low price at which RTG was trading, the company’s insiders limited the equity offer to just $3.8m USD to minimize dilution. While modest in size, this equity sale was just the right entry point for us as we were looking to deploy capital with a management team and asset we already knew well.

The third decision—which should not be glossed over—was our active management of our short portfolio. Our short exposure ended up costing 7% of partners’ capital in 2020. But, these losses could have been much worse had we not aggressively trimmed our exposure as the stock market became increasingly frothy last fall. The more ebullient the market became, the more we shifted our short exposure to mundane companies, like Planet Fitness. While we lost money on these shorts as well, we are certain that money-losing, over-levered gyms are not worth 13x revenues. The combination of such extreme valuation and such pedestrian business models reinforced our confidence that we remain in the very late stages of extreme financial overvaluation.

yearend Top-five holdings

MAG Silver: 18.8% of 12.31.20 Partners’ Capital

Bear Creek: 12.8% of 12.31.20 Partners’ Capital

Paramount: 9.5% of 12.31.20 Partners’ Capital

From its 2014 peak of just over $60 to its March 2020 trough of just under $1, the shares of Paramount declined 98.4% in slightly less than 6 years. Surprisingly, this 98.4% decline occurred while the company’s hydrocarbon production per share more than doubled. Underlying the collapse in Paramount’s share price is the decline in the oil prices. In the summer of 2014 when Paramount’s shares peaked, West Texas Intermediate crude fall from $105 to $45. The collapse in oil prices in 2014 happened at the worst time for Paramount, having borrowed heavily to complete a processing facility that ended up being both delayed and over budget.

Paramount’s traumatic near death experience has had a clearly positive effect on management behavior. Jim Riddell rationalized the company’s portfolio and middle-management. More importantly, both the company and its leadership has matured. They have a better appreciation for their own strengths and weakness, they realize they are good contrarian deal markers, and they don’t need to complicate that value-add with unneeded execution risk.

Like Crew, Paramount has more infrastructure and transportation commitments than makes sense at its current level of production. And like Crew, Paramount plans to go against the current market orthodoxy and grow production significantly next year. With its Q3 release, the company unveiled a plan to grow production 20% year over year by outspending cash flow by $100m in the first half of 2021. Once that growth is complete, Paramount will have a more sustainable cost structure that should allow it to generate $50m of free cash flow in the second half of 2021.

At current strip pricing, and if Paramount’s 2021 investments go according to plan, the company will have a sustainable leverage ratio by the second half of next year. Should that occur, Paramount will start to look very undervalued very quickly. Going forward, we expect Jim Riddell and his team to continue to make value-creating capital allocation decisions. Their decision to acquire shares of Nuvista Energy at 60 cents early last summer is one such example. Paramount is well positioned to grow and consolidate its core area as one of the survivors at scale in the Western Sedimentary Basin.

Crew Energy: 7.1% of 12.31.20 Partners’ Capital

From its year-end 2016 price of $7.50 to its March 2020 trough of 14.5 cents, the shares of Crew Energy declined 98% in just over 3 years. What’s remarkable is that this 98% decline occurred while the company’s hydrocarbon production per share remained roughly the same. Three things caused the share price decline: the decline in oil and gas prices, the market’s concern about Crew’s solvency, and the price the market is willing to pay for oil and gas companies.

As of January 13th, 2021 WTI oil is trading at $53 and Henry Hub gas is trading at $2.75. At these prices, the North American oil and gas industry can grow modestly if desired. The industry, however, is wary of growth given the ongoing uncertainty of the pandemic as well as the low market valuation of the sector. As a result, most large North American E&P companies are cutting back on capital expenditures and using cash flow to buy back shares and pay down debt.

Crew’s management, in contrast to almost all of their peers, is using today’s prices to grow into its infrastructure. Prior to the last down cycle, Crew had invested in infrastructure and transportation commitments to support 40kbpd+ of production. Due to the drop in pricing, Crew has been stuck at 22kbpd. As a result, Crew has been suffering from additional costs for infrastructure and transportation commitments that they couldn’t use.

In December, Crew’s management announced their plan to remedy this situation. Over the next 24 months Crew will grow their production to ~32k bpd from its current production of 22k bpd. Crew is largely funding this growth by borrowing an additional $50m from its banking syndicate. While this strategy is not without risk, Crew hedged a large portion of its production for the next two years to protect itself against another downturn in commodity prices.

Once production reaches 28k bpd in 2022, Crew expects to generate $140-$150m in cash flow and have ~$300-$350m in debt, which will bring its debt-to-cash-flow multiple to 2.0x-2.5x. This level of production will generate $40-$50m of free cash flow for further debt pay downs or share buybacks should the share price warrant it.

Finally, it is worth highlighting that Shell and its partners are going ahead with their LNG facility on Canada’s west coast. Crew’s portfolio of thousands of drilling locations is one of the cheapest ways for a supermajor like Shell to acquire the necessary resources for its project. While we have no intention of selling out, nor does management, the strategic value of Crew’s land package merits a special mention.

RTG: 6.3% of 12.31.20 Partners’ Capital

RTG is the spin-out of CGA Mining, a company we owned a decade ago. In 2013, the team at CGA sold its Masbate mine in the Philippines to B2Gold and spun out its early-stage assets into a new entity called RTG. While we elected not to keep our shares in the spin-co, we were pleased with CGA’s sale to B2Gold and with the clear alignment that RTG chairman Michael Carrick and CEO Justine Magee had with their shareholders. So, we jumped at the chance to invest with that team again in 2018 when the opportunity presented itself.

After our initial investment in July of 2018, the shares of RTG fell by 50% as the company failed to make much progress in moving the Mabilo deposit in the Philippines toward production or solidify its 30% ownership of the Panguna asset in Bougainville. This year, by contrast, the path to production for both of these projects improved meaningfully. In the case of Mabilo, the new Minster of Environment in the Philippines, Roy Cimatu, fast-tracked the project and RTG resolved a legal dispute with a former contractor. In the hope of positive developments, we increased our position in April and July through a series of small private placements. Thus far, these investments have been a good decision. Over the past eight months, the stock has quadrupled. Amazingly, RTG remains severely undervalued.

The company’s Mabilo project has an NPV of $473 million according to its 2019 feasibility study. This study, however, was done at $2.50 lb. copper. Today copper is trading at $3.56. The 5% NAV of the project at today’s metal prices is in excess of $600m by our calculation. More importantly, the vast majority of the capital for the project can be generated internally by RTG through the direct shipment of a high-grade starter pit that is 20% copper. While neither the financing nor the surface rights have been secured, we believe the project is likely to move forward in calendar 2021.

If RTG’s Mabilo project does proceed, the seven years of hard work that the board and executive team have put in nurturing that asset will finally pay off. This fall, Sean Fieler joined the board at RTG. We see this as a unique opportunity to build a larger gold-mining company with very little dilution, given the way RTG’s asset development can be sequenced. In the best-case scenario, RTG will soon be in position to redevelop the Panguna mine, an asset of truly world-class scale.

Sincerely,

Equinox Partners Investment Management

^[1] Sector exposures shown as a percentage of 12.31.20 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.18 unless otherwise noted. MAG Silver valuation using first full year of production and estimatied 8,000 tpd throughput.

Reuters

Tue, 12 Jan 2021 16:51:35 GMT

Gold investors target 'excessive' executive payouts amid deals

"The payout is 'egregious' given Teranga’s relatively small market cap, said portfolio manager Coille van Alphen at precious metals-focused fund manager Equinox Partners, which owns Endeavour shares."

Kuroto Fund, L.P. - Q4 2020 Letter

Tue, 12 Jan 2021 16:37:44 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

^{Kuroto Fund gained +14.0% in the fourth quarter of 2020 and was up +4.1% for the full year. By way of comparison, the EM index was up +19.6% in the fourth quarter and +18.4% for the year.} ^[1]

The principle cause of our underperformance in 2020 was the fund’s zero weighting in China, South Korea, and Taiwan. The MSCI emerging markets index is 67% weighted to these three countries, which were up 27%, 38%, and 30% respectively in 2020.

On a fundamental basis, we believe our portfolio is superior to the MSCI emerging markets index in terms of value, yield, and profitability. Our portfolio is trading at 6.3x our estimate of earnings in 2021 while the index is trading at 16x consensus ’21 estimates. Our estimated dividend yield is 5.5% for 2021, the index’s dividend yield is 2%. Finally, our estimated ROE is 18%, while the index’s ROE is 10%. While none of these metrics perfectly captures our portfolio, taken together we think they give a sense of the attractiveness of what we own.

yearend Top-five holdings

Our five largest investments going into 2021 are FPT, MTN Ghana, Logo Yazilim, Guaranty Trust Bank, and TBC Bank. TBC Bank is new to our list and Georgia Capital dropped down at year-end. This change is due to TBC Bank’s superior relative stock performance to Georgia Capital this year. Georgia Capital remains our sixth largest position.

FPT Group: 18.0% of 12.31.20 Partners’ Capital

FPT Group is a Vietnamese technology company with a thirty-year track record of enviable growth and returns. Founded in 1990 by Dr. Truong Gai Binh, FPT has grown to be Vietnam’s leading technology group. FPT owns Vietnam’s largest software outsourcing business, largest private IT university, largest streaming service, a leading cloud business, and one of the country’s three broadband networks. The common thread in all of these businesses is FPT’s meritocratic culture which has allowed the group to attract the country’s top tech talent.

During the downturn of early 2020, FPT’s businesses proved remarkably resilient. After the pandemic hit Vietnam, we thought FPT’s businesses would decline by double digits. That didn’t happen. Through the first eleven months of 2020, FPT grew revenue 7.6% and earnings by 11.7%. FPT’s growth should accelerate in 2021. In August, the company’s newly signed contracts were more than double those signed last year. Companies are more dependent on technology providers than ever before, providing a strong tailwind for all of FPT’s businesses.

FPT currently trades at just over 10x our 2021 earnings estimate. This valuation reflects a severe under-appreciation of its business. Similar businesses trade at more than double the valuation of FPT. We think that the undervaluation is a product of two factors: Vietnam’s status as a frontier rather than emerging market, and the premium to the local price required for foreigners to acquire the shares. We are happy to continue owning a business growing earnings at a mid-to-high-teens rate and paying a 3.5% dividend while we wait for its eventual upward reevaluation.

MTN Ghana: 12.6% of 12.31.20 Partners’ Capital

In 2020, MTN Ghana’s telecom and mobile-money businesses grew unabated through the local lockdowns. Through nine months, the company grew revenue 19% and earnings 53%. Data and payments/money transfers both grew over 20% and voice revenue grew over 10%. The company managed to take out 400 basis points in expenses through various efficiency initiatives, which caused such rapid earnings growth for the year. In 2021, we expect the business to continue growing revenues and profits at a high-teens rate, to continue earning 40%+ returns on equity, and to pay us a mid-teens dividend yield.

MTN’s strong performance is a direct result of the company’s market dominance. MTN manages 56% of Ghana’s voice calls, 67% of data, and over 90% of the country’s mobile-money transactions while generating operating margins of 39% and an ROE of 42%. MTN’s unique competitive positon and economic characteristics are very similar to those of Safaricom in Kenya, but the valuation of the two companies is very different. While Safaricom trades at 18x estimated earnings with a 4.5% dividend yield, MTN is trading at 4x our estimate of 2021 earnings with a mid-teens dividend yield.

This difference in valuation is attributable to several factors, the most obvious is the illiquidity of MTN Ghana’s shares. Only 15% of the shares float and fewer than 5% of the shares turnover on an annual basis. That said, MTN is just as dominant as Safaricom from a competitive standpoint and MTN’s market is actually less penetrated than Kenya. Therefore, MTN should be able to grow at a faster rate than Safaricom. The macroeconomic fundamentals of Ghana are not drastically different from those of Kenya; Ghana is actually growing in real terms at a faster rate than Kenya. Moreover, Ghana, just made it through a successful election, in which Akufo-Addo was reelected to a second term.

Guaranty Trust Bank: 11.0% of 12.31.20 Partners’ Capital

For thirty years, GT bank has honed its ability to operate in one of the world’s most difficult jurisdictions, Nigeria. While other Nigerian banks have engaged in politically motivated loans, GT bank has preserved its reputation as the safest Nigerian banks that lends to only the best Nigerian credits. As a result of this prudence, depositors are willing to accept very low yields. This, in turn, allows GT bank to generate 20%+ ROEs while taking very little credit risk. So, even in a year like 2020, in which the oil price declined substantially, Nigeria is struggling, and system-wide non-performing assets are rising, GT bank is still generating healthly profits.

GT bank’s conservativism has not only allowed the business to weather Nigeria’s economic and political ups and downs, but has also allowed management to plan strategically for the future of finance in Nigeria. As a result, at a moment in time when many of its peers are figuring out how to dig out of their troubled balance sheets, GT bank is about to spinoff a digital finance business that management has been incubating for several years.

In early 2021, GT Bank will convert into GT Holdco. This transaction will separate GT Bank from its digital payments business as well as several other digital and non-bank businesses, including insurance, wealth management, and a popular entertainment app. This decision will give the non-bank businesses more of a focus and an opportunity to raise capital separately if warranted. Given that these types of businesses trade on a revenue multiple rather than an earnings’ multiple, the spinoff could unlock significant value for shareholders. GT bank currently trades at just 1.1x book value and 5.5x our estimate of earnings in 2021.

The reason for such low multiples on such a high quality bank is that Nigeria’s macroeconomic policies remain a mess. The country’s parallel exchange rate and associated capital controls are a deterrent for most foreign investors. Add to this macroeconomic dysfunction the serious security problems in both the North and South of the country, and it’s easy to see why the company trades at such low valuations.

While Nigeria’s flaws are obvious, its virtues are less well understood. Having long been Africa’s most populous country as well as the continent’s largest oil producer, Nigeria is finally going to produce refined products that are consumed domestically. Aliko Dangote’s single-train oil refinery complex, built at an estimated cost of $15 billion USD, will begin operations this year. For years, this project has been a huge drag on the country’s current account. When up and running, this complex will process 650k barrels per day of oil and drastically improve Nigeria’s balance of payments. The government also struck a deal with Siemens to help fix its intermittent supply of local electricity, and it has made steps towards deregulating the price of electricity and gasoline. While Nigeria will remain a difficult place to do business, it offers an exceptional long-term opportunity for companies like Guaranty Trust that have a proven ability to operate there.

Logo Yazilim: 10.9% of 12.31.20 Partners’ Capital

Logo is Turkey’s largest software company. Founded by Tugrul Tekbulut in 1984, Logo provides enterprise resource planning (ERP) software to Turkey’s small and medium sized businesses (SME). With a market share that is more than double the size of the next largest competitor, Logo has achieved an extremely defensible positon in the Turkish market. Logo’s dominance amongst Turkish SMEs is a result of its localized, flexible, and affordable service offering.

Given Logo’s scale and advantage in R&D and service, the inherent stickiness of the ERP business, and the complexity of the local requirements for SMEs in Turkey, we think that Logo will continue to dominate its market in Turkey for the foreseeable future. Moreover, Logo’s market is expected to continue to experience double-digit secular growth due to low penetration relative to comparable markets. This secular tailwind is being helped by the government’s aggressive push to digitalize the Turkish economy. These factors should continue to drive Logo’s rapid top-line growth going forward.

Logo currently trades at 20x our 2021 earnings estimate. While this is a higher multiple than we typically pay for businesses, it is more than merited by Logo’s high rate of secular growth. The impact of the global pandemic was barely noticeable in Logo’s financial statements. Logo grew revenue 27% in the first 9 months of the year, and grew operating earnings by 29%.

TBC Bank: 8.2% of 12.31.20 Partners’ Capital

TBC Bank and the Bank of Georgia account for more than 70% of the banking sector’s assets and liabilities in the nation of Georgia. The power of this duopoly is such that the vast majority of Georgians have an account at one of these two banks, and many have accounts at both. In fact, combined, the banks have just under 5 million customers, while Georgia has a population of only 3.7 million adults. TBC and the Bank of Georgia use their privileged position in the Georgian economy to generate 20% ROEs while taking very little credit risk. With so many accounts in such a small country, TBC Bank and the Bank of Georgia have a near complete picture of Georgians’ financial situation and lend accordingly.

This knowledge was put to the test in 2020. Tourism accounts for 40% of the goods and services of the country and for a low-teens percentage of TBC and Bank of Georgia’s loan books. In April, the worst month of the pandemic from an economic standpoint, Georgian GDP was down by 16%. The banks in conjunction with their regulator decided to tackle the crisis head on and recognize all estimated pandemic-related losses upfront. This is the opposite of the approach taken in the rest of Europe. The Georgian banks were able to do this because they entered the crisis on a strong financial footing. Even after taking pandemic related losses into account, we believe that both banks will earn a high single-digit ROE in 2020.

That both banks continue to trade below book value despite their resilience is a result of two factors. First, Georgia is a small country in a difficult neighborhood that does not attract the interest of most investors. Second, both TBC and the Bank of Georgia are prohibited from buying back stock or paying dividends as part of the pandemic related measures implemented by the local regulator.

TBC is only leveraged 7.5 times on an asset to equity basis, and using IFRS methodology it posted a 15% capital adequacy ratio at the end of Q3. As of Q3, NPLs to gross loans were 3.5% and NPL coverage was 105%, or 216% including collateral. At some point in 2021, we think it is likely that the central bank will lift the capital return provisions and the bank will be free to pay a divided or buy back stock. Either option will be great for a bank trading at just 5x earnings.

Sincerely,

Sean Fieler Brad Virbitsky

END NOTES

Globe and Mail

Thu, 07 Jan 2021 16:54:26 GMT

Investor lashes out at US$31-million in exit payments to Teranga Gold execs after Endeavour takeover

"Coille Van Alphen, a portfolio manager with New York-based asset manager Equinox Partners, called the payments to Teranga executives 'exorbitant' and that they underline the Canadian mining industry’s poor track record in governance."

Bloor Street

Tue, 05 Jan 2021 16:39:54 GMT

Interview with Sean Fieler

Jimmy Connor sits down with Sean Fieler, as he gives his views on gold, silver, the US dollar and cryptocurrencies.

Kitco 3

Tue, 17 Nov 2020 16:27:19 GMT

post election analysis and gold

Sean returns to Kitco to provide his views on the post-election outlook for gold and financial markets

10 Rules for Investing in Gold Mining

Mon, 02 Nov 2020 19:21:27 GMT

Sean Fieler on 10 key pieces of wisdom when analyzing gold miners

"Gold has proven to be a liquid, uncorrelated asset ideally suited for the current era of uncertainty. With extreme valuations in U.S. equities, very low interest rates, and experimental central bank intervention, the tailwinds for gold are significant. At the same time, precious metals miners are trading at low valuations coupled with a scarcity of active managers willing or able to pick stocks after a prolonged bear market. Equinox Partners, a Connecticut-based investment manager that runs several funds and managed accounts, has over 20 years’ experience in the precious metals mining sector as long-term, contrarian, value investors. The firm’s CIO, Sean Fieler, will lead a discussion on the 10 rules the firm applies to analyzing investments in the sector" - Family Office Network

Equinox Partners Precious Metals, L.P. - Q3 2020 Letter

Thu, 29 Oct 2020 15:50:35 GMT

Dear Partners and Friends,

corporate capital allocation: From Asia to mining

Over the past quarter century, we’ve managed through a variety of sectors in which corporations systematically misallocated capitol. Emerging Asia, pre-Asia Crisis, still tops that list. Asian companies circa mid-1990s were maniacal about growth. From a capital allocation perspective, this meant investing all the capital they generated and sometimes all the capital they could borrow to drive the topline. The result, predictably, were businesses that could not withstand a downturn.

In years following the Asia Crisis as we aggressively allocated capital to companies in emerging Asia, we encountered a series of corporate insiders still resisting change. We literally had managers tell us that they viewed returning capital to shareholders as an admission of failure. But with shareholders overwhelmingly insisting on capital discipline, insiders eventually compromised. Dividends were increased, stock buybacks were announced, a few shares were even repurchased, and capital allocation slides began to appear in pitch decks. That said, it was clear to everyone involved that insiders were responding to pressure and had not internalizing a thoughtful capital allocation policy.

Gold and silver mining companies are in a similar situation today. Insiders are talking about capital discipline, but their commitments are for the most part superficial. Most mining company insiders still don’t have shareholders’ interest at heart, and it shows. What shareholders want are companies that have internalized a rational capital allocation framework and can take advantage of the mining cycle to create value. Since the distinction between a superficial and a sound capital allocation framework is difficult to tease out in the abstract, we offer two case studies: Dundee Precious Metals and Pan American Silver. The recent capital allocation decisions of these two companies captures the value of thoughtful capital stewardship as well as the frustrations of dealing with insiders that lack capital allocation clarity.

dundee precious metals

In June of 2018, we wrote to DPM’s board to make the case for a sizable share buyback (see enclosed letter to DPM). At the time, gold was trading at $1,200 and DPM was trading at less than three times 2020 projected cash flow. With the construction of the company’s second mine nearing completion, we knew that DPM’s ongoing capital obligations would fall precipitously and the majority of the company’s cash flow would become free. By our calculation, the company’s five-year cumulative free cash flow was roughly double its market cap at the time. The math was not complicated.

To their credit, DPM’s board actively engaged with us on the topic of capital allocation. Several members of DPM’s board met with us in person, and DPM’s chairman went out of his way to give us an opportunity to make our case. DPM had a Normal Course Issuer Bid (NCIB) in place, but the company was buying back stock tentatively. Unfortunately, despite our best efforts, the company did not change its behavior. From their annual meeting in 2018 until its annual meeting in 2020, DPM’s shares outstanding shrunk by just 1.5%. In a nutshell, DPM took steps in the right direction but did so without sufficient commitment to make much of a difference. This indecisiveness was laid bare when a large block of the company’s stock came up for sale in the spring of 2020, and the board passed on the opportunity to meaningfully shrink DPM’s share count.

The recent capital allocation decisions at DPM perfectly capture the typical board response to pressure: 1) take small steps in the right direct; 2) defuse the situation; 3) don’t do anything precipitous. As we look back on the past few years of our engagement with DPM’s management and board, we cannot help but conclude that the board failed to take advantage of the market’s inefficiencies for the benefit of shareholders.

With DPM’s shares up and their potential acquisition targets becoming more expensive, we’ve reduced our position in this operationally sound and still undervalued company. While the overall experience was frustrating, DPM has been one of our better investments in recent years. Since June of 2018, the shares of DPM have tripled, more than doubling the performance of the GDXJ over the same period.

pan american silver

Michael Steinmann and Ross Beaty have led Pan American Silver through a series of well thought out capital allocation decisions over the years. Most notably, in late 2018, Pan American bought Tahoe Resources for just $1.1b USD. The company consummated this transaction at a time when Tahoe had undergone a series of failed management changes, had lost rights to its flagship property in Guatemala, and its shares were down 70% in a 12-month period. Pan American brought the management and financial strength that the Tahoe assets needed, creating value for shareholders of both Tahoe and Pan American.

The countercyclical acquisition of Tahoe was possible because shareholders trusted Pan American’s leadership, trust that stems from Pan America’s demonstrated pattern of returning capital over time. Over the last 10 years, Pan American has returned $474m of the $1.3b of FCF that it generated. The leadership team at Pan American clearly understands that their long-term commitment to building value, not simply growing, has earned them a position of trust with investors—a fact they properly highlight in their presentation (see below).

Given this track record, when Pan American chooses to act countercyclically the market has been supportive. Pan American also has a history of under-promising and over-delivering. In recent years, Pan American has undersold the value of its La Colorada skar deposit in Mexico. By our calculation, the NAV of the project now exceeds $500m USD. Given management’s deliberate approach, we expect the market will embrace their decision to allocate capitol to La Colorada when they finally elect to go ahead with the project.

takeaways

The lessons contained in our experience with Dundee Precious Metals and Pan American Silver are nuanced, just like the stories themselves. First, while we are not satisfied with the recent capital allocation at DPM, it was unarguably the better investment of the two companies since the beginning of 2018. DPM shares appreciated 216% compared to the 119% appreciation for Pan American over the past twenty months. The superior performance of DPM highlights the importance of starting with an attractive valuation. Overpaying for the perfect capital allocator can result in poor returns just as paying a very attractive price for an imperfect but honest capital allocator can make for a great investment.

The larger lesson, however, is that over longer periods of time the allocation of capital matters more and more. The 20-year compounded stock return for Pan American is 13.4% compared to 9.9% for Dundee Precious Metals. Successful, long-term investing necessitates good corporate capital allocators, and superior capital allocators in a capital-intensive sector like mining deserve a superior valuation.

A board seat at RTG Mining

On October 12 ^th , Sean Fieler joined the board of RTG mining. We first met Justine Magee, RTG’s CEO, and Michael Carrick, its Chairman, fifteen years ago. At the time, they were building a mining company in the Philippines which they sold to B2Gold for $1.13b USD. As part of that transaction, Justine and Michael spun-out the early-stage assets that would not receive much value in the transaction.

Over the past dozen years, Justine, Michael, and their team have painstakingly progressed those assets as well as acquired new ones in Asia. Believing that their years of hard work are about to pay off, we became substantial shareholders in the company this spring and took a seat on the board earlier this month. We look forward to furthering the value creation at RTG as the company’s projects move into production in the years ahead. We believe that the team at RTG will once again provide a case study in how to take advantage of the mining cycle.

organization

After a quarter century in New York City, our firm is relocating to Stamford, CT. New York City is no longer the necessity it once was for our employees or our business. Our new office space is just 45 minutes away from the city. Please come and visit us at 301 Tresser once we’re up and running in late November.

We have also changed the name of our management company from Mason Hill Advisors to Equinox Partners Investment Management. Having caused confusion with companies and investors alike over the years, the name change reflects how we’ve always done business, as Equinox Partners.

Sincerely,

Sean Fieler

Equinox Partners, L.P. - Q3 2020 Letter

Thu, 29 Oct 2020 14:10:26 GMT

Performance & Portfolio ^[1]

Equinox Partners gained +16.9% in the third quarter of 2020 and is up +6.3% for the YTD through October 28 ^th .

^[1] Sector exposures shown as a percentage of 9.30.20 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg.

corporate capital allocation: From Asia to mining

dundee precious metals

pan american silver

takeaways

A board seat at RTG Mining

organization

Sincerely,

Sean Fieler

Kuroto Fund, L.P. - Q3 2020 Letter

Mon, 12 Oct 2020 13:48:51 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund gained +10.6% in the third quarter of 2020 and was down -8.7% for the year to date through 9.30.20. By comparison, the EM index gained +9.6% in the third quarter and was down -1% through the first nine months of the year. [1]

REvisiting Top-Ten Holdings

In our first quarter 2020 letter, we analyzed Kuroto Fund’s top ten positions in light of the global pandemic. To date, the impact has been less severe than our initial expectations. In the letter that follows, we revisit our initial assumptions, explain how they’ve changed, and provide our most recent forecasts.

FPT Corporation: 14.3% of 9.30.20 Partners’ Capital

FPT’s three main business lines – IT services, broadband, and education – have proven more resilient than we were expecting. After the pandemic hit Vietnam, we estimated that FPT’s earnings would decline 14% year over year. This was too pessimistic. Through the first eight months of 2020, FPT grew revenue 7.6% and grew earnings by 11.7%. The main source of this positive surprise has been the continued global outlay for IT services. For example, FPT’s digital transformation business is up 46% for the year. FPT’s broadband business was mostly unaffected by the pandemic, and the education business evolved to a hybrid model.

We expect FPT’s growth to accelerate in 2021. In August, the company’s newly signed contracts were more than double those signed last year. Companies are spending more than ever upgrading their technology—a trend that seems likely to continue. FPT currently trades at 9.0x our 2020 earnings estimates with a 4% dividend yield.

MTN Ghana: 13.2%

The growth of MTN Ghana’s telecom and mobile money businesses has continued to grow unabated through the local lockdowns. For the half year, the company grew revenue 19.5% and earnings 48.5%. Data and money transfers/payments are both growing over 20% and voice revenue is growing at over 10%. In a further positive surprise, the company managed to take out 400 basis points in expenses through various efficiency initiatives, more than doubling our earnings growth forecast for the year.

MTN manages 56% of Ghana’s voice calls, 67% of data, and over 90% of the country’s mobile money transactions. Predictably, this market share has drawn some regulatory scrutiny. Over the summer, Ghana’s regulators proposed restrictions on MTN to preserve competition. The government scrutiny is very similar to the treatment that Safaricom received in Kenya. As past investors in Safaricom, we are familiar with the situation and comfortable that the current valuation of MTN Ghana more than compensates us for the regulatory risk. MTN is trading at 4.9x our estimate of 2020 earnings and pays us an 11% dividend.

Guaranty Trust Bank Nigeria: 12.8%

Given the dual shocks of the pandemic and oil price crash to Nigeria’s economy, we had assumed a high level of write-offs to the bank’s loan book. We were pleasantly surprised when GTB’s write-offs for the first half of the year came in at just 0.8% of assets—in-line with our forecast prior to the pandemic. While we still expect an uptick in write-offs in the coming quarters, GTB has shown once again the benefits of its conservative underwriting standards.

Another positive surprise has been the bank’s decision to split off its payments business into a separate entity. GTB has one of the leading payments businesses in Nigeria; these businesses usually trade on a revenue multiple rather than an earnings’ multiple. Accordingly, we believe the spinoff could unlock significant value for shareholders. The stock currently trades at 1x book value, 5.1x 2020 earnings, generates an ROE of over 20%, and has a dividend yield of 10%.

Logo Yazilim: 12.4%

When the pandemic hit, we had taken our yearly revenue growth forecasts for Turkey’s dominant SME ERP provider down by half to 16%. However, in the first half of the year the company grew revenue 25% and earnings by 40%. We have since increased our 2020 forecast to 23% revenue growth and 30% earnings growth.

Demand for Logo’s products has grown throughout the pandemic. A large portion of Logo’s customer base is exporters to Europe that have been benefited by the low interest rate environment and weak lira. Logo is also one of the leading providers of the technology that facilitates the collection of commercial receipts by the government’s tax authority. When the environment in Turkey normalizes, the company believes it can continue growing at over 20% for several years due to low ERP penetration amongst small and medium sized businesses. Logo trades at 21.8x our 2020 earnings estimates.

TBC Bank and Georgia Capital: 6.8% and 5.3%, respectively

The Georgian tourist industry was particularly impacted by the pandemic. That said, so far the hit has not been as severe as we had initially estimated.

For TBC Bank, we had initially forecasted a 3% cost-of-risk, whereas the company now thinks it will be closer to 2%. It is still too early to tell, however, because a portion of the bank’s loan book is still on a government imposed interest suspension that ended in September. We should know the true state of the loan book soon. On our current estimates, the bank trades at 0.8x book and 4.5x earnings assuming a normalized cost of risk.

In the case of Georgia Capital, the company has appointed an executive solely focused on asset dispositions due to the company’s significant discount to NAV. Towards that end, in the second quarter, the company sold a stake in its worst performing hospital for 13x EV/EBITDA—more than double the valuation of the entire healthcare subsidiarity when it was listed. We are looking forward to the company proactively closing its sum of the parts discount, which is now over 50% by our estimates.

Tanzania Breweries: 6.7%

We had initially assumed a large slowdown in the business of Tanzania’s largest brewer due to the pandemic, leading us to forecast a 26% decline in earnings. However, our forecasts have so far proved to be too conservative. Revenue only declined 9% in the first half of the year and we are now forecasting a 14% drop in earnings for the year. Tanzania Breweries remains highly profitable with 30% EBITDA margins, 20% ROEs, and a net cash balance. The stock trades at 25.9x our estimate of 2020 earnings.

Grana Y Montero: 5.7%

Given that Peru has had one of the toughest lockdowns, with many projects ground to a halt, we expected that Grana Y Montero’s Peruvian construction and infrastructure business would be severely impacted. While we were broadly right about the business, we did not include any other positive developments in our forecast.

This summer, an activist shareholder from Brazil struck an agreement with the founding family to buy a 20% stake in the business. Following this change of control, we would not be surprised to see management changed and non-core businesses sold. From our perspective, this would be a welcome development. Grana Y Montero continues to trade at a large discount to its sum of the parts and we are looking forward to some of the value being unlocked now that there is a clear path to improved governance at the company.

Sonatel: 5.6%

Our initial forecasts for Sonatel, French West Africa’s largest telecom provider, have proved too optimistic. We had initially forecasted 10% earnings for the year and we are now estimating that earnings will be flat year over year. However, when you consider that the company has endured a pandemic, a coup in Mali, and a new entrant in Senegal, flat earnings for the year seem like an achievement.

Post this year, we forecast Sonatel’s earnings, which have been flat for several years, to start growing again driven by its fast growing money transfer/payments business. Like MTN Ghana, and Safaricom in Kenya, Sonatel has achieved dominance in money transfer and payments. However, the market has not yet given them credit for this business, which is far superior to its traditional telecom business. Sonatel trades at 7x earnings, generates a 22% ROE, and has paid us an 11% dividend yield this year.

Orascom Construction: 4.8%

Orascom’s domestic Egyptian construction business has fared well through the pandemic, while their international engineering firm focused on Europe and the Middle East suffered as a result of project delays. Combined, we forecast Orascom’s earnings to decline this year due to provision taking in its international-engineering investment and one-off expenses associated with the implementation of Covid safety protocols. Normalizing for this, Orascom is trading at 5x this year’s earnings, has a net cash balance, and generates an ROE of 20%.

organization

After more than two decades in New York City, our firm is relocating to Stamford, CT. New York City is no longer the necessity it once was for our employees or our business. Our new office space is just 45 minutes away from the city. Please come and visit us at 301 Tresser once we’re up and running in late November.

Sincerely,

Sean Fieler

Brad Virbitsky

END NOTES

The Federalist

Mon, 21 Sep 2020 15:58:30 GMT

After 14 Months, Federal Reserve Pick Judy Shelton Deserves A Senate Vote - sean Fieler

"With Congress repeatedly failing to muster the votes to pass the Audit the Fed Act, confirming Shelton is the only plausible way to find out. If Congress is unwilling to put one dissident on the Fed’s board, then the Fed is not just independent, but functionally unaccountable."

Kuroto Fund, L.P. - Q2 2020 Letter

Thu, 27 Aug 2020 13:56:25 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund gained +15.0% in the second quarter of 2020. The EM index rose +18.1% over the same period. For the year to date through August 26 ^th , the fund is down -12.4% [1].

Our portfolio of 14 companies trades at 6x our estimate of 2021 earnings. In 2021, we expect more than 30% year over year earnings growth, an unadjusted 17% ROE, and close to a 6% dividend yield. Fundamentally, the portfolio is incredibly cheap.

Quantatative easing Comes to emerging markets

Until this year, quantitative easing was the privilege of a handful of developed world central banks. This spring, to our surprise, more than a dozen emerging market countries adopted some form of QE. [2] While several of these EM countries already have a proven track record of irresponsible fiscal and monetary policy, the currency market’s reaction to the spread of QE in EM has been muted. We believe a more negative reaction is in the offing if QE in EM is not clearly limited in size and duration.

The appeal of QE requires no explanation. It’s not exactly free money, but it’s pretty close. EM central banks nevertheless felt the need to justify their adoption of QE. Most portray QE as a purely technical matter instead of a means to finance increased government spending. The South African Reserve Bank struck a particularly disingenuous tone when it presented its short-term repo and QE operations as a technical measure to ensure adequate liquidity for South African sovereign bonds and money markets [3] instead of a way to finance part of the country’s 15% fiscal deficit. [4] Indonesia’s central bank, by contrast, gets credit for being blunt about its merging of fiscal and monetary policy. The Bank of Indonesia’s governor, Perry Warjiyo, made clear that government bond purchases are aimed “to ease the government’s burden” in combating the virus’s economic fallout. [5]

While Warjiyo’s honesty is laudable, the real test will come when he, along with other EM central bankers, attempt to end their QE programs. For obvious reasons, QE is much easier to start than it is to stop. While several countries have managed to pause QE, no country that has opened the Pandora’s Box of quantitative easing has managed to permanently reverse the balance sheet expansion that it produces. The Fed in the first year of Jerome Powell’s chairmanship made a concerted effort to normalize monetary policy. With Powell at the helm, the FOMC raised rates 75bps and shrunk the Fed’s balance sheet from a 2017 peak of $4.7 trillion to a 2018 nadir of $3.9 trillion. However, this effort at normalization failed well before the onset of Covid-19. The Fed’s balance sheet now stands $7 trillion.

Thus far, no EM central bank except Ghana has terminated its bond buying program despite the undeniable improvement in liquidity and economic conditions since March. It is never a convenient time to reduce government spending and to increase government borrowing costs. Despite this obvious risk, some EM central banks haven’t even bothered with the standard developed world prohibition of buying bonds in the primary market. The central banks of India, Ghana, Malaysia, Philippines, and Indonesia elected to buy their sovereigns’ debt directly from the primary market, a Rubicon that even the Fed has not yet dared cross. The annual transfer of central bank profits aside, the Fed, BOE, and BOJ have all avoided moving money directly from the central bank to the treasury. This restriction on direct purchases lets central banks preserve the fiction that QE is not outright monetarization. While not much of a fig leaf, it does prevent the government from directly drawing on a limitless bank account at the central bank.

Despite the lack of historical precedent suggesting that QE can be reversed, EM central banks have embraced the policy with surprisingly short-lived market pushback. The Indonesian rupiah, which sold off 18% against the U.S. dollar in the height of the March liquidity crisis, is now down 5.5%—a figure not much higher than its average 5% annual depreciation over the last decade. The Brazilian real, South African rand, and Mexican peso have fared worse than the rupiah this year but have each appreciated rather than declined against the dollar since the announcement of their respective asset purchase programs.

The relatively strong performance of EM currencies experimenting with QE is not so much a sign of emerging market strength as it is a result of U.S. dollar weakness. America is running a 17% fiscal deficit going into an election that will likely generate even more demands for spending. The Fed is not just buying Treasuries but is also buying Illinois general obligation bonds and the debt of recently bankrupt Hertz. [6] Needless to say, these purchases are not supportive of a strong dollar.

With such adventurous monetary policy becoming the norm in the developed world, developed market central bankers have lost the ability to admonish EM central bankers against the dangers of QE. If ever-rising debt levels and money printing are the solutions for our ills, why shouldn’t emerging markets avail themselves of the same remedy? In short, there is no one left with the authority to talk the emerging world out of copying our ill-advised policies.

While we are concerned about the spread of QE to some of the countries in which we are invested, the initial indications are that EM QE will remain small by developed market standards. One obvious safeguard is that, unlike the developed world, most emerging markets have significant borrowings in currencies other than their own. While many economists point to this as a disadvantage, it also provides a certain discipline. You can inflate away debt in your own currency, but you cannot do that to debt in a currency you can’t print. In fact, inflation just makes your foreign currency leverage ratio worse. So, while EM central bankers are missing an opportunity to clearly disentangle themselves from the developed world’s monetary dysfunction, they have at least one important guardrail.

Over time, EM QE will prove to be a long-term negative in our view. We already factor in currency depreciation when calculating our expected return on all of our investments, and we will certainly account for the long-term effects of QE on our investments. At present, one-third of our portfolio is invested in countries that have experimented with some form of QE. The specific countries are: Turkey, Ghana, South Africa, Brazil, and India. So far, the extent of QE in these countries remains contained. The balance sheet expansion in Turkey is 5% of GDP, Ghana is 3%, South Africa 0.5%, India 0.2%, and in Brazil it is currently 0% of GDP. For comparison, the balance sheet of the Fed is projected to expand by 15% of GDP this year.

More broadly, while the macroeconomic backdrop for our companies remains challenging and EM QE is not a positive development, our portfolio is trading at historically attractive multiples. On a look-through basis, our portfolio is valued at 8x this year’s earnings and just 6x next. We believe these valuations give us a margin of safety for the risks we will face should QE become even more prevalent in emerging markets.

Sincerely,

Sean Fieler

END NOTES

[2] QE in developing countries is as follows: Central and Eastern Europe ; BIS report ; Ghana ; Croatia Costa Rica ; Brazil

[3] Investec , QE comes to SA, June 24, 2020

[4] Bloomberg , South Africa Sees 2020-21 Budget Deficit at 15.7% of GDP, June 24, 2020

[5] Reuters , Indonesia central bank ready to finance fiscal deficit, June 27, 2020

[6] Reuters , In rescue effort, Fed has broad stake in corporate America’s fortunes, May 29, 2020

Kitco 2

Wed, 19 Aug 2020 14:20:44 GMT

We are not returning to normal (Pt. 2/2)

Part 2 of Sean Fieler's interview with Kitco's David Lin

Kitco 1

Fri, 14 Aug 2020 14:19:25 GMT

We are not returning to normal (Pt. 1/2)

Sean Fieler discusses his outlook with David Lin.

Equinox Partners Precious Metals, L.P. - Q2 2020 Letter

Fri, 24 Jul 2020 15:55:04 GMT

Dear Partners and Friends,

governance

Junior gold and silver mining companies have a governance problem. Their board rooms are clubby, and their insiders are accustomed to profiting at minority shareholders’ expense. While there are numerous exceptions to these sweeping generalizations, in our opinion the industry’s reputation for poor governance is well deserved. Governance amongst junior gold and silver mining companies is on average far worse than what we have encountered in other sectors.

The gold mining sector’s entrenched insiders with poor track records of value creation and scant stock ownership would be particularly vulnerable to pressure from shareholders if any were applied. Unfortunately, activists have shown little interest in this capital-intensive, technically-challenging, cyclical sector. In many ways, gold and silver mines are the mirror image of the sectors to which activists are naturally drawn.

For all these reasons, John Paulson’s successful proxy fight at Detour Gold was a big deal. Paulson won control of the board in December 2018, changed management, and sold the company at a 100%+ premium from the point at which control changed. Relative to the GDXJ index, Detour’s shares outperformed by 85% over the 11-month period from the board change to the announced sale. While the deal was far from perfect, the Paulson-appointed board and CEO Mick McMullen created real value by running a competitive bidding process.

At the time, we hoped this success would engender additional activist campaigns in the space. This has not happened. Mick McMullen has not taken another job since stepping down from his positions as Detour’s CEO. Worse still, not a single one of Paulson’s nominees to the Detour board joined another public mining company board this proxy season. While we still expect Mick McMullen to resurface at some point given the value he created at Detour, it is regrettable that this year’s proxy season did not include any proxy fights in the gold mining space.

Despite activists remaining largely on the sidelines, a meaningful change in governance is underway within the junior gold mining sector. Passive funds have gone from a non-issue in the board room to the single most important influence over the past two years. Blackrock, State Street, Vanguard, et al, are top-five shareholders in many of these companies and are making their presence felt. Our experience in this regard is firsthand. The chairman of one our largest holdings, MAG Silver, just stepped down as a result of pressure from these so-called “passive shareholders”. His resignation letter in the management circular got right to the point:

“I will not stand in 2020; and other long-tenured Directors will leave in the medium term. In replacing Directors, we will focus on new gender and diversity objectives.”

The removal of directors, and especially the removal of a chairman, is a particularly high-profile way to make your presence felt. And, the information circular announcing Jonathan Rubenstein’s departure was refreshingly direct. Rarely does the behind-the-scenes tension in the boardroom spill into the public domain so clearly, let alone in a regulatory filing. Most of the governance action is private and most of the signals are more subtle. One increasingly useful tell in this regard is the declining percentage of the vote received by directors running unopposed for reelection.

This proxy season, seven directors across three of our portfolio companies received 90% or less of the recorded vote. While 90% may sound good, it’s not great when you are running unopposed and have the support of both major proxy advisory firms, ISS and Glass Lewis. In this context, the 90% figure reflects some serious reservations on the part of shareholders. Those most vulnerable to such pressure are long-serving board members and also those who serve on too many other boards. Accordingly, it’s no surprise that five of the seven directors targeted at GT Gold, Dundee Precious Metals, and Alamos were on four or more boards and three had served on the board in question for more than a decade.

Insiders interested in making a career out of their board service are easily scared off by a low vote total. If they stick around and lose a contested election, they become an easy target for removal from their other boards and an undesirable nominee for new boards. Accordingly, they usually bow out as quietly as possible. And, for every director who retires after receiving a low vote total in an uncontested election, there are more who retire without standing for that first, difficult reelection.

With over-boarding and length of tenure being used to drive turnover, the vacancies are being filled with an emphasis on gender and racial diversity. Blackrock, State Street and Vanguard are all supporters of the 30% Club, “a group committed to increasing gender representation on boards and in senior management.” These same large asset managers are also committed to increasing racial diversity in the board room. With proxy advisor ISS now collecting the ethnicity of directors, shareholders will soon have the data necessary to advocate for greater ethnic diversity in the board room as well. [1]

Given that gender and race neither determine one’s beliefs nor abilities, we are confident that the identity politics animating the large passive shareholders are not going to solve what ails the junior gold mining boards. By leaving it up to existing insiders to recruit new board members within the designated categories, passive shareholders are all but making sure that the new additions to the boards are not going to rock the boat. No public mining company, for example, has picked up the particularly well-qualified woman, Dawn Whittaker, that Paulson advanced for the Detour board. [2] According, don’t expect new board members to advocate too vociferously for consolidation or against abusive compensation packages.

That said, given the junior mining sector’s poor governance starting point, increased board turnover is generating some improvements in the short term. MAG Silver is a case in point. Blackrock’s successful effort to remove Jonathan Rubenstein as chair paved the way for the elevation of our 2012 nominee, Peter Barnes, to the position. Needless to say, we are particularly pleased with this outcome. Peter’s demonstrated track record of astute capital allocation should drive the further rerating of MAG Silver’s shares.

Longer term, however, we have serious misgivings about the governance strategy of the passive shareholders. Their explicit lack of focus on stock outperformance and extreme portfolio diversification deprives them of the financial incentive necessary to fix any particular board. Their interest in the boardroom, instead, runs toward virtue signaling that can be used in their marking campaigns. Moreover, their attachment to the financial status quo creates an obvious conflict with most other shareholders of gold and silver miners.

Take Blackrock for example, a money manager that literally works for the Federal Reserve buying corporate bonds in an effort to muffle the markets’ price signals. Surely, this same firm should not be in charge of revamping the board rooms of gold and silver mining companies. After all, investors who own gold and silver mining companies have implicit reservations about the Fed’s ever-expanding role in capital markets. Why would we want an asset manager with such an obvious conflict of interests to be actively involved in our companies’ boardrooms?

Lest this concern seem too hypothetical, we offer Nick Holland, CEO of Goldfields, as a real-world example of what can go wrong when a CEO and board do not believe in their product. Despite Goldfields’ stated policy of “remaining unhedged to the gold price,” Nick lost hundreds of millions of dollars over the past twelve months shorting gold on behalf of his shareholders. Officially, Nick collared the gold price so that he could execute on the company’s business plan even if the price of gold fell precipitously. [3] Nick’s board—which is long credentials and diversity but not much of Goldfields’ stock—supported Nick’s decision [4] . In doing so, they failed to represent the interest of Goldfield’s shareholders who own the company in anticipation of higher gold prices or protect shareholders from the permanent dilution suffered when Goldfields issued equity as the gold price rose.

Only through a greater connection between the active shareholders and corporate boards can the agency issue be solved. Long-term shareholders of junior gold and silver mining companies need to cajole and force their way into the boardroom, pushing for representation and well as regular engagement. For our part, we fully recognize this obligation, and we’ve participated in the restructuring of a handful of boards. Prudently managing the related time commitment and trading restrictions that come with such engagements is a core skill for us. We are happy to see a growing number of other shareholders doing the same. As the junior gold and silver mining sector generates more free cash flow, we expect conversations about governance and capital allocation to intensify and companies with well-aligned boards to seriously outperform.

Sincerely,

Sean Fieler

ENDNOTES

[1] Financial Times, Edgecliffe-Johnson and Nauman, 7.13.20, Proxy Adviser ISS increases pressure for disclosure of directors’ ethnicity

[2] Wall Street Journal , Thomas, 12.13.18. Investor Paulson Deposes Five Detour Gold Board Members

[3] See this and Goldfields 2019 annual report , pages 86-87. Estimate includes realized 2019 losses and our estimate of 2020 losses.

[4] The board owns a cumulative 0.09% of the company . See annual report, page 19 , for a full listing.

Equinox Partners, L.P. - Q2 2020 Letter

Fri, 24 Jul 2020 13:19:56 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners gained +76.0% in the second quarter of 2020 and is up +11.1% for the YTD through July 22rd.

The Second Quarter of 2020

Following a disastrous first quarter during which Equinox Partners, L.P. declined -48%, our fund has more than doubled and is now up double digits for the year.

Gold and silver miners, our largest weighting, have also been our best performing sector. They declined less than our fund in the first quarter and appreciated more than our fund in the second quarter. These companies continue to trade at incredibly low valuations as their margins and cash flows begin to ramp up. At spot metal prices, our producing miners trade at just 4.8x our estimate of 2021 cash flows. With such low valuations as a starting point, our precious metals miners are poised for a meaningful revaluation.

GOVERNANCE

“I will not stand in 2020; and other long-tenured Directors will leave in the medium term. In replacing Directors, we will focus on new gender and diversity objectives.”

Given that gender and race neither determine one’s beliefs nor abilities, we are confident that the identity politics animating the large passive shareholders are not going to solve what ails the junior gold mining boards. By leaving it up to existing insiders to recruit new board members within the designated categories, passive shareholders are all but making sure that the new additions to the boards are not going to rock the boat. No public mining company, for example, has picked up the particularly well-qualified woman, Dawn Whittaker, that Paulson advanced for the Detour board. According, don’t expect new board members to advocate too vociferously for consolidation or against abusive compensation packages.

Nick’s board—which is long credentials and diversity but not much of Goldfields’ stock—supported Nick’s decision. In doing so, they failed to represent the interest of Goldfield’s shareholders who own the company in anticipation of higher gold prices or protect shareholders from the permanent dilution suffered when Goldfields issued equity as the gold price rose.

TAX METHODOLOGY

Sincerely,

Sean Fieler

^[1] Sector exposures shown as a percentage of 6.30.20 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg.

^[2] Financial Times, Edgecliffe-Johnson and Nauman, 7.13.20, Proxy Adviser ISS increases pressure for disclosure of directors’ ethnicity

^[3] Wall Street Journal, Thomas, 12.13.18. Investor Paulson Deposes Five Detour Gold Board Members

^[4] See this and Goldfields 2019 annual report, pages 86-87. Estimate includes realized 2019 losses and our estimate of 2020 losses.

^[5] The board owns a cumulative 0.09% of the company. See annual report, page 19, for a full listing.

Real Vision 2

Wed, 22 Jul 2020 15:37:27 GMT

Why Precious Metals? Why Now? - Sean Fieler

Roger Hirst from Real Vision is joined by Sean Fieler to talk about precious metals.

Swiss Mining Institute 1

Thu, 09 Jul 2020 15:42:18 GMT

memory and imagination - Daniel Schreck

Speech at the Swiss Mining Institute 2016 Conference.

Real Vision 1

Mon, 15 Jun 2020 15:34:03 GMT

Finding Opportunity in Junior Miners - sean Fieler

Sean "reveals his outlook for markets going forward given factors like government policy, social unrest, and COVID-19 to explain why he is positioned for a bull run in the precious metals space"

Mining 101 Primer

Fri, 01 May 2020 18:11:27 GMT

EQUINOX PARTNERS
Gold & Silver Mining 101

The concepts, terms, and tips to know before you invest

With a 25 year track record, Equinox Partners is a New York based team of stock pickers who build concentrated portfolios of undervalued, high-quality public companies in the resource sector and emerging markets. The firm’s gold mining team has 35 years of cumulative, relevant experience.

Overview

Public companies 528 above $10m market cap

Market capitalizations A vast range from less than $10k to $50b; most companies are small

Total Production Gold 107 million oz (2018); Silver 856 million oz (2018)

Social License to Operate Focus on rule of law, political stability, permitting, headline risk

Nations: Good Australia, Canada | Less Good Mexico, Peru | Difficult S. Africa, Equator
States matter: British Columbia is not Ontario, and Idaho is not Nevada
Localities matter more: It’s all about local social and political dynamics
NGOs: They are ideologically driven and looking for leverage

Demand

Gold: Driven by investment and Central Banks. Read this report.
Silver: Driven by both investment and industrial demand. Read this report.

Supply

Gold: 1% annual growth should continue.
Silver: Flat production for the past six years.

Mainstream Research Gold Counsel | Callan | Goldman | BofA | Dalio

Alternative Research GATA | BullionStar | RealVision | Goldmoney.com

Concepts

Company Type

Prospector: Stakes and acquires prospective ground with mineral potential; performs initial low-cost exploration work (geologic mapping, geophysics, geochemistry, etc.); establishes drill targets and outlines the opportunity; secures joint-venture partners to fund drilling/exploration by offering a majority interest.
Explorer: Attempts to find economic metal in the ground via the use of preliminary techniques (geophysics, geochemistry, and soil and rock sampling) and drilling. Due to the uncertainty associated with this stage, there tends to be high-risk/high-reward profiles.
Developer: Has already identified a profitable ore deposit, and is raising funds to build a mine a mine. These companies have lower risk/reward profiles than explorers, but still have risk in the form of financing and construction.
Producer: Engaged in the mining and processing of economic ore, producing: 1) doré bar (alloy of gold and/or silver) which is later refined, or 2) concentrate (processed ore with a much higher concentration of gold/silver) that has to be smelted to extract the
precious metals. Since they are already producing, they tend to offer the lowest risk/reward.
Royalty: Financier that funds exploration and production projects for cash-strapped mining companies in exchange for royalties (% of revenues) or a stream (% of metal). They take no operational risk, participate in exploration upside, and have less leverage to metals prices.

Asset Type

Precious Metals: Gold, Silver, and Rhodium, Palladium, and Platinum (RGM group)
Base Metals: Copper, Lead, Tin, Aluminum, and Zinc

Geology

Rock: Gold is found in various geological systems with several sub-level classifications. Economic concentrations are rare. No two deposits are the same.
Consistency: Does the material between two drill holes likely reflected in the results measured from assaying the drilled core samples?
Size: Is it likely that the ore deposit continues further down (at depth) or further horizontally (along strike) than the holes at the extremes indicate?
Prospectivity: Is it likely that there are deposits to be found on a land package? Are there deposits that have been found historically that are close to/within the land package?

Metallurgy

Removing valuable metals from ore and refining the extracted metals into purer form.
But can it be done profitably given currently available technologies and metals prices?

metrics

The Industry Specific Metrics: The World Gold Council introduced all-in sustaining costs (AISC) and all-in costs (AIC) metrics to establish comparable metrics on a cost per ounce basis.

AISC: Costs associated with mining and maintaining an ounce of gold/silver.
AIC: Similar to AISC, but includes cap ex to grow production.

NAV, P/NAV: Allows comparison and evaluation of a given company’s value.

Calculated as NPV of all mining assets + the value of the minority interest/equity investments + cash & equivalents – NPV of Corporate Overhead – Debt for a given company.

Mineral Resource: It is a concentration or occurrence of natural, solid, inorganic, or fossilized organic material in or on the Earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics, and continuity of a Mineral Resource are known, estimated, or interpreted from specific geological evidence and knowledge.

Measured Resource: These are resources from which the quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; grade and/or quality are computed from the results of detailed sampling. The sites for inspection, sampling, and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth, and mineral content of the resource are well established.

Indicated Resource: Resources from which the quantity and grade and/or quality are computed from information similar to that used for measured resources, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for measured resources, is high enough to assume continuity between points of observation.

Inferred Resource: Resources from which estimates are based on an assumed continuity beyond measured and/or indicated resources, for which there is geologic evidence. Inferred resources may or may not be supported by samples or measurements.

Resource Confidence Level: Inferred < Indicated < Measured

Reserve: A Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials and allowances for losses that may occur when the material is mined. Measured Resources, if economic, convert to Proven Reserves. Indicated Resources, if economic, convert to Probable Reserves. Inferred Resources cannot be converted to Reserves until they are first converted to either Measured or Indicated.

Grade: The grade of ore refers to the concentration of the desired mineral it contains, commonly quoted in grams/metric tonne, or percentage concentration. Ceteris paribus, higher grade is better.

EV/Resource Oz, EV/Reserve Oz: What you’re paying for metals in the ground.

EV/CF, EV/FCF: Measures of profitability for mining companies.

operations

Open Pit: Open-pit mining, also known as opencast mining, is a surface mining technique that extracts minerals from an open pit in the ground. Open-pit mining is the most common method and does not require extractive methods or tunnels. This surface mining technique is used when mineral or ore deposits are found relatively close to the surface of the earth. Open-pits are sometimes called ‘quarries’ when they produce building materials and dimension stone. The grade required for open-pit mining is considerably lower than the grade required for underground mining.

Underground: Underground mining is used to extract ore from below the surface of the earth safely, economically and with as little waste as possible. The entry from the surface is through a horizontal or vertical tunnel, known as an adit, shaft or decline. Underground mining is practical when the ore body is too deep to mine profitably by open pit, when the grades or quality of the orebody are high enough to cover costs, and when the footprint of an open-pit mine is too expansive in a particular jurisdiction to get permitted.

Throughput: The amount of ore processed by a mill/plant or heap leach pad. The mill/plant/heap leach pad has a nameplate capacity (rate at which mill/plant/heap leach pad was designed to process ore).

PEA (Preliminary Economic Assessment): A PEA tries to answer the question, “How can we exploit a deposit to maximize its economic returns?” Unlike more advanced studies, a PEA can use inferred resources for its operational and financial modeling so long as one has a reasonable expectation the outcome will be a profitable mine. A PEA is normally followed by a PFS and an FS. A PEA rarely forms the basis for a production decision because of the unknown risks, costs, and timelines.

PFS (Prefeasibility Study): A PFS is a more advanced study that uses only reserves and measured and indicated resources and involves more detailed engineering in order to optimize the alternatives for developing the mine and processing the ore. It also uses tighter estimates of capital and operating costs and other economic parameters by comparing them to recent examples. A PFS is usually followed by a FS, but if financing with equity, can sometimes be used as the basis for a production decision if the economics are particularly robust or the costing is at a FS level.

FS (Feasibility Study): An FS is the most advanced study. It typically only uses reserves and involves definitive engineering and detailed costing based on actual bids where possible instead of estimates. An FS is considered essential in order to finance larger, more complex, capital intensive, lower return mining projects, or if financing with banks, in which case it is often called a “bankable”.

mining lifecycle analysis

Mining companies have a life cycle as they develop from a claim to a producer. Analyzing each part of the life cycle requires different methods as the value of the company (hopefully) increase.

Proof of Concept: The exploration company makes a discovery, drills, needs access to capital, delineates their initial resource and conducts a PEA. See Talisker Resources.

Development: Moving into developing the asset, the company must receive permits, conduct a feasibility study, and line up project funding. See MAG Silver.

Production: The company constructs and then operates the mine, operationally optimizes it, makes positive ROIC decisions (hopefully), and lays out an effective strategy. See B2 Gold.

Depletion: The company processes its stockpiles, its mine-life expansion becomes limited, and it begins a closure plan.

caveats and insights

“A mine is a hole in the ground with a liar standing next to it.” – Mark Twain, failed gold miner

Governance: Governance is more important in mining than any other industry. Capital intensive businesses necessitate good capital allocation, lest only the insiders get rich.
Management: Knowing managements is vitally important since good and bad actors are not easily discoverable. Actually knowing the people is crucial.
Financial Statements: Don’t say much about pre-production mining companies.
Expertise: Technical studies require interpretation from experts. The analysis is as much art as science. You need to know the experts.
ESG: is the competitive advantage of mining companies. If you mess up one element of ESG, your company fails. This isn’t necessarily true in other non-resource industries.
Community Relations: The ability to manage community is key to success. Management teams that understand power and influence are more successful. Those that don’t, fail.
Jurisdictional Risk: is always a part of the thesis. Jurisdictions that seem difficult prima facie can be among the best mining jurisdictions: it’s easier to permit in Burkina than Canada.
Analysis: Perhaps unlike any other sector, gold mining investing takes a high degree of technical expertise, personal insights, fundamental analysis, and prudential tradeoffs.
Inefficiency: Gold stocks are incredibly inefficiently priced, which isn’t surprising. Some companies are winners and some are losers. It is highly difficult to identify the differences.
Now you’re ready? You can understand everything in this primer, and still lose 100%.

Kuroto Fund, L.P. - Q1 2020 Letter

Thu, 09 Apr 2020 14:07:00 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund fell 28.1% in the first quarter of 2020. The EM index fell 23.6% over the same period. [1]

Our portfolio of 16 companies trades at just 7x our downwardly revised 2020 earnings estimates. This represents an enormous discount to 12.5x earnings for the EM index, especially given the quality of our businesses. We suspect that the first quarter low-tick in valuations has brought to a close the nine-year period during which our businesses grew while their value went sideways.

COronavirus and our Top-Ten Holdings

To clearly detail the impact of the coronavirus on our portfolio, we’ve provided a company-by-company analysis of our top ten positions.

MTN Ghana: 16.8% of 3.31.20 partners’ capital

We still expect MTN Ghana’s earnings to grow over 20% for the year. The company is trading at 6.5x our 2020 earnings forecast with a 10% dividend yield.

As the largest telecom company in Ghana, MTN should experience a slight uptick in usage from the stay-at-home measures being imposed in the country. MTN’s mobile money transfer and payments business should also benefit from the reduced use of cash because of concerns about the ability of cash to spread the coronavirus. The company has recently lowered fees on smaller transfers, and the government, in turn, has encouraged greater usage of MTN’s service.

Mobile money currently accounts for ~20% of MTN Ghana’s revenue. As this business becomes a larger percentage of MTN’s topline, we expect the company to command a higher valuation. In terms of balance sheet, P&L, and competitive position, mobile money is clearly superior to MTN’s telecom business. Even in the case of a prolonged economic slowdown in Ghana, MTN’s business should remain resilient. Moreover, the company is well prepared with a net cash position.

Logo Yazilim: 15.0%

We almost halved our estimate of Logo’s 2020 growth rate, from 30% to 16%. The company is trading at 16x our revised 2020 forecasts.

Logo is the dominant ERP software provider to small and medium sized businesses in Turkey. In February, the company guided to over 30% revenue growth for the year. But with the business disruptions from coronavirus continuing to grow, we are forecasting 16% revenue growth for the year with a similar level of earnings growth. Our estimates assume a severe disruption in Q2, with a gradual recovery in Q3 and Q4.

Logo is used to disruptions to its business plan given the challenges Turkey has faced over the past several years. Accordingly, we expect management to deal with the current crisis efficiently. In the case of a prolonged economic slowdown in Turkey, the company is well prepared, with a net cash position and a 26% ROE.

FPT: 11.5%

We have reduced FPT’s income growth forecasts for 2020 from 17% to -14%. The company is trading at 10x our revised 2020 forecasts.

FPT has three businesses: ERP outsourcing, broadband, and education. We expect FPT’s ERP business to grow just 15% this year, as the company will be unable to complete most projects in Q2 due to travel and work- from-home restrictions. Longer-term, the coronavirus should increase demand for the company’s digital transformation business and help FPT take market share from Chinese competitors. We decreased our estimated 2020 growth of the broadband business by 5%, but expect the business to be largely unaffected. FPT may actually experience an uptick in its FPT Play offering, which is the largest streaming service in Vietnam, with 39% market share versus 22% for Netflix. Finally, we have reduced our estimates for FPT’s education business by 15%. New enrollments will be hit as the education business moves online. Should the economic slowdown persist in Vietnam, FPT is well prepared with a net cash position and a 22% ROE.

Guaranty Trust Bank (GTB): 8.2%

We estimate that GTB’s earnings will decline 21% in 2020. Most of this decline is the result of increased provisioning. We have taken our cost-of-risk estimate from 0.8% of assets up to 3% in 2020 and 2% in 2021. While we cannot see it in the reported data yet, we know that GTB’s loan book will be hit by both the oil price drop as well as business interruptions from the coronavirus.

More generally, GTB is by all accounts the best prepared bank in the country for such a crisis. The bank’s liquidity ratio is 49%, leverage is less than 6x, and the capital adequacy ratio is 23%. Even with a tripling of the cost of risk, the bank will still generate a 20% ROE this year. The company trades at 3.5x our reduced earnings estimates, 0.7x book, and it just fully paid its dividend yield for the year. At today’s price, GTB has a 12% yield.

While GTB’s business will undoubtedly be hit by an extended economic dislocation, we are optimistic about both its near and long-term prospects. This crisis has prompted Nigeria to adopt some of the tough but necessary measures it has been putting off. In March, Nigeria ended its dual exchange rate regime and removed fuel subsidies. As the corona crisis eases, GTB should be perfectly positioned to grow into one of the world’s most underpenetrated banking markets. We added to our GTB position in early April.

Tanzania Breweries: 7.6%

We expect a decline in beer and spirits demand in Tanzania this year. Accordingly, we are forecasting a 26% decline in TBL’s profit and an ROE of just 18%. At these reduced levels of profitability, the company trades at 30x earnings.

Demand for TBL’s products will fall if and when the government forces the closure of bars, which account for the majority of beer sales in the country. Our estimates factor in a two-month bar closure. The closure, if it does happen, could obviously be much longer. On the other hand, off-site consumption may rise during a prolonged shutdown.

TBL’s free cash flow generation is strong enough that, with no debt, there is little chance of a dividend suspension this year even with a precipitous drop in sales. TBL remains the dominant beer franchise in Tanzania and with the recent success of its Castle Lite brand is poised to protect its current market share from further deterioration. Our largest concern is the company’s growth. We still do not know when to expect volume growth and the planned Dodoma plant expansion.

Grana y Montero: 6.8%

Grana y Montero, of all our top-ten holdings, has been the most affected by the coronavirus. Government lockdowns have brought a halt to almost all construction work in Peru. Accordingly, we expect Grana’s construction business to post substantial losses this year.

Peru’s fiscal package launched to counter the negative economic impact of the virus is an impressive 12%+ of GDP. That said, these funds are not earmarked for additional construction projects and do not provide direct assistance to companies as large as Grana. Some of Grana’s other businesses will remain profitable throughout the downturn. Grana’s midstream assets, which have only seen slight declines, will be cash generative. And, Grana’s infrastructure, while negatively affected due to traffic declines from the lockdowns, will still generate positive cash flow this year. Finally, on a positive note, the parent company is net cash and should not experience meaningful balance sheet stress.

Sonatel: 6.7%

Our 2020 Sonatel forecasts remain unchanged. We’re still expecting 10% earnings growth. The company is trading at 7x earnings and a 10% dividend yield.

Sonatel is the largest telecom company in Senegal, Mali, Guinea, and Guinea Bissau. Like MTN Ghana, Sonatel’s telecom business should prove particularly resilient to the coronavirus, with a tailwind from work-from-home measures and efforts to increase mobile money usage. Our thesis for Sonatel is similar to that of MTN Ghana: Sonatel is at an earlier stage of its transition to a capital-light, mobile-money transfer and payments business.

TBC Bank and Georgia Capital: 5.3% and 5.9% respectively

Due to its heavy reliance on tourism, the Georgian economy has been hard hit by the coronavirus.

For TBC Bank, we tripled our cost-of-risk estimate to 3% and decreased our loan-growth estimates for the year. The bank currently trades at 0.5x book value and 5x earnings on our revised 2020 estimates. TBC is the largest, most well-capitalized bank in the country. Over 80% of the bank’s loans are collateralized and the bank has a conservative leverage ratio of 6x. Moreover, the government has stated that they will subsidize loan payments for businesses in the most affected economic segments, like hospitality. We don’t expect the bank to face the kind of difficulties that the stock price is currently implying, and, as a result, we have recently added to our position in TBC.

As for Georgia Capital, the market has abruptly reduced the carrying value of its listed holdings, and we, in turn, have reduced the value of its unlisted holdings. Despite this sizable markdown in value, the company’s three largest businesses—a hospital, water utility, and bank—are all well positioned for the crisis. The holding company has stopped incremental investments and will be conserving cash until the Georgian economy reopens for business.

Orascom: 5.0%

Our 2020 Orascom forecasts remain unchanged; we’re still expecting 10% earnings growth. The company is trading at 5x earnings and generates a 13% dividend yield.

The coronavirus should be a short-term negative and a medium-term positive for Orascom. At the moment, Orascom’s contractors in Egypt are suffering from a government mandated 6pm to 7am curfew, which complicates the completion of certain road projects that have historically been carried out at night. When these restrictions are lifted, we expect a new round of government infrastructure spending to take effect. Orascom already has a strong current backlog which will benefit, while new government projects should add top-line growth. We expect this impressive contractor to generate 20%+ ROE for the foreseeable future.

Sincerely,

Sean Fieler

END NOTES

Equinox Partners Precious Metals, L.P. - Q1 2020 Letter

Wed, 08 Apr 2020 16:07:28 GMT

Dear Partners and Friends,

Top-five holdings Coronavirus update

Pan American Silver: Market Cap: $3.4b / Net Debt: $78m

All of Pan American’s mines except for Timmins (about 6.5% of NAV) have been placed on care & maintenance due to the coronavirus, and the company has pulled production/cost guidance for the year. With net debt of $78m, $240m available on its credit facility, and no significant capex projects planned for this year, Pan American can navigate the current environment without much trouble. The management team has taken a 20% reduction in salary in a show of solidarity with their employees who are currently being paid their base salary.

2019 was a transformative year for Pan American with the closing of the Tahoe transaction and the release of an initial resource for the polymetallic skarn deposit at its La Colorada mine. The company reported an initial inferred resource at La Colorada of ~73 million tonnes, which we value at ~$1B. During Q1 2020, the company released additional drill results for the skarn deposit which were higher grade than the inferred resource, suggesting the skarn will continue to grow and its economics improve.

With a strong balance sheet and nine silver mines in five countries in the Americas, Pan American is well positioned to weather the current storm and benefit from higher silver prices going forward. With over one-third of the world’s silver supply currently offline and investor demand for silver surging, we expect silver prices to rise in the near future. [1]

MAG Silver: Market Cap: $741m / Net Cash: $72m

We’ve pushed our estimate of MAG’s production startup out 6+ months, to the first half of 2021. All the equipment necessary for construction is on site and the joint venture’s construction crews were still working as of April 5th. That said, we believe that there is good reason to expect a delay in the construction given the logistical challenges posed by the coronavirus.

The delay in construction will slow the rate at which MAG spends its remaining cash. The company had USD$72m in cash as of Dec 31. We expect MAG will need an additional USD$50m in the next twelve months due to cost overruns plus another year of G&A. MAG will likely borrow these additional funds in the second quarter when its construction timeline is clarified.

Our estimates for the joint venture once it begins production remain unchanged. Tonnage will begin at 4,000 tonnes per day (tpd) and increase to 8,000 tpd within a few years of initial production. At 8,000 tpd, the JV will have a stated mine-life in excess of 12 years and a functional mine-life of much longer. The JV has increased its exploration budget to $5m to build on the promising results in late 2019. We expect the JV will identify another mine on the property in the next few years.

At $18 silver and 4,000 tpd, the JV generates a 44% IRR with a cash cost of ~$5 per ounce of silver. At 8,000 tpd, the project’s IRR rises, the cash cost falls, and MAG’s portion of the JV’s free cash flow tops USD$100m per year and generates a FCF yield in excess of 13%. In the first year of commercial production, we anticipate that the JV’s free cash flow will be reinvested in the expansion to 8,000 tpd. After that expansion, we expect MAG’s board to either reinvest the company’s free cash flow into high-return projects on the JV property or to return the free cash flow to shareholders via dividends and share buybacks.

Sandstorm: Market Cap: $982m / Net Debt: $0m

We expect Sandstorm to be profitable in the second quarter despite the halving of its revenue due to mine shutdowns. Within its portfolio, the most notable suspensions and reduced operations are Yamana’s Cerro Morro, Lundin Gold’s Fruta Del Norte, and First Majestic’s Santa Elena. Assuming a 3-month stoppage at the affected mines, 12.5% of Sandstorm’s 2020 attributable production will be shifted to future years. Accordingly, we’ve reduced our estimate of Sandstorm’s free cash flow to just $7m for the quarter.

With ~$300m USD in credit lines available and no debt, Standstorm has an opportunity to acquire incremental assets at attractive prices given the current stress in the mining sector. Sandstorm has also just renewed its stock repurchase program. The company repurchased 3.7m of its own shares during the market volatility in March. Either through acquiring royalties at a great price or buying its own undervalued portfolio through share repurchase, Sandstorm has the ability and the willingness to grow value for shareholders. We expect CEO Nolan Watson and his team to consummate at least one opportunistic deal in the next few months.

Longer term, we believe that the market is making a mistake by not attributing any value to Sandstorm’s 30% equity stake in the Hod Maden mine in Turkey. When Hod Maden goes into production, currently scheduled for the fourth quarter of 2022, we expect the asset to almost double Sandstorm’s cash flows.

Dundee Precious: Market Cap: $680m / Net Cash: $50m

With no large capital requirements, no net debt, and Ada Tepe’s ramp up complete, Dundee Precious Metals is in a very favorable position. We estimate that they exited Q1 with a $50m net cash position. The company’s coronavirus impact has been minimal: both of its mines continue to operate without interruption, while the smelter is still running at ~80% of its current capacity. As a result, the company is on track to generate in excess of $175m in operating cash flow in 2020.

Dundee Precious Metals is also well positioned to acquire another company for a bargain price or to acquire a meaningful amount of its own shares. Either option should benefit shareholders materially. For the share buyback to be effective, the company will need to make a tender offer. They could do so for up to 25% of the shares outstanding and still exit the year in a net cash position. As for acquisitions, the company has been reviewing targets for more than a year. The pricing for such an acquisition is obviously more favorable now. We believe that either buying back stock or making an acquisition would be wise in the current environment. The mistake would be to do neither.

CEO Rick Howes is scheduled to be replaced in May at Dundee’s AGM by COO David Rae. David is sharp, competent, and offers Dundee operational continuity that is especially important in these more uncertain times.

Goldmoney: Market Cap: $130m; Net Cash $51

Goldmoney is one of the obvious beneficiaries from the stress in the physical market for gold and silver. With retail investors unable to purchase physical coins at reasonable premiums, and growing uncertainty surrounding the physical backing of the gold and silver ETFs, Goldmoney’s user-friendly physical storage services for gold and silver bullion around the world are poised to benefit.

The Goldmoney’s portfolio consists of four principal businesses: Goldmoney.com, Mene, Schiff Gold, and a gold-lending platform. Goldmoney.com is a precious metals holding platform which allows customers to buy and take delivery of physical metals in secured locations for a lower cost than coins or ETFs. Mene crafts pure 24-karat gold and platinum jewelry that is sold by gram weight with a 20-30% premium. These are, in effect, gold investments in the form of jewelry. Schiff Gold is a U.S. dealer of physical metals in the form of bars, coins and wafers. Finally, Lend & Borrow Trust is an online lending platform that enables peer-to-peer lending and borrowing collateralized by precious metals.

Goldmoney’s CEO, Roy Sebag, who began his carrier at Paypal, has spent the last four years building Goldmoney’s retail transaction platform. While the regulations allow for such a business to work in theory, in practice the regulators in both the U.S. and Canada stopped Roy from developing a gold-transaction business. Accordingly, Goldmoney has stopped investing in its transaction business and refocused on building its gold and silver investment businesses.

p/NAV of Gold miners

In the first quarter of 2020, gold prices were up and the price of gold mining companies were down. BMO’s long-term graph of the P/NAV (with a 0% discount rate) for their coverage universe of senior and junior producers provides a sense of how depressed today’s valuations are. As the graph shows, seniors which traded at a ~50% premium to NAV after the lows of 2015, are now trading at a meaningful discount to NAV, while the juniors are trading at an unbelievable 80% discount to NAV. The gold price and mining valuations are clearly disconnected, especially for the juniors that have traded at an increasingly large discount to NAV as the gold price has risen in recent years. The current combination of strong gold prices and low prices for gold mining companies presents an opportunity to invest in the space at a time when its underlying fundamentals are very strong and valuations are low.

mine closures

“296 mines globally have been temporarily shut down due to the corona virus as of April 6 ^th . 178 (60%) are precious metal operations,” according to fund manager Marin Katusa. These closures have impacted our portfolio unevenly. Broadly speaking, our operations in Australia, Bulgaria, Ontario, Sweden, and West Africa have fared the best so far. We are also witnessing a number of exceptions on a mine-by-mine basis. MAG Silver’s construction site, for example, was still in operation through April 6 ^th , despite the shutdown of most mines in Mexico.

We expect the broad restrictions on mining activity to be lifted in May and June, with the specific timing of the restarts varying from country to country. We are encouraged by the restart of some refining capacity in Switzerland, and we have yet to hear of companies being unable to monetize the metal they produce.

abnormalities in the gold market

“Some dealers are desperately contacting clients to see if anyone is willing to sell their gold bars and coins, and offering a rare premium over spot prices.” [2] Even at premium prices, there are few sellers of gold and silver coins into the retail channel. This has led to coin shortages and high premiums to spot prices. Current premiums for a one-ounce gold or silver round are over USD$100 for gold and over $5 for silver. [3] These premiums are a result of surging demand, low inventory and supply limitations caused by flight cancellations, and the widespread shutdown of precious metals refiners and mints.

The pricing discrepancies within the institutional precious metals markets are more difficult to explain and more important to understand. The most glaring anomaly is the differential between the COMEX future price and the spot LBMA price. This differential has remained large and volatile in April as other spreads in the capital market have normalized. Accordingly, there is growing speculation that the spread between COMEX gold and LBMA gold signals a deeper problem with the physical backing of these exchanges.

The LBMA issued two press releases last week to diffuse the situation. The market was not reassured: LMBA is trading at a $36 discount to COMEX gold as we write. With the LBMA holding over 8,326 tonnes of gold in storage (USD$407b) as of December 31, 2019, [4] the financial implications of this discount are non-negligible. Should LBMA gold continue to trade at such a substantial discount to COMEX, the credible allegations that the LBMA failed to fulfill some of its contractual obligations will gain additional credence. [5]

It is worth noting that the GLD and IAU ETFs are dependent on the performance of the LBMA and its sub-custodians. As such, questions about the integrity of the LBMA and its sub-custodians raise important red flags for the $80b+ of capital currently invested in gold ETF’s. Surprisingly, these two ETF continue to experience inflows. GLD alone has recorded estimated inflows of USD$3.9b since March 23 ^rd . [6] Given the difficulties many have experienced sourcing physical gold recently, we are not alone in publically questioning these ETFs’ ability to successfully translate these massive dollar inflows into physical gold. [7]

Sincerely,

Sean Fieler

ENDNOTES

[1] Silver Shock Update , Jeff Clark, March 31, 2020

[2] Source: Bloomberg News .

[3] For example, the cheapest silver round at APMEX on April 7 ^th trades at premium of $5.30/oz for a bulk 500-oz order of silver rounds, while their cheapest gold round enjoys a hefty premium of $178.

[4] Source: LBMA .

[5] Source: Numismatic News .

[6] Source: Reuters ; Bloomberg data.

[7] Source: Bloomberg News .

Equinox Partners, L.P. - Q1 2020 Letter

Fri, 03 Apr 2020 13:52:17 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners lost -48.2% in the first quarter of 2020.

The first quarter of 2020

For a brief moment on Monday, February 24th, with gold up $85 and the S&P 500 down 5%, our decision to avoid U.S. stocks seemed like it was finally going to pay off. Not only were stock prices declining but the market was anticipating the fiscal and monetary response to these declines. Gold, it appeared, would become a must-own asset for a broader swath of investors. We were particularly well positioned, confident that if even a small fraction of the world’s wealth moved into gold, the price of gold and gold miners would rise dramatically.

Unfortunately, gold’s late-February high proved fleeting. As stocks crashed, gold also traded down as investors scrambled for U.S. dollars. Worse still, gold mining stocks began falling much faster than the stock market. At its lows on March 13th, the GDXJ gold mining index was down 48% for the YTD. The S&P was down a comparatively modest 16% at that point. Our positioning for the end of the bull market was dead wrong.

As of March 31st, our mining companies were down 40%, our E&P investments were down 80%, and our emerging market companies were down 15% for the year to date. Our fixed income shorts gained 4% in the first quarter, adding to our losses. As a result, Equinox Partners ended the first quarter of 2020 down 48%. We’ve managed to lose money in both the bull market in financial assets as well its end. That said, we are confident that the current chapter in financial history is far from over.

2020 Versus 2000

As in 2000, we believe that Equinox Partners’ current drawdown is a prelude to serious outperformance. Even the magnitude of this year’s decline is similar to what we experienced in late 1999 and early 2000. While our portfolio in the fall of 1999 was perfectly positioned for the next eight years, it declined 55% from the beginning of October 1999 through March 2000. During that six-month period, as in the first quarter of 2020, everything went against us. Then, over the following eight years, our fund increased fourteen-fold as the S&P rose just 1.5% cumulatively.

A confluence of factors contributed to the fund’s precipitous turn of the century and first quarter of 2020 declines. But, both periods are characterized by extreme peaks in financial assets and extreme lows in global commodity prices. The fifty-year graph of the S&P commodity index divided by the S&P 500 accurately captures these long-term trends. It is worth noting that by this measure, commodities are much cheaper today in relation to the S&P 500 then they were at the height of the tech bubble in early 2000.

Our eight-year run from April 2000 to February 2008, during which we compounded at 40% per year, was a result of many factors. First and foremost, post-peak 2000, we were mercifully free from the temptation to buy still-overvalued stocks just because they had declined. Our resistance to this temptation was in stark contrast to investors who participated in the tech bubble of the late 1990s and who struggled for years to buy anything other than the companies that they owned at ever lower prices.

Today, as in 2000, our companies simply jump off the page. Take Dundee Precious Metals and TBC as two cases in point. Dundee Precious Metals is a net-cash company with a market cap of $560m USD that we estimate will generate ~$175m of free cash flow in each of the next three years. There’s simply no reason why this company should trade at just 3.1x free cash flow. TBC, the best bank in the nation of Georgia, currently trades at 60% of book and at less than 3x trailing earnings. While it’s too early to tell how much TBC’s provisioning will increase and income will decline in 2020 because of the corona virus, we are confident of two things. First, TBC’s book value will not be impaired. Second, TBC will be able to generate a 20%+ ROE post-crisis. We haven’t seen valuations this compelling since 2000, not even at the lows of 2008.

In macroeconomic terms, 2020 is nothing like 2000. The macroeconomic imbalances of 2000 seem positively benign when compared to today’s situation. Both the Fed and the federal government have already taken unprecedented steps within two months of the stock market top. We expect the government’s “bold, persistent experimentation” to continue until such efforts prove obviously futile. We will manage our 9% short equity position accordingly, and we expect to generate most of our future returns from our undervalued longs.

Our Biggest Mistake

For more than a decade, first world central banks have adeptly supplied liquidity at the right moment and then balanced the supply and demand for U.S. Dollars, Yen, and Euros so as to keep inflationary expectations anchored. It seemed impossible to us that central bankers could manage this complicated dynamic, but they’ve done it over and over again. Broad disinflationary forces in the world economy gave central bankers free license to set the most important price in the economy, interest rates.

As a result of their success, our government bond shorts have been a disaster. Developed world central banks have ratcheted up the price of government bonds year after year, costing us and our partners over $200 million on a cumulative basis since 2008. We remain surprised that bond investors proved so eager to front-run central bank largess without any apparent concern about fiscal deficits. The market’s willingness to lend money to governments that can never pay it back is not a new phenomenon, but the eagerness to do so at ever lower rates is.

We were further mistaken not to anticipate that bonds would rally in a stock market crash even as deficits blew out to unimaginable levels. We are guilty of wishing that the markets wouldn’t rush to lend governments money even as they spent ever more profligately. In retrospect, we should have known that the central banks would set the price for their own government’s debt at ever higher levels until they had thoroughly debased their currencies.

Interestingly, government bonds in the U.S. not only rallied as stocks crashed this year, but they also rallied as stocks rose. The U.S. 30-year bond had already appreciated 8% for the year to date as the stock market peaked on February 19 ^th . As the stock market crashed, the 30-year bond rallied even further. At its peak, the U.S. 30-year bond offered a yield of less than 1% and was up an amazing 35% for the YTD. Bonds started the year on a tear and rose further as the economic situation deteriorated. In the end, this year’s abrupt, unidirectional bond rally endangered our other positions, and we covered a majority of our fixed income shorts in the first quarter, crystalizing our losses.

The End of the Fed's Balancing Act

Even if the Fed could print just the right amount of money to stabilize the economy without unmooring inflation expectations, we doubt this intervention would lay the groundwork for future economic growth. Can we honestly expect Americans to resume their pre-crisis rate of debt-fueled consumption now that they know their life and work can be disrupted by a virus at any point? The federal government, as powerful as it is, cannot simply pass a Collective Amnesia Act to get everyone to go on borrowing and consuming as though nothing happened.

Accordingly, there are two plausible ways to lay the groundwork for sustainable economic growth: debt reduction via bankruptcy and debt reduction via inflation. Making debt worth less in real terms without making money worthless is unlikely, but the possibility of less pain is always more politically attractive than the tough medicine of debt restructuring. Therefore, we believe that policymakers will attempt an orderly transfer of wealth from creditors to debtors.

The problem is that a gradual transfer of wealth is unlikely to spur debt-fueled consumption anytime soon. We’ve reached a point that only intentionally irresponsible monetary and fiscal policy will generate more economic activity. People, even scared people, will anticipate their purchase of a new car or a house if the price of that car or house is rising fast enough. The trick for policy makers is achieving that fear of rising prices without creating too many negative externalities. A string of Fed officials touting their infinite ability to print money on TV certainly looks like an attempt to signal their irresponsibility. We doubt that signal will be enough. We suspect the Fed will actually have to deliver on some inflation to spur consumption. While presumably well intended, this monetary strategy coupled with supply shortages will make for a particularly punishing environment for the American consumer.

On a happier note, the message of monetary irresponsibility has already registered with gold and silver retail investors. The physical supply of both gold and silver is tight, and premiums are high in the retail market. Roy Sebag, the CEO of Goldmoney which holds over $2 billion of gold and silver metal, has gone on record detailing the trouble he is having acquiring physical gold and silver at reasonable premiums. How it is that gold and silver ETFs continue to acquire massive amounts of physical metal at no premium while others cannot, is a growing mystery.

Should today’s physical shortages of gold and silver persist, investors will likely change the way they hold their precious metals. In normal times, investors prefer the convenience of holding gold and silver in its de-materialized form: paper. But at times of financial stress, those same investors often decide they would rather own the physical metal. When this happens, the investors inevitably discover that there is not enough physical metal to go around, and the price spikes. This is the exact situation that gold and silver markets are in today.

oil & gas: the capitulation

The oil war/corona virus combination finally forced the capitulation of a global oil industry that has been in a bear market for years. While $20 oil is obviously not sustainable, the industry has destroyed so much wealth that there are few asset allocators willing or able to invest based on 2021 or 2022 energy prices. The share prices of our two largest E&P companies have declined precipitously in this environment. Crew and Paramount are down 71% and 84% for the year to date and are down 98% and 96% from their 2011 peaks. Together these two companies have generated a loss of $94 million for our partnership over the past decade.

Amazingly, both of these companies have grown significantly since 2011. As such, on an enterprise value basis, we’re currently paying under $14,000 per flowing barrel per day at Crew and $8,500 per flowing barrel per day at Paramount. On a reserve basis, these companies are even cheaper. Today we are paying $1.45 for each barrel of reserves at Crew and $1.85 for each barrel of reserves at Paramount. Excluding the companies’ debt, the price per barrel of production and reserves of these two companies is just stupid.

The stock market clearly believes that E&P companies that have high debt-to-EBITDA ratios are not going to survive. As such, Crew and Paramount are likely worthless and certainly worth nothing more than an out-of-the-money option on much higher energy prices. This analysis overlooks the fact that today’s oil prices are in large part the result of a deliberate effort on the part of both Russia and Saudi Arabia to depress the oil price. Their attack on U.S. shale is working better than they could have imagined. As of this week, U.S. companies have already begun filing for bankruptcy. Whiting Petroleum sought protection from its creditors last week, and Callon and Chesapeake have hired restructuring advisors.

While the news of distressed liquidations seems bad, the lower oil prices go now the more quickly they will recover and the higher they will eventually be. Irresponsible, low-cost debt capital won’t be available again for U.S. producers for years. As such, those North American E&P companies that can weather the storm should enjoy years of strong returns as the industry insists on higher cash-on-cash returns.

Finally, it is worth noting that persistently low oil prices will improve the long-term fundamentals for natural gas in North America. In the unlikely scenario in which oil prices stay in the $20 range for the rest of the year, we’d expect natural gas prices to move up dramatically in 2021. Natural gas has not suffered demand destruction to the same extend that oil has, but capital budgets for new gas production are being cut along with oil budgets. For both Crew and Paramount, $4 gas would be even better than $50 oil.

Sincerely,

Sean Fieler

^[1] Sector exposures shown as a percentage of 3.31.20 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg.

^[2] From April 2000 to February 2008

Mine Visit Note: Perseus

Thu, 06 Feb 2020 18:34:00 GMT

EQUINOX PARTNERS - Precious Metals Miners
Site visit—Perseus Mining
February 2020

Dates February 6-11, 2020

Mines Visited Yaoure, Sissingue, and Edikan

Countries Visited Cote d’Ivoire and Ghana

Analyst Coille Van Alphen

OVERVIEW

Perseus (PRU Australia) is a gold miner with two operating mines and one mine in development in West Africa. The company is well capitalized and has top tier management, good governance and can execute in a tough jurisdiction. PRU is a 2% position in the SMAs.

metrics

Market Cap $900m USD
Enterprise Value $907m USD
EV/CF 5.1x 2020 estimate cash flow
P/NAV (5% discounts) 0.6x
Resources 6.5m ounces of gold
EV/Resource $141 per ounce of gold
Reserves 2.9m ounces of gold
EV/Reserves $309 per ounce of gold
All-in-sustaining cost $888 per ounce of gold

Thesis

Perseus Mining has two producing assets and is in the middle of constructing its third asset, Yaoure, in Cote d’Ivoire. Once Yaoure is commissioned, the company should produce ~500,000 oz. by 2021 and generate substantial FCF (~USD$125m per year at $1700 gold). Yaoure has the potential to provide PRU with a “cornerstone asset” from which they can start to upgrade the portfolio metrics. The company trades at 0.6x P/NAV and is not covered by any sell side analysts because of its 2014 operational failure at Edikan. Management replaced several key people in 2014, and the company has clearly demonstrated operational stability at Edikan. Generating FCF from low grade material in Ghana is challenging at the best of times, but PRU has achieved plant and mine stability over the last 12 months and I am optimistic they have finally found the right balance.

Trip summary

Overall, the trip was well run, informative, and I left having a better understanding of their operational strengths which weren’t evident prior to seeing the assets. The one thing that particularly stood out from the tour is the very conservative nature of the company: from security protocols to resource modeling, the company doesn’t want to lose the market credibility they have built up over the last 18 months which is stemming from more consistent operations. The company has learned a lot from building Sissingue, a small mine footprint, which they are applying to Yaoure and should enable them to meet capex and construction timelines of Q1 2021.

By the end of this quarter (Q1 2020) they will have paid back their initial capex of $106M at Sissingue, and they are trying their best to extend the mine life to generate as much FCF as possible. Edikan was working much better than it looks on paper, and I have more confidence in their current LOM plan, and am keen to see what the new exploration targets generate. Processing ~1 gpt rock in Ghana is marginal, but they seem to have reached an inflection point where they can consistently generate FCF. They have not historically had a lot of additional FCF to spend on exploration at any of the assets due to patchy operational success, but they are starting to spend money on this area now due to a growing cash balance. Their exploration approach seems quite sensible, and they are willing to allocate more capital based on results.

Management and governance

Jeff Quartermaine, CFO of PRU during all of Edikan’s previous woes and Managing Director (CEO) since 2014, personifies the company’s conservative culture. Andrew Grove has recently been brought on in an IR/Corp development role and does a good job of providing a more enthusiastic face to the market, while also being very qualified for corporate development given his time at Macquarie. In terms of compensation, it should be noted that their compensation packages are very modest when compared to their North American peers.

JURISDICTIONO

Cote d’Ivoire is a high-risk country: the upcoming election outcome is very uncertain, but with President Ouattara and Gbabgo both out of the race, the election outcome should not spark civil disorder. Ghana is a medium risk country: there is also a presidential election in 2020 and growing frustration with mining taxes not reaching the local communities. Within the Cote d’Ivoire, a 0.5% royalty goes to the community in the form of a fund called the CDLM. The fund is composed of two individuals from each impacted community, along with one person from PRU. At the moment, most of the money is going towards infrastructure, but as they get further up the development curve they would like it to transition to education.

Corporate Social Responsibility (CSR)

In Ghana, because the royalty that is supposed to be paid to the community is not reaching the community, PRU decided to allocate USD$300,000 per year towards a fund in order to win the trust of the community. From the surface, it doesn’t appear they are doing anything beyond basic infrastructure, basic health, and basic education. I would

like to see the CSR projects more advanced at Yaoure, given the community started with a higher level of development versus the other mine sites. This being said, the communities were all welcoming and happy to have us walk around and see the various infrastructure initiatives.

Security

The Security costs in Cote d’Ivoire have picked up. The company is monitoring the election in December because they worry that if Ouattara (the current president) doesn’t step down and give it to the second in line, then another civil war could break out. Flights started once per week in January 2020 from Sissingue in order to limit the use of roads. In Abidjan, we stayed in a hotel that had the most stringent bomb checking measures I have ever been through. While we were allowed to go out for one meal, the rest of the time we were not allowed to the leave the hotel ground.

In Ghana, the security tone was much more muted: they drove us 8 hours to the airport without a security convoy. The roads in Ghana were far worse than I remembered, and I could see why there is growing frustration with the level of infrastructure in the country.

Catalysts

Perseus will publish a new life-of-mine plan (LOM) shortly. It will use $1300 versus the current $1250/oz., which should have a positive impact by bringing in additional ounces (particularly Edikan). Because PRU’s LOMs are quite short, this should be meaningful to the valuation. Overall, I will add ~1 year of production at Sissingue and ~3 years at Edikan. Bringing in Yaoure on time and on budget will also help, but I think exploration success at the asset will be more meaningful to cement it as their cornerstone asset.

MINES

Edikan (90% interest)

Their COO has had a very large impact on the organization. Chris came from Barrick/Goldcorp, and is energized about turning around operations. I attribute his arrival to Edikan’s recent consistency. His impact at Edikan is obvious, as they have really started to make sustainable progress keeping the mill recoveries stable.

LOM gold production is currently expected to be 1.08 million ounces over the remaining 6 year mine life; however, there is potential to extend the current mine life through exploration and inclusion of the Esuajah South and the AG pit optimization into the LOM.

Esuajah South: the potential material could be removed by open pit and or underground mining at Esuajah South (ESS) but part of the reason they prefer the underground option is because it reduces the number of people impacted (and therefore relocated). The open pit option would require relocating essentially half the town, which would be a very significant cost. They had to relocate 200 homes, along with a church, police station etc. The topography was a little more difficult (on top of a hill) which increased the cost. The cost was $25 million. This relocation gives them plenty of flexibility though to expand the relocation area with more houses if necessary.

The nameplate capacity of the mill is 5.5Mtpa but they are currently doing 7.5Mtpa. The addition of the Mill Slicer (an initiative put in place by Chris) has been an upgrade that has also led to several additional improvements in the mill. They usually use grid power, but the transmission of grid power isn’t consistent so they have added generator sets. They are now working with GenSer who is providing another source of stable power and will lower their power costs. Keeping the mill going is particularly important there given the grade—every hour the mill is down costs them ~$500 oz.

Continuous improvement has been started and they are identifying 2nd order projects to work on. They believe they have executed on the obvious first pass projects. They added a carbon column to reprocess the tailings water which is now adding 500 oz per month. The cost of carbon column was paid back in three weeks.

Exploration at Edikan : The company has recently changed out its exploration team because they needed “new blood”. Targets that had been previously identified as unlikely are now proving to be much more interesting. They have also identified some new areas (don’t have the ground yet) that have many artisanal miners working on it. They are going to be spending ~$6.5 million in 2020. While it is difficult to quantify how many more ounces are there, I was the most optimistic about the mine’s upside vs. the rest of the portfolio. The Anikokoso prospect and the Agyakusu prospects are the targets we should be monitoring for progress.

Yaoure (90% interest)

The main takeaway is that the project is roughly on schedule and running slightly below budget. At the moment they are forecasting it to cost $258m vs. the $265m in the feasibility study; however, they are only 35% through construction. They are still targeting initial production for December 2020, but that is a stretch goal. At the moment, the FS outlines Yaouré’s life of mine gold production to be 1.4Moz at an AISC of USD$759/oz over 8.5 year. This study doesn’t include the initial underground inferred resource of 595 koz grading 6.2 g/t gold. I would expect ~50% of those ounces to con vert to reserves and make it into a mine plan which would further extend mine LOM by ~1.5 years. Currently within the Cote d’Ivoire there isn’t an underground mining convention, so they need to work through this before they can upgrade to a reserve and provide economics around those ounces.

All major contracts have been awarded, and so far EPC work is on schedule and there have been no major scope changes. They are clearly having some issues getting items released at the port, which is impacting various things but nothing on the critical path at the moment.

The project is much closer to infrastructure and people than Sissingue is, which will have positive and negative impacts on the project. The communities have much higher expectations. They have 5 impacted communities, along with a 6th that they include despite it technically not being in the catchment area. They include it because they feel it is close enough to be included and want to keep the expectations the same for all communities nearby. At the moment, they are employing 56% of the workforce from the local communities, and they would like to increase this figure to 60% once production starts. In addition to employing locals the government mandates that 0.5% of revenue must go back to communities and the communities decide how to allocate that money.

Exploration at Yaoure : They have some additional targets; Sayiko is the next key target. They need to remove the artisanal workers before they are able to mobilize a rig to test it, despite it being on their mining lease. They continue to believe it’s a large system, but so far they haven’t found anything meaningful. They have had a few “technical successes” but haven’t vectored in on the next CMA pit. It should be noted though that they haven’t spent a lot of money on exploration, so they are in the very early stages of exploration on the rest of the ground.

Sissingue (86% interest)

The mine started in 2018, exiting construction ahead of time and on budget. Currently the mine is producing 80,000 oz. per year from 3 pits. The flowsheet and mill are basic, but it has been running closer to 1.4 Mtpa due to blending (nameplate capacity of the mill is 1Mtpa). The recoveries have also been slightly better at ~94% vs. the 90% outlined in the FS. They believe, based on what they have milled so far, that as they transition to 100% fresh rock the recoveries should not drop to 86% as outlined in the FS. They think they can keep them around 90-94%, which would be an incremental positive. Maintenance (and therefore productivity) has been an issue, but the contractor has compensated for this by having extra equipment around.

Exploration at Sissingue : Zanikan is the most tangible exploration target that they have. They think it could at ~9 months of production. Sissingue doesn’t look like it has a lot of additional upside, so the likely outcome is that the mill is packed up and moved to a new deposit in country. Lykopodium has told them that relocating the mill would save them ~$30- $40m in capex.

*** END ***

*Figures and statements as of February visit. This is an internal research note written by an analyst employed by Mason Hill Advisors, LLC. It is not intended for distribution. This information was intended exclusively for the person to whom it was delivered and ought not to be distributed further. Opinions are expressed throughout this note as of the date of the note. Opinions can be wrong or can prove to be right. Investment decisions are made in part as a result of mine visits and company discussions, but not exclusively so.

End Notes

Equinox Partners, L.P. - Q4 2019 Letter

Tue, 21 Jan 2020 15:07:41 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners rose +13.6% in the fourth quarter of 2019 and was up +22.8% for the full year.

MAG Silver, Dundee Precious Metals, and Paramount Resources remain top-five positions in the fund year over year. Over the course of 2019, we sold both Aramex and Gold Road. The slowing growth of Aramex’s ecommerce business along with a management change tempered our enthusiasm for the company. We exited Gold Road in order to manage the fund’s growing exposure to precious metals miners. The new two additions to fund’s yearend top-five positions are Pan American Silver and Bear Creek Mining.

Yearend top-five holdings

Mag Silver

MAG Silver is the 44% owner of a high-grade, large-scale silver project in Zacateca, Mexico scheduled to begin production at the end of 2020.

The joint venture’s (JV) tonnage will begin at 4,000 tonnes per day (tpd) and should increase to 8,000 tpd within a few years of initial production. At 8,000 tpd, the JV will have a stated mine-life in excess of 12 years and a functional mine-life of much longer.

At $18 silver and 4,000 tpd, the JV generates a 44% IRR with a cash cost of ~$5 per ounce of silver. At 8,000 tpd, the project’s IRR rises, the cash cost falls, and MAG’s portion of the JV’s free cash flow tops USD$100m per year. In the first year of commercial production, we expect the JV’s free cash flow to be reinvested in the expansion to 8,000 tpd. After that expansion, we expect MAG’s board to either reinvest the company’s free cash flow into high-return projects on the JV property or to return the free cash flow to shareholders via dividends and share buybacks. Following the retirement of Johnathan Rubenstien, MAG’s current chairman, this spring, we expect the new board chair to crisply articulate MAG’s future capital allocation plans.

MAG’s unique combination of high-quality free cash flow and superior reinvestment opportunities should command a premium valuation. With a market cap of less than USD$1b, we believe that the company’s very desirable financial characteristics are being grossly undervalued by the market. Once MAG demonstrates its ability to generate and wisely allocate free cash flow, we believe the market will accord the company a much higher valuation.

Bear Creek Mining

Bear Creek’s fully-permitted Corani project in Peru is one of the largest undeveloped silver mines in the world. With reserves of 225m ounces of silver, 2.7 billion pounds of lead, and 1.8 billion pounds of zinc, the contained metal value of the deposit exceeds $8 billion USD. Per the company’s December 2019 feasibility study, the project has an IRR of +20% IRR, an NPV of $531m and a life-of-mine AISC of just $4.55 per ounce of silver.

The project’s $600m USD capital cost remains the sole impediment to the successful development of Corni. Given the Bear Creek’s current market cap of $200m USD, management is patiently waiting for the right price environment in which to finance the project. The quality of the project combined with the strategic patients of management makes Bear Creek one of the best options on slightly higher silver prices in the market today.

With the addition of Tony Hawkshaw as CEO, Alan Hair as a director, and Eric Calbra as VP of project development, the company is well positioned to structure the offtake agreements and partnerships necessary to move the project forward. And, with a concentrated shareholder base including the company’s founder and Chairman, Andrew Swarthout, the company is intent on protecting shareholders from excessive dilution in the financing of the project.

pan American silver

Pan American Silver is the world’s second largest primary silver producer, with a diversified portfolio of 10 producing assets located in North America and South America. In addition to its producing assets, Pan American has a diverse option-like project pipeline. From Navidad in Argentina to Escobal in Guatemala, the company has exposure to a number of world-class, but politically challenged, assets for which it currently receives little value.

Pan America has a long track record of creating free cash flow and consequently has a strong balance sheet and a consistent dividend. Ross Beaty, Pan American’s chairman, and Michael Steinmann, its CEO, both have well-deserved reputations as good capital allocators. We have confidence that these two gentlemen will continue to make wise decisions with respect to reinvestment and the return of capital.

The company’s current priorities are asset optimization, debt reduction, and brownfield exploration. In 2019, the company focused its brownfield exploration on the La Colorada skarn discovery. The result is a very significant poly-metallic discovery adjacent to the company’s La Colorada silver mine in Mexico that should add over $1 billion USD to Pan American’s NAV.

dundee precious metals

Dundee’s second Bulgarian mine, Ada Tepe, began commercial operations in the first quarter of 2019. While Ada Tepe was not completely immune to ramp-up issues, the plant has consistently achieved its designed throughput and recovery levels and should generate USD$75m of free cash flow this year. Chelopech, Dundee’s other Bulgarian mine, produces $100m of free cash flow per year, bringing the company’s free cash flow per year to USD$175m. At this run rate over the next five years, the cumulative free cash flow from Dundee’s two Bulgarian mines will exceed the company’s current market cap.

Dundee trades on an incredibly low multiple to its free cash flow for two reasons: 1) For years, the company’s smelter consumed all of its free cash flow; 2) The management failed to articulate a clear capital allocation policy. We believe both of these longstanding issues have been resolved. The smelter generated a modest amount of free cash flow in 2019 and should be a cash generator rather than consumer for the foreseeable future. David Rae, Dundee’s COO, will succeed Rick Howes as CEO this spring. With the company so undervalued and no internal use for its free cash flow, we expect David to announce a clear capital allocation policy with the support of Dundee’s board. For our part, we are encouraging the board and management to return half of the company’s free cash flow to shareholders, leaving a sufficient, but not excessive, amount of capital available for future growth.

Paramount Resources

Paramount Resources is a Canadian oil and gas company. The third quarter of 2019 marked the third quarter in a row that Paramount met or exceeded its operational guidance. This improved predictability of its operations reflects the company’s revamped internal budgeting process and focus on core competencies. Most importantly, the company has outsourced much of its infrastructure requirements to midstream partners.

Paramount’s focus on core competencies is a result of a concerted effort on the part of CEO Jim Riddell to take a more disciplined approach to capital allocation. Most notably, the company rationalized its non-core assets, selling a collection of midstream assets for CAD$470m and a marginal natural gas asset for CAD$55m over the course of 2019. These sales helped de-lever the company’s balance sheet and financed a share buyback, which the company did throughout the year. Combined with the company’s strong well results, these financially astute decisions led to Paramount’s meaningful outperformance last year.

Over the course of 2019, Paramount grew its production from 81k boepd in Q1, 37% of which were liquids, to a Q4 guidance of 84.5-97.5k boepd, 42% of which is liquids. Going forward, we expect Paramount to continue growing production at 10%+ per year, with high-value liquids growing much faster than gas. As a result, margins will continue to improve with cash flow increasing at a much faster pace than production.

At $60 WTI, the company is on pace to generate $350-500m of free cash flow per year from its Karr/Wapiti asset in 2022. This free cash flow theoretically would allow Paramount to buy back more than one third of its share outstanding in a single year.

Sincerely,

Sean Fieler

^[1] Sector exposures shown as a percentage of 12.31.19 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.18 unless otherwise noted. MAG Silver valuation using first full year of production and estimatied 8,000 tpd throughput.

Kuroto Fund, L.P. - Q4 2019 Letter

Fri, 17 Jan 2020 15:12:17 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund gained +5.8% in the fourth quarter of 2019 and was up +7.2% for the full year. By way of comparison, the EM index was up +11.7% in the fourth quarter and +18.6% for the year. [1]

We exited two of our top-five positions last year, Aramex and Garanti Bank. The slowing growth of Aramex’s ecommerce business along with a management change tempered our enthusiasm for the company. With respect to Garanti Bank, the doubling of the bank’s stock price made our investment very profitable but less compelling going forward. We trimmed, but did not exit, our holding in Grana y Montero following their dilutive but necessary capital raise last spring. The company remains a sizable position for us but it is no longer a top-five holdings. The three new additions to the fund’s top-five holdings are Logo Yazilim, Georgia Capital, and Guaranty Trust Bank.

YEAREND top-five holdings

Logo Yazilim

Logo Yazilim is a technology company that provides enterprise resource planning (ERP) software to small and medium sized businesses in Turkey and Romania. As is typical of ERP companies, over half of Logo’s revenues are recurring.

In Turkey, Logo dominates its target market. Amongst small to medium sized businesses using ERP software, Logo’s market share is over 50%. Even more impressively, less than 1% of Logo’s clients switch to a competitor each year. The incredible resiliency of their business was on full display over the past two years as Logo generated strong financial performance throughout Turkey’s economic and political turmoil. Logo’s Romania business, by contrast, is neither as good nor as dominate as their Turkish business. That said, local management in Romania has been making steady progress growing revenues and increasing margins.

Mehmet Tugrul, Logo’s founder, chairman, and 35% owner is responsible for much of Logo’s success. We are particularly impressed with his willingness to engage with other shareholders and his hands-on participation in talent recruitment. Developing world-class software means attracting world-class talent. Tugrul not only understands this but is personally involved in the process.

Given the under-penetration of ERP software with SME clients in Turkey, we expect Logo’s business to grow over 15% per year, with earnings growing over 20%, while generating ROEs over 20%. At 16x 2020 estimated earnings, the shares of this dominant, high-return franchise are still underpriced.

FPT

FPT is a Vietnamese IT outsourcing and broadband company. Through the first 11 months of 2019, FPT recorded 20% revenue growth and 24% growth in profit after tax. FPT’s IT outsourcing business is the company’s principal growth driver, outpacing the company’s domestic broadband business. The company’s IT outsourcing solution continues to take share in Japan and has begun to get traction in the U.S. market as well. The management expects FPT’s outsourcing segment to grow in excess of 20% per year for each of the next three years.

FPT’s management recently broke out a third business line in their financials, education. Years ago, the company entered the higher education business to develop a talent pool for its own IT outsourcing business. That internal business function has now reached scale. At last count, 49,500 students were enrolled in the company’s schools. While FPT’s education segment is still just 6% of the company’s total revenues, we believe it may eventually have significant value as a standalone business. But, even if FPT’s education unit continues to principally serve an internal function, we find it impressive that students are willing to pay to become part of FPT’s core job applicant pool. FPT hires ~40% of the students they graduate.

In recent years, FPT’s chairman and founder, Dr. Truong Gai Binh, has embraced a more streamlined corporate structure as well as more transparent financial reporting. The company’s increased transparency is a direct result of the company’s expansion overseas. FPT’s Japanese and American outsourcing clients want a predictable partner with world-class talent and governance. FPT is delivering on that expectation.

MTN Ghana

MTN Ghana is the dominant telecom and mobile money provider in Ghana. While the company has yet to report fourth quarter results, we estimate that MTN Ghana grew both revenue and earnings over 20% in 2019. This year, we expect the company to pay investors over 80% of its earnings, resulting in an 10.5% dividend yield. More importantly, we believe that, going forward, MTN Ghana will continue to pay out the vast majority of its earnings while maintaining a high growth rate. This particularly desirable combination of a high growth rate and a high payout ratio is made possible by the increasing role of MTN’s capital-light mobile money services.

The value of MTN’s rapid growth and high dividend yield is partially offset by the persistent decline of Ghana’s currency, the cedi. Last year, the cedi declined 11% against the U.S dollar, roughly in line with our expectations given Ghana’s 10% inflation rate. 2020 may be worse, as Ghana’s current president, Nana Akufo-Addo runs for reelection against the country’s former president, John Mahama. We expect more spending and more volatility in the run up to the yearend election results.

While investing in a truly frontier market like Ghana comes with predictable challenges, the dominance of MTN Ghana as well as the quality of its leadership offer the right starting point for such an investment. Selorm Adadevoh, the company’s CEO, is a particularly compelling leader. His TEDx talk gives a taste of his leadership style: watch it here .

Georgia Capital

Georgia Capital is an investment holdings company in the Republic of Georgia. It is run by Irakli Gilauri, the former CEO of the Bank of Georgia and 10% owner of Georgia Capital. Irakli turned Bank of Georgia into one of the best performing banks in the region. He also seeded healthcare and energy startups which turned into large, profitable companies in their own right. Georgia Capital’s broad mandate gives Irakli the freedom to oversee the portfolio of businesses he has helped launch over the past decade in Georgia.

Georgia Capital’s portfolio includes investments in the country’s second largest bank, the largest healthcare company, a water utility, a renewable energy business, a brewery, a winery, an insurance company, an education business, a real estate firm, a hospitality business, and an auto repair business. The bank and the healthcare company are public; combined they cover 78% of Georgia Capital’s market cap. Implicitly, Georgia Capital’s other businesses are severely undervalued given the current price of the holding company. We expect this gap will close as Irakli monetizes several investments in the coming years.

Guaranty Trust Bank

GT Bank is the largest and most profitable bank in Nigeria. The premier financial institution in Nigeria, GT Bank has amongst the lowest cost of funds of any commercial bank in Nigeria. This lower cost of funding allows the bank to generate a 25%+ ROE while taking little lending risk. This low-risk lending strategy, in turn, reinforces GT Bank’s position as the safest commercial bank in Nigeria.

GT Bank’s culture is meaningfully different from every other bank in the country. The difference begins at the top, with Segun Agbaje, the bank’s CEO since 2011. GT Bank’s emphasis on professionalism has allowed it to attract the best talent in-country and executive on its long-run strategic plan. The bank’s superior cost-to-income ratio of 34% captures GT Bank’s focus on both profitability and costs.

The growth opportunities for GT Bank in Nigeria are enormous. Nigeria’s banking penetration is amongst the lowest in the world. We expect GT Bank will grow 15% while earning an ROE of over 25% and paying a dividend yield of over 10% for many years.

Sincerely,

Sean Fieler

END NOTES

Equinox Partners Precious Metals, L.P. - Q4 2019 Letter

Thu, 16 Jan 2020 17:26:05 GMT

Dear Partners and Friends,

yearend Top-five holdings

MAG Silver: 8.9% of the consolidated portfolios’ 12.31.19 value

MAG Silver is the 44% owner of a high-grade, large-scale silver project in Zacateca, Mexico scheduled to begin production at the end of 2020.

At $18 silver and 4,000 tpd, the JV generates a 44% IRR with a cash cost of ~$5 per ounce of silver. At 8,000 tpd, the project’s IRR rises, the cash cost falls, and MAG’s portion of the JV’s free cash flow tops USD$100m per year. In the first year of commercial production, we expect the JV’s free cash flow to be reinvested in the expansion to 8,000 tpd. After that expansion, we expect MAG’s board to either reinvest the company’s free cash flow into high-return projects on the JV property or to return the free cash flow to shareholders via dividends and share buybacks. Following the retirement of Johnathan Rubenstien, MAG’s current chairman, this spring, we expect the new board chair to crisply articulate MAG’s future capital allocation plans.

Sandstorm: 8.4%

Sandstorm owns 190 royalties and streams. Most notably, Sandstorm has an economic interest in Endeavour’s Houndé and Karma projects, Yamana’s Chapada and Cerro Moro, Newmont’s Emigrant, and Equinox’s Aurizona. With record revenue of $89.4m, 23 producing assets, and 63,800 attributable gold equivalent ounces, 2019 was an outstanding year for Sandstorm.

Sandstorm’s management, led by CEO Nolan Watson, have proven to be savvy acquirers of new royalties and streams. Just this past year they acquired attractive, long-lived royalties on Lundin’s Fruta del Norte and Americas Gold and Silver’s Relief Canyon. These acquisitions, financed with free cash flow and debt, coincided with a weak share price and as a result an aggressive repurchase program. The management team’s willingness to buy back 5.8% of their outstanding stock last year, highlights their focus on growing intrinsic value per share.

Unlike its peers, Sandstorm is not a pure royalty and streaming company. In particular, the company holds a 30% equity stake in the Hod Maden mine in Turkey. While this asset has royalty-like characteristics, Sandstorm is an equity owner in the project, not a royalty holder. Accordingly, the market has given the company little credit for the value of this asset. As Hod Maden nears production, we expect the near-term prospect of USD$50m+ in additional cash flow to meaningfully re-rate the company’s stock.

Pan American Silver: 8.3%

Dundee Precious Metals: 7.9%

Detour Gold: 6.4%

Detour Gold owns and operates the Detour Lake open-pit mine in northeastern Ontario, Canada. This single-asset mine produces ~550,000 ounces of gold per year and has a reserve life of 22 years. Given the attractive scale and jurisdiction of Detour Lake, the market has long thought that Detour would be acquired by a larger gold mining company. Accordingly, Kirkland Lake Gold’s CAD$27.50 bid per share for Detour last November came as no great surprise. The transaction captures a more than 100% year-over-year appreciation of Detour’s share price.

The groundwork for Detour’s sale began with Paulson Fund’s successful proxy fight in December of 2018. The resulting board hired Mick McMullen as CEO in May of 2019. Mick promptly cut unnecessary spending and improved the company’s cash flow. The market in turn rewarded Mick with a much higher stock price, and Mick locked in that higher stock price by selling the company to Kirkland. We expect shareholders to vote in favor of the deal at the end of January. And, while we will not be long-term holders of Kirkland, we consider Mick’s quick turnaround and sale of Detour a success.

Sincerely,

Sean Fieler

Swiss Mining Institute 2

Thu, 12 Dec 2019 16:46:42 GMT

The new activists and the active fund preppers - Daniel Schreck

Speech at the Swiss Mining Institute 2019 Conference

Equinox Partners, L.P. - Q3 2019 Letter

Thu, 14 Nov 2019 15:36:10 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners, L.P. was down -3.4% in the third quarter of 2019. For the year to date through October 31 ^st , the fund was up +7.8%.

the devaluation of common sense

"There's no place to go. You just have to ride it out. You invest even though you expect the price to decline."

—Robert Schiller, October 23 ^rd , 2019

“The repo operations have…been effective at restoring calm in money markets…”

—Lorie Logan, senior vice president of the New York Fed’s Markets Group, November 4 ^th , 2019

The U.S. stock market is making new highs as the Federal Reserve spends billions to calm markets. The coincidence of these events suggests a positive consensus view of the Fed’s intervention into the repo market. The purchases are evidence that our central bank stands ready to address whatever problems may arise in the plumbing of the financial system. As such, the Fed’s action does not raise concern but instead instills confidence about the Fed’s willingness to act preemptively.

This logic strikes us as overly simplistic and the accompanying confidence misplaced. Just because the Fed has taken $193 billion of repos onto its balance sheet since September 17 ^th does not mean the Fed can or will do the same for other asset classes. Moreover, if overnight repo rates can jump almost five-fold without warning, it is reasonable to think that there are other problems lurking in our debt-laden financial system.

Two segments in particular strike us as potential flash points: auto loans and leveraged loans. Both sectors have more than $1 trillion in current credit outstanding, would be politically awkward to rescue, and evince warning signs despite their still contained delinquencies.

aUTO lOANS

Since the global financial crisis in 2008, U.S. auto loans have nearly doubled. “U.S. consumers held a record $1.3 trillion of debt tied to their cars at the end of June, according to the Federal Reserve, up from about $740 billion a decade earlier.”

Such impressive credit growth is typically accompanied by an easing of some sort, and booming U.S. auto loans are no exception. Rather than lowering FICO score requirements—although this has happened at the margin—lenders have radically extended the tenor over which they are willing to make auto loans. As a result, “[a]bout a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to credit-reporting firm Experian PLC. A decade ago, that number was less than 10%...”

The increased tenor of auto loans has been necessitated by a combination of rising car prices as well as the growing need of borrowers to roll-over negative equity from their previous car loan into their new car loan. About a third of consumers trading in their car to purchase a new car had negative equity. Sensing that such auto loans are a train wreck waiting to happen, we shorted the corporate debt of Ally Financial, America’s largest auto finance company, earlier this year. We subsequently covered the short at a slight loss and hope to reestablish the position when the sector’s delinquencies begin to actually tick up.

lEVERAGED LOANS

We see a similar problem in the leveraged loan market. Like the auto loan market, the quality of leveraged loans has deteriorated in recent years. This deterioration is captured by two data points: the rapid rise in covenant-light loans, which now account for more than 80% of leveraged loans outstanding, and the rising debt to EBITDA ratios of newly issued leverage loans, which now stand at over 5.5x. Both metrics are cause for concern. But what we find most disturbing about the leverage loan market is the growing dollar value of these loans that are held by CLOs.

CLOs performed better than other structured-products in the 2008 downturn. Accordingly, they have been embraced with gusto in this cycle, with new issuance above $100 billion annually. The thinking underpinning these flows mirrors the logic that caused so much trouble in 2008. While slicing and dicing a credit with good historical performance does not necessarily create a problem, problems do tend to arise when investors behave as if history and structure have made them immune from the systematic risk inherent in the underlying credits. In the case of leveraged loans, we believe that we crossed this threshold some time ago.

don’t throw in the towel like schiller

Despite the obvious valuation problem with conventional asset classes, the Robert-Schiller-throw-in-the-towel mentality is just wrong. A wide variety of assets have not participated in the current bubble. These out-of-favor investments are no longer widely held by alternative investment vehicles, including hedge funds. Many hedge funds, like just about everyone else, are now heavily invested in large tech stocks. As such, our persistence in owning underappreciated and even maligned assets in advance of a market correction is increasingly unique.

While it has admittedly been a long wait, our recent results suggest that our strategy may finally be about to bear fruit. After declining for the first ten months, our E&P portfolio has risen sharply in November. Our gold miners are up 43% for the year to date. And, our emerging markets portfolio has just turned positive for the year after ten months of sideways trading. Moreover, despite their recent upticks, our E&P, mining, and emerging markets companies trade at incredibly low valuations. Based on our estimates for next year, our E&P companies trade at 5.0x cash flow, our gold and silver miners trade at 4.1x cash flow, and our emerging markets companies trade at 5.5x earnings.

don’t expect a repeat of 2008

When the current bull market in financial assets eventually turns, we expect the experience to be very different than the last crash. Investment decision making has changed radically over the past decade. 80% of equity trading is now based on passive flows and algorithms. It is therefore completely unclear how equity markets will behave in a stress test. It is equally unclear how the bond markets will behave if dealers are unwilling to take on inventory. While impossible to predict with any precision, it stands to reason that the massive reduction in prudential judgement guiding investment decisions will not result in less volatility. Rather, we expect more volatility, and consequently more upside, in the contrarian sectors in which we’ve invested. We believe that owning an actual alternative to today’s most overvalued financial assets in advance of a correction is more important than ever.

Sincerely,

Sean Fieler

^[1] Sector exposures shown as a percentage of 9.30.19 AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Equity short positions of operating companies are netted out against long positions. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 10.31.19 unless otherwise noted.

^[2] The Seven Year Auto Loan. WSJ, Eisen and Roberts, October 1, 2019.

^[3] Ibid

^[4] A $45,000 Loan for a $27,000 Ride . WSJ, Eisen and Andriotis, November 9, 2019

^[5] Source: Arena Investors, LP.

^[6] Emerging markets companies exclude operating companies trading in developed markets. Valuation as of November 13, 2019.

^[7] Source: CNBC .

Kuroto Fund, L.P. - Q3 2019 Letter

Wed, 06 Nov 2019 15:20:36 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund appreciated +1.3% for the year to date through September 30 ^th and is up +1.0% for the year through October 31 ^st . By comparison, the EM index was up +6.2% for the year to date through September 30 ^th and was up +10.7% through October 31 ^st .

Our flattish year-to-date performance belies the remarkable volatility of the underlying stocks we own (see scatter plot). As of the end of the third quarter, the average company in our portfolio (on an equal-weighted, absolute basis) had moved 16.8% since the start of the year. [1]

not since 2008

Kuroto Fund trades at 9.1x this year’s earnings and just 7.1x 2020 estimated earnings. Our fund has not traded this cheaply since December 2008, when the current year P/E ratio was 9.3x! Continued investor pessimism about emerging markets and the growing earnings of our companies has rapidly reduced the valuation of our portfolio. The resulting combination of valuation, growth, and quality makes now a particularly opportune moment to deploy capital, in our opinion.

the market’s year-to-date favorites

Amongst our positively performing companies this year, we have observed two clear themes: (a) high-growth companies in select, high-growth markets; and (b) defensive stocks in more developed countries such as South Korea and Poland. Businesses in the first category are attracting investors willing to pay for growth, while our businesses in the second category are attracting risk-averse capital still committed to emerging markets. As the scatter plot above makes clear, we’ve benefited from the meaningful ownership of a handful of such businesses this year.

FPT exemplifies a high-growth company in a high-growth economy, while Neuca exemplifies a stable business in a more developed market. The year-to-date share price performance of these two companies is eye-popping. Specifically, in U.S. dollar terms, the shares of these two companies are up 57% and 49% for the year through October 31 ^st , respectively. The desirable growth characteristics of both FPT and its country of domicile, Vietnam, are obvious. Through nine months, FPT’s reported revenues grew 18% and Vietnam is on pace to generate real GDP growth of 6.5% this year. [2] Similarly, Neuca’s defensive characteristics are equally apparent to investors. This Polish pharma distributor grew its topline just 4.8% in the first half of this year while Polish real GDP grew 3.8%. [3] Despite this modest growth, both the company and the country are perceived to be defensive in the emerging markets context.

little tolerance for jurisdictional risk

The positive returns of FPT and Neuca contrast sharply with the share price performance of our companies domiciled in less-desirable jurisdictions. Our companies in Peru, Ghana, Tanzania, Georgia and Sri Lanka have suffered from risk aversion. Peru is struggling with an impeachment hangover, Ghana suffered from a banking crisis, Tanzania’s exchange now allows only limited price discovery in their equity markets, Georgia saw geopolitical tensions with Russia flare up, and Sri Lanka suffered a terrorist attack that killed dozens of people. The long-term economic fundamentals of these countries continue to be supportive of above-average growth, and the highly cash generative companies which we own in these jurisdictions are well positioned given their particular defensive characteristics. Nevertheless, these markets and our companies doing business therein have suffered steep share price declines this year almost regardless of their operating performance.

MTN Ghana’s share price performance typifies the returns of a superior company in a difficult jurisdiction this year. This dominant telecom and mobile money provider is down 17% for the year through October 31 ^st despite impressive operating results and low valuation. As affirmed by its Q3 results, MTN Ghana’s core telecom business is growing over 20% and its valuable mobile-money business is growing over 40%. That these spectacular results are coupled with a single-digit earnings multiple is surprising. The net result is that the company’s shares are down 17% while the local stock market is down 23% in USD through October 31 ^st .

zero tolerance for operational problems

Our companies that have experienced company-specific operational problems have performed horribly regardless of their valuation. Blue Label, a South African telecom distributor with an ill-fated investment in a local cellphone carrier, is down 50% for the year through October 31 ^st . The company now trades at 3x 2019 earnings excluding the writedown in its cellphone subsidiary. UFO Moviez, an Indian media distribution business which suffered delays in achieving regulatory approval, is down 39% through October 31 ^st . The company now trades at 6x 2019 earnings. And finally, Atento, a Brazilian outsourcing company that has struggled to grow revenues, is down 25% for the year. The company now trades at 6.5x our estimate of 2020 earnings. While we too are disappointed by these companies’ operating results, the market’s clear overreaction to such disappointments is creating real opportunities for better-business value investors like ourselves.

Sincerely,

Sean Fieler

END NOTES

[2] Source: IMF estimates

[3] Source: IMF estimates

Kuroto Fund, L.P. - Q2 2019 Letter

Tue, 27 Aug 2019 14:26:58 GMT

Dear Partners and Friends,

As investors pile into the ‘safest’ and most liquid assets they can find, the last thing they want to own are less liquid emerging and frontier markets equities. After all, when developed markets catch a cold, emerging markets get pneumonia. This tip-of-tongue logic has driven government bonds and large tech stocks up and emerging markets stocks down. Even within emerging markets, investors are showing a strong preference for size and liquidity. Smaller emerging market stocks have noticeably underperformed emerging market equities indices this year. It seems, investors still willing to put their money into emerging markets want to make sure they can change their mind.

The preceding logic does not just capture the mindset of investors based in the developed world, but that of developing world investors as well. Wealthy Latin Americans, Africans, Asians and Middle Easterners have crowded into American government bonds and American stocks along with their first world peers. The gravitational force of the decade-old bull market in developed world financial assets has attracted capital from the far corners of the earth.

T he notion that emerging markets could decouple from developed markets and fare better in a downturn is no longer contemplated anywhere. That economic stress leads to dollar strength, commodity weakness and emerging market pain is an accepted truism. Accordingly, emerging markets with conservative monetary policy, low debt loads and stable politics won’t be rewarded for their good behavior in a downturn, but will merely be punished less. More importantly, emerging market financial assets will significantly underperform developed market assets in a stress environment.

In our opinion, such thorough pessimism about emerging market equities reflects a serious failure of imagination when it comes to the future. Accordingly, we offer five reasons to be actually bullish on the emerging markets in which we are invested.

Debt Matters

While the world has lever up to record levels, debt accumulation remains very uneven across countries. The total debt to GDP of the average G7 country is 274%, while the average total debt to GDP of our top seven countries is just 110%. The corporations and governments within the G7 are more than twice as leveraged as the corporations and governments in our top seven markets, while the average G7 consumer is four times more leveraged. [1]

Economic Growth Matters

Our top seven countries are on pace to grow at 4.1% in 2019, while the G7 economies are forecasted to grow just 1.2% this year. [2] The higher rate of growth in our countries is a result of favorable demographics, manageable debt levels, and attractive investment opportunities. These superior attributes deserve a valuation premium, not a discount, in our opinion. [3]

Orthodox Monetary Policy Matters

While the developed world is still trapped in endless cycles of quantitative easing, the emerging world, by and large, never started down this path. [4] As a result, the aggregate balance sheet of the average G7 central banks increased 3.5x as a percentage of GDP from 2008 to 2016, whereas the central bank balance sheets of our top seven countries remained nearly flat as a percentage of GDP over the same time period. [5]

Valuation Matters

Our portfolio trades at 8.0x next year’s estimated earnings, while the S&P trades on a forward PE of 17.5x. Given the superior growth rate of our emerging markets, this valuation disparity should narrow.

Inflation Returns

While an uncontrolled uptick in inflation would clearly be negative for developed world equities, the effect of higher inflation on emerging market equities would be more mixed. Not only is much of the emerging world commodity rich, but the financial architecture of the emerging world remains far more amenable to higher rates of inflation.

Sincerely,

Sean Fieler

END NOTES

[1] Source: IMF , Bloomberg . Debt numbers include household, non-financial corporate, and government debt for each country except Ghana, which includes only government debt due to lack of available information on household and corporate debt. Debt numbers exclude financial corporate debt as well as debt issued by state-owned enterprises. The G7 debt number is the average of the debt numbers for each of the seven countries that constitute the G7, while the debt number for our top seven countries follows the same method.

[2] Source: IMF .

[3] Source: Lazard Research Insights .

[4] Source: Yardeni .

[5] Source: FRED data. The average G7 country’s central bank balance sheet increased from 3.9% to 17.6% as a percent of GDP from 2008 to 2016, while the balance sheets of our countries’ central banks increased from 5.8% in 2008 to 6.4% in 2016.

Equinox Partners, L.P. - Q2 2019 Letter

Wed, 07 Aug 2019 14:51:09 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners, L.P. was down -2.2% in the second quarter of 2019. For the year to date through August 6 ^th , we estimate the fund was up +17%.

sTILL NOT MUCH ENTHUSIASM FOR GOLD

While gold mining stocks are up sharply this year, there is no groundswell of enthusiasm for the sector. In marked contrast to the 2016 bull market in gold mining shares, capital has flowed out of the GDX and GDXJ gold mining indices this year. During 2016 these two indices collectively attracted $5.7b of inflows. By contrast, through August 5 ^th of this year, these two indices have suffered cumulative outflows of $2.9b. Incredibly, the daily outflows from these indices continued well into July. Active managers of gold mining portfolios also experienced outflows in the first half of 2019. The gold mining mutual funds of Oppenheimer, Tocqueville, and Franklin-Templeton collectively distributed $89m more to their investors than they took in the first half of this year.

With such modest levels of investor interest in the sector, gold mining companies have appreciated roughly in proportion to their net asset values. Accordingly, the Price-to-NAV ratio for gold mining companies has remained broadly flat this year. There are, however, several notable exceptions to this trend. Detour’s shares, for instance, are up 101% through August 5 ^th , while the company’s NAV is up 65% over the same period. But, as the graph of RBC’s coverage universe makes clear, P/NAV multiples for the industry remain roughly flat for the year to date as of July 31 ^st .

A further indication that the bull market in gold miners is just beginning is the hesitance of the sell-side to adopt a higher price deck for gold. As of August 5 ^th , the sell-side brokers we use were still modeling a long-term, average gold price of $1327, while today’s spot gold price is almost 14% above that figure. Specifically, BMO is using $1331, RBC is using $1300, and Cormark is using $1350. The subdued nature of this rally gives us confidence that the move upwards in the price of gold mining shares is still early as we break out of a very deep, eight-year bear market.

Responsible Investing is hard work

Our holdings are long-term partnerships with the managements and boards of the companies in which we are invested. Over the years, our partnership approach to investing has generated many valuable insights. In some cases, our meetings with management and directors have given us a much greater appreciation for the strategic challenges and opportunities our companies face as well as the skill with which corporate insiders are navigating these challenges. Other times, our interactions have revealed managements and directors who say the right thing but see their interests as fundamentally divergent from those of minority shareholders such as ourselves. In almost every case, our engagement has proven invaluable to our evaluation of management and corporate governance.

In addition to a better understanding of the people with whom we are invested, our long-term relationships with management and directors offers us regular opportunities to advance our own thoughts concerning the strategic direction of our companies. In our experience, an open dialogue characterized by informed and constructive back and forth is a natural result of a good relationship between well-aligned business partners.

While our input varies from company to company, we regularly emphasize the importance of disciplined capital allocation. For instance at Georgia Capital, we’ve advocated for share buybacks over business diversification given the holding company’s low valuation. In the case of MAG Silver, we’ve advocated for a reinvestment policy focused exclusively on its high-return joint venture property. At Ferreycorp, we’ve pushed for the sale of the company’s non-core, low-return businesses. With our Turkish company, Logo, we’ve discouraged management from scaling up the company’s unprofitable Indian subsidiary. And, in the case of Paramount Resources, we supported divestiture from lower-return infrastructure assets. While each case is different, we believe that our vantage point as a long-term shareholder gives us particular clarity when it comes to the rational allocation of capital.

These frequent interactions with the management and directors of the companies in which we are invested have also provided us an intimate appreciation for the evolving corporate governance landscape. Most notably, over the past two years, we have observed large passive funds becoming some of the most engaged and aggressive shareholders. The growing engagement of passive funds on issues of governance is not principally the result of investor pressure. These products are held for their low fees, liquidity, and accurate benchmarking. Instead, the impetus for these passive money managers’ growing interest in governance appears to us threefold: a desire to increase their market dominance, a long-term effort to attract Millennial investors, and an appeal to elite opinion makers in New York and Boston.

To better fulfill their role as arbiters of good corporate governance, the largest passive managers have all built out stewardship teams: “The Big Three in passive investment – BlackRock, Vanguard and State Street, which collectively oversee more than $15tn – have beefed up their stewardship teams in recent years and argue that they do hold companies to account. BlackRock has 43 people working in stewardship, Vanguard 35 and SSGA a dozen.”

While sizable, these centralized stewardship teams are dwarfed by the number of companies in which passive managers are invested. Consequently, passive managers remain drawn to cookie-cutter solutions that can be uniformly applied to their holdings. Leaving aside the obvious hot-button issue of quotas based on sex and race, we want to focus on the passive managers’ problematic approach to director independence. As engaged shareholders, we appreciate just how difficult it is to find directors who will actually represent the interest of shareholders when they are in tension with the desires of management. We were particularly disappointed this spring when passive shareholders failed to signal their support for one such director on Great Panther Mining’s board.

Great Panther acquired control of Beadell Resources in February of this year in a friendly merger. As part of the transaction, every member of Beadell’s board except one, Nicole Adshead-Bell, resigned. Nicole’s presence on the combined board offered important representation for the shareholders of Beadell in the new company—representation which any shareholder interested in board independence should have supported. Unfortunately, as the former CEO of Beadell, Nicole was not technically independent and therefore did not check the box for the passive managers seeking to increase the number of independent directors. While their implicit lack of support for her was not the precipitating event in her departure from the board this spring, it was an important factor in our opinion.

More broadly, we believe the premise that disinterested (“independent”) directors are somehow most qualified to direct companies is delusional. There will simply never be a disinterested priesthood that will govern companies better than the people who actually have a sizable financial interest in the companies’ success. Unfortunately, this obvious fact is not going to stop passive managers from putting forth a slew of independent directors for years to come.

Normally, fund managers advocating an ill-conceived governance strategy would underperform their benchmarks and lose assets. In the case of passive funds, however, they are the index. So, even if their proposals hurt the interests of minority shareholders in every company they own, they can still deliver their promised performance. Moreover, to the extent that they have an interest in boosting the prices of their holdings, this interest is best achieved by stifling competition amongst firms rather than improving each individual firm, a point detailed in an article by Jose Azar, Martin Schmalz and Isabel Tecu published in the Journal of Finance last summer.

Despite their serious shortcomings, passive managers are here to stay and will almost certainly become increasingly involved in the governance of the companies in which we are invested. The open question is whether other active managers will become more engaged on points of governance when they see the agenda of passive manager damaging their companies. This is, perhaps, the most realistic silver lining of the passive managers’ foray into corporate board rooms. If other active managers were more engaged with the companies in which they invest, there would be less opportunity for the passive managers to dictate board priorities. For our part, we will remain active owners of companies in which we are invested.

Sincerely,

Sean Fieler

^[1] Sector exposures shown as a percentage of 7.31.19 AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Equity short positions of operating companies are netted out against long positions. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 7.31.19 unless otherwise noted.

^[2] etf.com/etfanalytics/etf-fund-flows-tool. June 1—July 24 outflows: GDXJ -$481m; GDX -$596m. However, they have seen inflows since July 19 ^th .

^[3] Bloomberg, using fund total assets and changes in net asset values for the given mutual funds.

^[4] FTfm, Thompson, Jennifer. US index funds less likely to hold companies to account, study finds. August 4, 2019

^[5] The Journal of Finance, Vol 73, No 4, August 2018. Azar, et al. Anticompetitive Effects of Common Ownership

Equinox Partners Precious Metals, L.P. - Q2 2019 Letter

Thu, 25 Jul 2019 16:15:19 GMT

Dear Partners and Friends,

Still not much enthusiasm

While gold mining stocks are up sharply this year, there is no groundswell of enthusiasm for the sector. This broad lack of enthusiasm is clearly reflected in the year-to-date capital out flows from the GDX and GDXJ. During the 2016 surge in gold mining shares, these two indices attracted $5.7b of inflows. By contrast, this year through July 23, the two indices have experienced $3.2b in outflows. And, even since gold began to climb in June, the indices have experienced nearly consistent net outflows. [1] Active managers of gold mining portfolios also experienced outflows in the first half of 2019. The mutual funds of Oppenheimer, Tocqueville, and Franklin-Templeton collectively distributed $89m more to their investors than they took in the first half of 2019. [2]

With such modest levels of investor interest in the sector, gold mining companies have appreciated roughly in proportion to their NAVs. Accordingly, P/NAV for the gold mining companies has remained broadly flat for the year. There are several notable exceptions to this trend. Detour’s shares, for instance, are up 73% for the year to date, while the company’s NAV is up 27% over the same period. But, as the graph of RBC’s coverage universe makes clear, P/NAV multiples for the industry remain roughly flat for the year to date.

A further indication that the bull market in gold and silver miners is just beginning is the hesitance of the sell-side to adopt a higher price deck for gold. As of July 22, the sell-side brokers we use are still modeling an average gold price of less than $1300, 9% below today’s spot gold price. Specifically, BMO is using $1331, RBC is using $1300, and Cormark is using $1250. Needless to say, the subdued nature of this rally gives us confidence that the move upwards in the price of gold mining shares is still early as we break out of a very deep eight-year bear market.

gold/silver ratio

The gold silver ratio peaked at 93x on July 5 and subsequently reversed to 86x. The peaking of this ratio is an important early indicator of investor interest returning to precious metals. The physical gold market is approximately 200x larger than the silver market. Accordingly, as capital begins flowing into precious metals, silver tends to outperform. The math of a $15b investment is instructive. Such an investment would account for 0.1% of the world’s gold but more than 20% of all the silver available for delivery.

We expect that a continued upward move in silver prices will be magnified by our silver mining investments. Pan American Silver, MAG Silver, Bear Creek Mining, and SilverCrest Metals collectively account for the vast majority of our silver exposure. We’ve enclosed a brief description of each:

Pan American is a diversified precious metals producer which derives half of its current year revenue from silver. The company’s seasoned management team and scale enabled them to acquire quality assets throughout the bear market. Just last year, Pan American was able to acquire Tahoe Resources at a particularly attractive valuation. When Tahoe’s Escobal mine resumes production, over 50% of Pan American’s revenues will come from silver.

MAG Silver’s Juanicipio JV is currently under construction and will begin production next year. Given Fresnillo’s strong track record in the region, we are expecting a smooth, on time ramp-up. The JV mine will begin with production of 4,000 tonnes per day and increase to 8,000 tonnes per day within two years. At 8,000 tonnes per day the JV will generate more than $130m USD to MAG’s account every year.

Bear Creek Mining controls a 446m ounce silver project in Peru. The economics of the project are outstanding at $20 silver. Once the market begins to discount $20+ silver, Bear Creek should be able to finance the project’s substantial upfront costs while not excessively diluting the current shareholders. With more than $30m in cash on its balance sheet and a monthly cash burn rate of a little over $1m, the company is well-positioned to remain patient for the right silver price.

SilverCrest Metals is an exploration company focused on advancing the Las Chispas project in Sonora, Mexico. Over the last 3.5 years, the company has hit a series of impressive milestones. As of May, the company has a resource of over 100m ounces and an NPV of over $400m USD. The company’s feasibility study is expected in late 2020. With strong FCF margins, future exploration upside, and a high-quality management team, we believe SilverCrest can grow its silver production for years to come.

Sincerely,

Sean Fieler

Equinox Partners Precious Metals, L.P. - Q1 2019 Letter

Fri, 10 May 2019 16:28:04 GMT

Dear Partners and Friends,

Our positive performance so far this year is in part a reversal of the aggressive tax loss selling some of our companies endured at the end of last year. Goldmoney, Altius, Great Panther, West African Resources, Mandalay, and Bear Creek are each up double digits this year after having declined double digits in Q4 2018. Shortly after Canadian tax loss selling season expired on December 27, the shares of these companies began rebounding on little to no fundamental news.

We also own a handful of companies that had very good Q4 2018 performance and which continued to perform well thus far in 2019. Sandstorm and Dundee Precious Metals are up over 10% for the year to date after appreciating substantially in Q4 of last year. The shares of MAG Silver and Gold Road, which were down slightly in Q4, are also up substantially for the year to date. In these four cases, the share price performance is correlated with positive company specific developments, which we highlight as follows:

· MAG: On April 11, 2019, MAG’s joint venture partner, Fresnillo, formally announced their decision to put the Juanicipio joint venture into production. While the JV has been actively building the mine for more than a year, this announcement put to rest most of the lingering doubts about Fresnillo’s timeline or intentions with respect to the JV property.

· Gold Road: After some initial slippage last year, Gold Road’s Gruyere project has been tracking the company’s revised schedule and budget. Recent site visits have confirmed that when the asset comes on line later this year it will be a world-class facility with a mine life of at least 15 years.

· Dundee: The production start date for Dundee Precious Metal’s Krumovgrad mine slipped one quarter, but the build came in ~$13 million under budget. While this result exceeded the markets expectations, the market is waiting to see how Dundee’s board will allocate the company’s substantial free cash flow before more fulsomely revaluing the company.

· Sandstorm: As of late April, Sandstorm had completed over 1/3 of the share buyback program they announced last September. Over the course of the twelve-month buyback program, we expect Sandstorm to reduce their share count by ~10%. The company has continued to find attractive streaming deals with double-digit IRRs and is making good progress on their JV project in Turkey.

portfolio Changes

In March, we sold the entirety of our Fortuna Silver position and invested that capital into Pan American Silver. While we continue to have confidence in Fortuna’s management team, particularly CEO Jorge Ganoza, the company’s Lindero mine in Argentina has suffered from a series of problems. Fortuna’s experience is proving that even for seasoned Latin American operators, Argentina is often an unworkable jurisdiction. Local engineering-and-construction firms have been unable to deliver on schedule and the local work force is extremely inefficient. Add to this the new export tax and the possibility of a shift to a more unfriendly government, and we believed the time to sell had arrived. We hope to partner with the excellent team at Fortuna again, but we’d like to do so without the aggravation of Argentina risk.

Pan American Silver, our substitute for Fortuna, is trading at NAV with silver at $15. Pan American’s management team is top-notch, and Pan American’s purchase of Tahoe Resources has given them ownership of one of the best non-producing silver mines in the world. Higher silver prices will result in the rapidly growth of this well run, diversified company’s NAV.

With the $25m capital addition in late March, we also added three, more liquid companies to the SL portfolio: Alamos Gold, Detour Gold, and B2Gold. Of these, Detour aligns best with our investment philosophy, and has become the largest of the three positions. Detour Gold trades at an attractive ~0.5x P/NAV. Moreover, the Paulson team’s involvement assures us that the board is well aligned with shareholders. Importantly, Detour’s board has managed to fill their CEO position with Mick McMullen, an executive known for his focus on culture and cost control. While relatively high cost at $1000 AISC, Detour provides good governance, long-mine life, and excellent jurisdiction at a discounted valuation.

Alamos, like Detour, trades at 0.5x-0.6x P/NAV. The company is making good progress with the Young-Davidson mine in British Columbia and its Island Gold mine continues to perform well. The company has also moved the permitting process for its Kirazli asset in Turkey forward. While the market remains skeptical about the path forward at Kriazli—as do we—the company’s shares are undervalued even if Alamos continues to struggle to get this particular asset into production.

We bought B2 and subsequently sold the company as the shares appreciated from our initial purchase price. The company has an attractive mix of assets but is trading at close to $300 per reserve ounce: at the upper end of the valuation we are willing to pay. We have reinvested these funds into Detour and K92.

With a market cap of approximately $200m USD, K92 Mining is the smallest company we added to our portfolio this year. Operating a single mine in Papua New Guinea, it trades at ~0.5x-0.6x P/NAV. The company is expanding the mill, which in turn is increasing production and driving cash flows higher. More importantly, the company’s currently exploration program will likely double the size of their resource and make K92 an attractive acquisition target for intermediate gold mining companies.

Sincerely,

Sean Fieler

Equinox Partners, L.P. - Q1 2019 Letter

Fri, 10 May 2019 14:58:17 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners, L.P. was up +14.4% in the first quarter of 2019 and is up +8.4% for the year through May 8.

the federal RESERVE'S FUTURE

For a decade, our portfolio and quarterly letters have reflected our conviction that the Fed would not be able normalize interest rates. The Fed’s pivot since December is clear evidence that we remain correct about this critical point. Meaningfully positive real rates of interest are incompatible with our deeply indebted economy.

We have also long believed that once it became clear the Fed could not normalize interest rates that the Fed would begin to lose credibility. This has not happened, at least not yet. In fact, despite their recent flip-flop on rates, the Fed now appears to be more powerful than ever. At the moment, the Fed seemingly has the power to manage not just the bond market, but the stock market and the economy as well. Incredibly, these powers appear impervious to President Trump’s open advocacy for lower rates and the mainstreaming of Modern Monetary Theory (MMT).

A variety of forces have underpinned the Fed’s remarkable resilience. First and most importantly, other developed world central banks continue to pursue radical monetary policies, making the Fed appear normal on a relative basis. Second, the U.S. dollar has proven indifferent to political criticism of Fed policy and growing U.S. fiscal deficits. Third, inflationary expectations remain firmly anchored. And, fourth, investors remain confident that the Fed will keep both long and short-term interest rates low. As a result of these factors, the Fed finds itself with at least the appearance of an increased, rather than diminished, ability to influence the price of financial assets and manage the economy.

The mainstreaming of MMT at a moment when the Fed enjoys the perception of heightened powers is no coincidence. The Fed’s appearance of being able to do so much naturally leads to demands to do even more. No future U.S president is going to sit idly by as the Fed tightens monetary policy to manage the bond market while the alternative, bond buying, remains potentially costless. Instead, future presidents will demand a Fed that finances more growth if they are Republicans, or funds more government solutions if they are Democrats. These escalating political demands will eventually push the Fed to its breaking point, unless the market does so first.

As such, the critical question for investors is what is the likely outcome for financial assets when the Fed’s powers of manipulation eventually fail? Historically, an overextended Fed would have spooked the bond market. But, with quantitative easing now just another tool in their toolkit, this is not our base case. Moreover, with other central banks in the same boat as the Fed, it is not clear to us that the dollar will weaken relative to the euro, yen & pound. What is clear to us is that the gold price will strengthen as the Fed demonstrates its limitations.

The real puzzle for gold investors is why gold prices are not already significantly higher given the Fed’s actions in recent years. Having mulled this question over since gold’s 2011 peak, we believe that gold has undergone its own form of “quantitative easing.” While the supply of physical gold has increased by less than 2% a year, the supply of gold futures and derivatives has expanded much more rapidly. The effect of this supply of paper gold has been particularly noteworthy this year. Just in the past month, there have been two instances of over $1b of notional gold sold into the futures market in the space of minutes. While the unexpectedly abundant supply of gold futures for sale has nothing to do with the physical supply of gold, it has had a clear effect on the gold price in the short term.

Happily, growing central bank gold demand will not be satisfied by the seemingly limitless supply of gold futures and other derivatives. Central banks don’t want paper gold, and they are increasingly insisting on physical delivery of the gold they own. The same is true of Asian gold demand. Over time, growing central bank and Asian investor demand for physical gold will make the abundant supply of gold futures and derivatives less relevant to the price of gold. Needless to say, the result should be a much higher gold price. And, with central banks accumulating gold at the fastest pace in 50 years, we believe the peak of paper-gold’s influence should soon be behind us.

Since 2011 weak gold prices have coincided with even weaker shares of gold mining companies. The compounding of these bear markets makes it possible for us to own excellent companies with great management at low valuations at a time when the underlying commodity that they produce is itself undervalued. We currently own gold mining companies at fractions of their NAV and at low multiples to cash flow. Given the attractive risk/reward of these investments and the path the Fed is on, we’ve allowed our weighting in gold mining companies to touch 60% for the first time.

We also remain short low-yielding sovereign and corporate debt. We continue to own deeply out-of-favor E&P and emerging market companies that are not part of the financial asset price bubble. And, we’ve begun to add to our equity shorts that are part of the bubble. The ten-year bull market in U.S. equities has given rise to a crop of businesses that are overvalued, capital intensive, and vulnerable to competition. Tesla clearly fits this bill. We’ve also recently shorted shares of Alarm.com and Netflix, to name two new positions. Our short equity exposure is presently -7.4%. While we are mindful that today’s frothy investment environment could become crazier still, the time is ripe for adding equity short positions.

Responsible Investing is hard work

We continue to right-size our business to correspond with the ~$500m of assets we have under management. In January, we replaced our trader, Gerald Kane, with Nicholas Engel, an existing analyst and experienced trader. The change was made possible by the implementation of a new order management system that greatly reduces the time required to execute and settle trades. Nick is able to better integrate our research and trading activities, which is an obvious advantage. At the end of April, we parted ways with Dan Gittes, a partner of 15 years who joined us straight out of Williams College in 2004. During his time here, Dan accumulated broad experience in emerging markets. We wish both Dan and Gerry well in their next endeavors. Our team of 11 people now consists of six investment professionals and five in operations.

Sincerely,

Sean Fieler

^[1] Sector exposures shown as a percentage of 3.31.19 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 3.31.19 unless otherwise noted.

^[2] Source: As observed by our trader on Bloomberg. See also: ZeroHedge and usagold.com

Kuroto Fund, L.P. - Q1 2019 Letter

Fri, 10 May 2019 14:36:46 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund appreciated +3.8% in the first quarter of 2019 and is up +3.0% for the year through May 8. By comparison, the EM index is up +9.4% for the year through May 8. [1]

Avoiding CHINA

For 20 years we have avoided China. Our decision to eschew sizeable investments in China is in part a product of our experience making small investments in China. In almost every case, we were surprised by the opaque influences on our companies, and when things went wrong, we found ourselves wading through spin and obfuscation.

Given this experience, it would be easy for us to write-off China as simply too political and too opaque for investors focused on business quality and governance. This conclusion, however, fails to capture what we find so uniquely problematic about China. After all, we are invested in Turkey and Vietnam: two highly political economies in which the lines between corporate activity and the government are often far from clear. So, we thought it would be useful to distill down exactly what we find so uniquely unattractive about China.

When an emerging market goes wrong, the local stock market and currency typically become volatile and unpredictable but the overall framework for the country’s macroeconomic success or failure tends to remain surprisingly straightforward. Turkey, for example, borrowed way too much money from abroad, unwisely channeled much of that capital into a domestic real-estate bubble, and has been using a variety of tricks to delay the fallout from their economic mismanagement. Aspects of Turkey’s crisis management have been orthodox, including higher interest rates, while other measures, such as overstating foreign currency reserves and price controls, are unorthodox but not entirely surprising. It remains to be seen if Erdogan’s half measures and survival instincts will be sufficient to prevent a deepening of the current economic and political crisis in Turkey. But, at least we can track the variables: e.g. tight monetary policy good, redoing the election in Istanbul bad.

Vietnam is not facing anything like the crisis in Turkey. Instead, they are wrestling with a more typical emerging market scenario. The country’s policymakers are attempting to contain inflation and manage their currency without slowing GDP growth too much. To achieve the desired mix of outcomes, the government has not been above using its influence over utilities to hit topline inflation targets. That said, Vietnam’s policy makers are clearly reluctant to use these controls and have been liberalizing the economy over time. Most notably, the government of Vietnam has sold off several sizable state-controlled enterprises. As a result of this overarching trend, we can both track their progress and backsliding: e.g. privatizing state-owned enterprises good, copying China’s great fire wall bad.

China, like Turkey and Vietnam, wants to deliver a desirable combination of growth, inflation, and asset price stability, but unlike Vietnam or Turkey, China is a superpower. Accordingly, China has the ability to influence not just the domestic but the global framework through which its policies are evaluated. Well informed people often cooperate with China’s spin on things out of self-interest. As a result, the internal tensions in the Chinese economy are much more difficult to pin down. The last three years provide a useful case-in-point.

By late 2016, China appeared to be on the verge of a macroeconomic and political meltdown. The RMB had fallen 10% from its 2015 peak, and China had lost $1 trillion USD in FX reserves in two years. China responded to this crisis with further restrictions on their capital account. But, with domestic debt having increased rapidly, it was far from clear that the Chinese economy and RMB would stabilize.

A dding to the crisis, the looming 19 ^th Party Congress set for the fall of 2017 promised to test the remaining strength of the Jiang Zemin faction against the growing power of President Xi Jinping. A disorderly outcome from the Party Congress raised the real possibility of a political as well as economic crisis. While China’s high-stakes political contest was decisively resolved in President Xi’s favor, what is less clear is why the pressure on the RMB went away.

Not only have the factors which caused the RMB’s depreciation not been addressed, but they seem to have worsened over the past two years. According to Bloomberg Magazine, “China’s total debt has increased sevenfold since the crisis [of 2008]. It accounts for more than half the outstanding debt of the entire emerging world, while its private sector has accounted for 70 percent of all new debt taken on anywhere in the world since the crisis.” [2] China perma-bulls don’t even bother to address this issue.

Andy Rothman recently made the ridiculous argument that the “biggest weakness in China last year was poor sentiment among the country’s entrepreneurs and investors.” But, several long-time China bears have also gone quiet recently. This unsatisfying outcome typifies our experience in China. Opinions change even though the underlying facts remained the same.

Perhaps the tendency to oscillate between optimism to pessimism on China is a natural outcome of the irreconcilable reality of China itself. China’s economic achievements are impossible to ignore, but so are its problems. The complete absence of any check on the power of the Chinese Communist Party has led to policy extremes that are hard to fathom. And, the fallout from these policies—from Huawei to the Uighurs—is so polarizing that market participants tend to ignore them. We take a more holistic approach and hold that not only can the worst policies of the Chinese Communist Party not be cordoned off from the positive aspects of their regime, but that they make the Chinese regime inherently unstable.

The disorienting spin that engulfs China is also at play within individual Chinese companies, and the ways in which politics impact Chinese companies are far more nuanced than what we see in other emerging markets. Take Jack Ma’s surprise resignation from Alibaba last year. This man, who was powerful enough to sell Alipay to a related company of his in 2011 and had scrupulously avoided politics in public, appears to have been forced to resign. Why? The most common explanation is that he was asked to step down by the Chinese Communist Party. Unfortunately, with the absence of a free press, the truth of the matter is not something that we are likely to find out any time soon.

We fully concede that those who have the inside track on Chinese policy can navigate the local market and that China has amazingly skilled technocrats who have been able to manage through a daunting sequence of crises in recent years. That said, investing in China will likely become more, not less, political in the future; we are avoiding investments in China.

organization

Sincerely,

Sean Fieler

END NOTES

[2] Bloomberg Magazine, April/May, page 60

Mine Visit Note: Dundee

Thu, 11 Apr 2019 17:06:36 GMT

EQUINOX PARTNERS - Precious Metals Miners
Site visit—Dundee Precious Metals
April 2019

Dates April 11-14, 2019

Mines Visited Krumovgrad and Chelopech
Countries Visited Bulgaria
Analyst Stephen Saroki

OVERVIEW

Dundee Precious Metals (DPM Canada) is a gold/copper producer

with two operating mines in Bulgaria and a smelter in Namibia. It has quality mining assets, a solid balance sheet, excellent management, and operates in reasonable jurisdictions. It is an 8% position in the SMAs.

Market Cap $530m USD
Enterprise Value $515m USD
EV/FCF 3.0x 2020 estimate free cash flow
P/NAV (5% discount) 0.5x
Resources 11.6m ounces of gold
EV/Resource $45 per ounce of gold
Reserves 3.1m ounces of gold
EV/Reserves $170 per ounce of gold
All-in-sustaining cost $750 per ounce of gold

Thesis

With the addition of its new asset, Krumovgrad, the company will generate $175 million in FCF on a market cap of $530 million. While there will likely be ramp-up issues, just as there are with most mining assets, I expect that the management team will continue to execute just as they have done at their other mine, Chelopech. In addition, it seems that the major issues related to the Tsumeb smelter are in the past: While only generating modest free cash flows (~$10-15 million per year), Tsumeb will no longer be a capex burden. There are also opportunities for Dundee to optimize Tsumeb, allowing it to double or even potentially triple its FCF in the coming years. DPM remains very attractive, and is far too cheap not to own in size.

Trip summary

The trip was excellent. It started with a visit to Krumograd, including a visit to the integrated waste management facility and a tour of the processing facility. The next day involved a visit to Chelopech, including the smart center, the processing facility, and the underground mine. In the underground mine, there was a demonstration of how the company uses drones to survey stopes. Overall, it was well organized and informative. There was ample access to both senior management and employees at the mines.

Management and governance

From an operational perspective, Dundee has an excellent team. I was impressed by the quality of operations at both Chelopech and Krumovgrad. The consensus was that Chelopech is one of the most impressive operations in the gold mining sector. As for managements’ ability to allocate capital, that’s another story. The board’s reticence to return capital to shareholders, especially in the form of share repurchases at half of NAV, is disappointing.

Rick Howes, CEO: He is honest and a good mining engineer. He has put together good teams at both Chelopech and Krumovgrad. He is attentive to the operations, but doesn’t micromanage. He is not, however, able to coherently articulate the company’s capital allocation philosophy. He said that he was considering share repurchases at below $2 a share, but otherwise wasn’t considering them despite the fact that the company trades at 3x EV/normalized FCF (including full-year Krumovgrad production). He is good from an operational standpoint and at building mines, but he is clearly not interested in returning capital to shareholders.

David Rae, COO: He is really impressive. He comes from a smelting/processing background. He was a BHP Smelter Manager, and worked as a GM for Falconbridge. He is a trained metallurgist. He has an ability to articulate things in a simple fashion and is forthright. He is very good with his employees, and he’s the type of person that I’d nominate to boards if Dundee was a better capital allocator.

He said a few things that were particularly interesting:

When asked about the company and what it should do, he talked about how they have to acquire an asset. He said that given that one could buy ounces in the ground for $7/oz, they shouldn’t be spending any money on exploration. They should find an attractive asset and use their exploration geologists to drill it up, develop it, and put it into production. Rick disagrees with him on this. But he said that management has a healthy tension where disagreement is allowed.

When I asked him about how he started working for Dundee, he said he was on a motorcycle in Namibia riding past the Tsumeb smelter. He had heard about the smelter from Rick before. When riding past, he called Rick and told him that they shouldn’t buy the smelter. To quote him: “It’s a terrible business. Don’t ever do it.”

Iliya Garkov, VP & GM Bulgaria: He served in the Bulgarian military as a tank commander and still serves as part of the reserves. He runs a tight ship, and also seems to be well liked by those that work for him. It is a good sign that Dundee has allowed a Bulgarian to take as prominent a role. It means that they take their local commitments seriously. According to him, including retirement, Chelopech has zero turnover. He seems to have a very good working relationship with Rae as well.

Zebra Kasete, VP & Managing Director, Tsumeb: Namibian born, Zebra worked for Rio Tinto, Rossing Uranium, and Murowa Diamonds prior to his current tenure at Dundee. He was brought in at Dundee during February of 2016. In his time, the smelter’s performance has really improved. He has professionalized the operation and systematized the approach towards issues in the smelter. 2018 is the first year that the smelter generated positive FCF.

Jurisdiction

Bulgaria, while being good from a rule of law perspective, is very difficult from a permitting perspective. While Dundee has shown an ability to navigate these issues and has an excellent relationship with the governmental authorities, the time required for permitting a project can range from 7-10 years. For context, countries like Australia and Canada have permitting timelines of ~3 years and ~4 years, respectively. Even getting exploration permits in Bulgaria is a chore. The people are very salt of the earth and tend to be hardworking.

Corporate Social Responsibility (CSR)

DPM’s track record in CSR has been excellent. Virtually all (more than 95%) of their employees are local. While some of their geologists are expats, some of them are also locals. Dundee has shown its commitment to both employ and promote locals, and the locals are very happy with the approach that Dundee has taken. They have also invested in social programs in the local communities. Foremost among these programs is the Private English Language Secondary School (PELSS) in Chelopech that DPM funds. It is one of the top schools in the country. In Tsumeb, the company formed a community trust to fund local education and business initiatives.

Catalysts

DPM is ramping up Krumovgrad. As it ramps up, the resultant cash flow should rerate the company’s stock.

This asset seems like a well-oiled operation, sentiment was exceedingly positive. Several on the visit with me suggested that it is one of the best run operations they’ve ever visited. They have implemented the most technologically advanced operations in the mining space. This includes the use of Mine RP software (of which they own 78%).

Mine RP is software that integrates all of the existing, distinct programs that are used in the mining space into a single platform. It is also linked to financial data to optimize operating metrics. While it is clear that they are in the early stages of implementation, they claim that the benefits will be considerable.

Specifically, they mentioned that the Life of Mine plan would be much easier to change. According to Rick, most life of mine plans used to take 6 months to adjust. With the Mine RP system in place, he believes that one could determine most of the effects of a change in Life of Mine plan in just days. In addition, they’d be able to make decisions connected with financial results, which is not commonly what geologists or mine engineers do. In fact, he said that the decisions at a mine are commonly made in a manner that is divorced from the financial consequences, and that Mine RP is going to solve that. He also said that Mine RP technology is in the

process of being implemented by 6 or 7 other companies. It will likely be used by every mine in the world in 10 years. As far as I know, nobody in the world does this but Mine RP. While Mine RP, as a company, is currently just short of breakeven, it is getting to the point where it might start making some money, especially if it is widely adopted. DPM had ~130 companies visit them at Chelopech in 2017 to see the technology in action, and ~80 companies visit them at Chelopech in 2018. They are doing something right at Chelopech, and Mine RP should succeed as a result.

DPM uses drones to do its surveying work. Applying this to the stopes, they get far more data in a much shorter period of time. It also gives them much more accurate data. I don’t know the cost of this, and it is not clear what the benefits are, and so the cost benefit analysis is not clear yet. What is interesting is that I did get to speak in a bar on the last night with the CEO of the drone company (called Exyn) which runs propriety machine learning. He said that when his company considered the mining space, he interviewed several different mining companies. He was not only particularly impressed by Dundee, but everyone he met in the space indicated that Dundee is far and away the best in terms of technology in the mining space.

At the visit, we went to the area where they were expanding the decline, and got to see the drill rig they use for putting holes in the wall for dynamite. The process is more sophisticated than one would think. They then took us to see an area where ore was actively being drilled. They then did a demonstration of the drone and how it is used for surveying purposes. We then saw the processing facility, the tailings facility, and the central command/smart center for the mine.

Most concerning was the tailings facility, which is an upstream configuration. It looks pretty full. They are doing a lift of 10 meters in three stages (4m, 3m, 3m), which is expected to cover them for the next 16 years. Assuming a full conversion of resources, they currently have 12 years of mine life. They do believe they will expand mine life beyond 2029 (the current end of the LOM plan), and potentially beyond 12 years as well. In looking at Chelopech’s exploration prospects, they have no ability to expand at depth. All of their potential new material is coming from adjacent to where they currently mine, which is where the sublevel cave operation used to be. I expect that they will get to 12- 14 years with this material, but I don’t think it will expand much further than that.

Finally, the other really notable thing about the visit was the Smart Center. Dundee has decided to use a rolling average of the KPIs/alerts instead of using the millisecond frequency data. As a result, fewer alerts pop up so the team remains focused. In addition, they have singled out a set of 5 or so important KPIs as primary focal points.

Krumovgrad

The Krumovgrad site visit involved a distant view of the tailings/integrated waste management facility followed by a look at the processing facility. We didn’t get to go see the pit because it was raining.

The first thing that sticks out is the small footprint of Krumovgrad; it is on a hill/mountain. While it is a full mine (everything is there), it is very compact. The processing facility is quite vertical. In addition, they have already mined a month’s worth of material. This took up most of the available space.

As good a team as I think Dundee has, I suspect that the ramp will have some issues. First, I think the space will be limiting from an optimization perspective, both in terms of the grade of the ore and the efficiency at which they can move material. Second, the semi-dry stack tailings facility/integrated waste management facility will likely be difficult to manage. I think it is possible to do, but the optimizing of it will involve some trial and error. Finally, as with all processing facilities, I think it will take some time for them to get the expected recoveries, and it may take longer than one expects.

I would have hoped to be able to get a closer look at the tailings/integrated waste management facility along with getting to see the pit. I don’t think they were hiding it, but it would have been good to see the machines at work.

As for exploration at the site, I think that the chances to add significant ounces to the mine are minimal. I’m sure they could probably add 100k ounces here or there, but I don’t expect mine life to be expanded more than a few years. They are very close to a town, which makes permitting, even of exploration, very difficult. They indicated that it takes them ~3 years to get exploration permits, and so they have to decide what they want to drill years in advance. They are good at managing the permitting regime, but it still takes a long time to permit in Bulgaria.

Tsumeb Smelter

The smelter is in the best shape it has been since it was purchased by DPM. In 2018, it generated ~$10 million in FCF. It is pushing through ~240k-250k tonnes of concentrate. That is the new material that goes through the mill, the primary feed, and it represents 60% of the new material going through the mill. 40% of the material is secondary feed. This is because material inventory built up historically as they had to shut down the smelter to make improvements. As a result, secondary feed came to make up a larger portion of total feed processed. According to DPM, the secondary feed should only be at 30% (125k tonnes) of the total feed (~420k tonnes). Primary feed should make up 70%, allowing them to process ~292k tonnes. With each tonne generating $400 in revenue with $300 being profit, they can generate another ~$15 million in FCF. In addition, they’ve kept temperatures stable in their furnace, which allows the equipment to last longer. While they have historically had to re-brick their furnace every 18 months, this change has allowed them to re-brick every 24 months. As a result, they should be able to process ~10k more tonnes. At the same margin, this will allow them to generate an extra ~$3 million. So, at ~300k tonnes of throughput of primary material, the smelter should generate ~$30 million.

David Rae believes that with an extra $40m in capex, they can increase throughput in the mill to 370k tonnes, or a total of ~$50m in FCF from the smelter (~$20m additional). This would be done primarily through the addition of a holding furnace, which keeps the secondary material hot, and reduces the amount of time and energy needed to heat the material mixed with the primary feed. Tsumeb is the only smelter in the world without a furnace.

There are a few issues with this. First, it is not clear that there is any demand for it. Despite the fact that they are the only smelter in the world that processes high arsenic concentrate, there is a simple and cheap alternative for most companies. They have the concentrate processed at smelters in China where it is blended. Second, lots of high arsenic projects, due to the difficulty that arises in processing concentrate, have been discontinued. As a result, very few mines are currently producing high arsenic concentrate. The other issue, given that there is always the Chinese blending alternative, is that they have no pricing power.

According to the company, they will not spend this $40 million until they know that they have the demand. The one thing that they do say is that companies could favor them in the future because they want to know that the arsenic is dealt with correctly, and they know that DPM does that.

As for my assessment, I just think smelting is a bad business. It is high capex in an industry that is very competitive, leading to low margins. It is the opposite of what I look for in a business. While I don’t expect the smelter to be a cash drain, I’m not convinced it will be a real source of cash going forward.

Exploration

Timok

They’ve had some recent drill holes that are good and outside of their resource. They include 28m at 3.0 g/t Au from 85m, 35m at 2.0 g/t Au from 246m, and 16m at 1.7 g/t from 65 m. It is not clear what will come of these. What is clear is that the 2 million Au oz that they have on the board are low grade.

Sabina

While they aren’t exploring this project, DPM owns 10% of Sabina. Rick said that he thinks Sabina is too big, and would only do it with a JV partner.

*** END ***

*Figures and statements as of April visit. This is an internal research note written by an analyst employed by Mason Hill Advisors, LLC. It is not intended for distribution. This information was intended exclusively for the person to whom it was delivered and ought not to be distributed further. Opinions are expressed throughout this note as of the date of the note. Opinions can be wrong or can prove to be right. Investment decisions are made in part as a result of mine visits and company discussions, but not exclusively so.

End Notes

Equinox Partners, L.P. - Q4 2018 Letter

Mon, 28 Jan 2019 16:12:02 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners declined -23.5% in the fourth quarter of 2018 and was down -41.9% for the full year.

THE STATUS QUO VS. THE FUTURE

As the Fed struggled to raise rates one last time in December, it became clear that America’s monetary policy is not on the verge of normalization. We simply have too much debt for meaningfully positive real interest rates. As such, America, and most of the rest of the Developed World, remains trapped in a debt bubble in which the solution to the problem of too much debt is more debt, and the solution to the problem of rising interest rates is central bank manipulation.

While investors are broadly uncomfortable with this disconcerting flaw in our financial system, they are focused on more urgent problems. The debate surrounding the Fed’s rate increase in December of last year was a case in point. The market’s long-term concern about the Fed’s failure to normalize monetary policy was completely overwhelmed by a far more urgent concern that the quarter point rate increase would tip our economy into recession.

In this environment characterized by growing uncertainty, traders are sticking with correlations that have been working, most notably buying core sovereign bonds when risks rise. The notion that the government bonds they are buying out of fear are creating most of the trouble in the first place remains a bridge too far. As such, the market’s reflexive rush into treasuries is not so much an endorsement of a brave new paradigm in which debt levels are irrelevant, but instead a failure to imagine an alternative.

The sophisticated, but ultimately ridiculous, arguments of economists like Olivier Blanchard that public debt may have little to no cost will simply never gain wide acceptance. Investors know that such a free lunch is simply too good to be true. Accordingly, we are confident that the search for alternative investments will continue. And, in that search, we are confident that gold, silver, and less-indebted emerging markets will rise to the top. This, however, has not yet happened.

In 2018, the market doubled down on the status quo, and we posted the worst performance in our twenty-five year history. The market continues to treat gold mining stocks as an environmental nuisance and gold itself as irrelevant, emerging markets as risky locations to be avoided in such an uncertain world, E&P companies as environmentally-problematic, potentially-obsolete undertakings, and core government bonds as unquestionably safe even though they are the root of the debt problem. In short, the status quo continues to embrace a worldview that is deeply at odds with reality.

Our companies are both well positioned for the actual world in which we live and incredibly cheap. Our largest gold mining investment trades at less than 4x FCF, our portfolio of operating companies trades at 10x earnings, our E&P companies at 4x CF with depressed commodity prices, and our bond shorts at a collective yield of roughly 1%.

The letter that follows details our largest five equity positions and highlights the value embedded in our portfolio.

TOP-FIVE HOLDINGS

pARAMOUNT

Paramount is a Canadian energy company led by Jim Ridell with a $1.1b market cap, $900m in debt, and ~$200m of listed and unlisted investments in other companies.

U.S. oil prices started 2018 at $60, peaked at $76, and ended the year at $46. Compounding this decline, the differential at which Paramount sells its most valuable product, a very light oil called condensate, traded at a massive $20 discount to WTI at one point in the fourth quarter. As a result of these commodity price declines, Paramount’s stock fell from $19 per share to $7 per share during the year.

Since year end, the Canadian condensate differential has decreased from $20 to $5, and the oil price has recovered to $53. As a result, Paramount is on track to generate $359m in cash flow in 2019 and to grow production slightly. Paramount is buying back shares to take advantage of their very low share price, so the company’s per-share production growth could exceed 10% even with oil at $50 and Canadian natural gas at $1.40 CAD.

Paramount owns one of the best land packages in Canada with top-tier assets across several basins. The company’s land is capable of supporting multiples of their current production. Moreover, the company’s incremental production will be much more profitable as they scale fixed costs and existing infrastructure. We believe Paramount is in a particularly good position to take advantage of the current energy environment and to create value going forward.

Aramex

Aramex is the FedEx of the Middle East.

After promoting their long-serving CFO, Bashar Obeid, to CEO in November 2017, Aramex delivered particularly impressive results. Thanks to the company’s network effect and reputation, the business continued to generate close to a 50% adjusted return on equity (excluding cash and goodwill).

In the first nine months of 2018, Aramex was able to generate 8% revenue growth while walking away from low-margin business in India. This decision to prioritize profit over revenue reflects management’s renewed focus on costs and margins. The financial benefits of this decision were immediately apparent. Margins improved from 10% in 2017 to 12% in 2018. The margin increase led to earnings growth of 25% for the nine-month period, which is well above the high single-digits we forecasted for the year.

Bashar Obeid also decided to terminate Aramex’s joint venture with Australia Post after a couple years of little progress. While the JV no longer represents a blue sky opportunity for Aramex, the decision reflects management’s disciplined approach to capital allocation and costs.

MAG SILVER

MAG Silver is the 44% owner of the highest-grade undeveloped silver mine in the world. Located in Mexico, the Juanicipio JV generates an attractive IRR even at $10 silver and is being developed by the largest silver miner in the world, Fresnillo. The mine has a 19-year life with reasonable expectations for expansion. MAG’s JV with Fresnillo is fully funded for production, with no significant dilution risk to shareholders. Once in production, we expect Juancipio’s reserves to increase and new mineralization to be discovered on the JV’s land.

While the current mine plan stipulates 4,000 tonnes per day throughput, MAG anticipates an actual throughput of 8,000 tonnes per day. The JV has already purchased an adjacent plot of land for a possible processing facility which would allow them to double throughput. This upsizing of the project will improve the NPV and substantially increase the JV’s cash flow.

As a result of this planned expansion, MAG pushed back its construction timeline by a few months. Commercial production is now expected in mid-2020, instead of the first quarter of 2020. Trading at ~0.6x our estimate of NAV, the company is incredibly undervalued.

DUNDEE PRECIOUS METALS

2018 was an exceptional year operationally for Dundee. Their Chelopech mine, located in Bulgaria, produced 201k oz of gold and $80m in FCF outpacing the company’s original guidance of 165-195k oz. When combined with their Tsumeb smelter, the company’s total free cash flow last year rose to $90m.

On top of this recurring $90m USD of free cash flow, the company is in the process of bringing a new mine into production. The Krumovgrad mine—also located in Bulgaria—is currently being commissioned and is on pace to come in slightly below the $178m budget. Krumovgrad will generate an additional $70 million in FCF on an annual basis for Dundee over the next six years.

Combining the two mines at current metals prices, we expect Dundee to generate ~$150 million per year in FCF for the next 5 years. The real question going forward is how they will allocate this substantial free cash flow. At this current share price, the math of returning most of this capital to shareholders via stock buybacks and dividends is overwhelmingly attractive.

GOLD ROAD RESOURCES

Gold Road Resources is an Australian mining company in a 50/50 joint venture with Gold Fields. The joint venture is scheduled to start production in the second quarter of 2019 and will continue for at least 15 years. When in production, the JV asset is expected to generate ~$110m per year at current gold prices, $55m of which will accrue to Gold Road’s account.

With Gold Fields as the operator, Gold Road enjoys dramatically reduced execution risk: Gold Fields has considerable experience building mines around the world. At just 7.7x free cash flows once in production, Gold Road is very undervalued given the quality of their JV and longevity of the asset.

Surrounding the joint venture property, Gold Road has a vast land package which they will explore at a cost of ~$20m in 2019. While the company’s land package is highly prospective, we do not know if they will find additional economic ounces. Accordingly, if its exploration results are subpar, we will favor the return of capital to shareholders.

organization

As of January 1, our third-party administrator changed from Northern Trust to SEI/Archway. After an extensive search, we chose SEI/Archway due to its combination of culture, use of technology, and competitive fees. Specifically, the Indianapolis-based Archway has low employee turnover, has developed impressive fund accounting software, was recently acquired by global fund administrator SEI, and we negotiated a competitive fee structure. Moving administrators is also a result of the rapid changes in the fund administration business over the last 10 years; we intend to provide our partners with the best service-provider at the best value. Finally, our clients will now be able to access their statements online—directions for doing so are forthcoming in the beginning of February.

Please make note of the contact details for SEI/Archway:

Email: equinox@archwayfo.zendesk.com (this is the preferred method of contact)

SEI AFO

8888 Keystone Crossing, Suite 1400

Indianapolis, IN 46240

Sincerely,

Sean Fieler Daniel Gittes

^[1] Sector exposures shown as a percentage of 12.31.18 pre-redemption AUM. Performance contribution is derived in U.S. dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L are included in Fixed Income. P&L on cash is excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data is derived from internal analysis, company presentations, or Bloomberg. All values are as of 12.31.18 unless otherwise noted.

Kuroto Fund, L.P. - Q4 2018 Letter

Mon, 28 Jan 2019 15:46:47 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund declined -6.9% in the fourth quarter of 2018 and -17.9% for the full year. The EM index lost -7.6% and -14.5% respectively over the same periods. [1]

Our poor performance last year was a result of wide spread declines in our holdings. 23 of our 33 investments posted a negative return for the year. Our companies everywhere, even those that delivered strong operating results, declined. For example, FPT, our largest holding, declined 12% in 2018 despite delivering better than expected results. Our companies that delivered poor results declined far more. Most notably, Atento, a top-five position last year, which struggled to just maintain their profitability and replaced their CEO, declined 61% during the year.

portfolio & Fund Size

Our largest client has begun redeeming capital from Kuroto Fund. Over the next twelve months, we anticipate a reduction in the fund’s size to approximately $100m. We will run the resulting smaller fund the same way we’ve run Kuroto for the past decade: ~25 positions with a sizeable amount of our holdings below a market cap of $1b

Going forward, we expect Kuroto’s performance to further diverge from the emerging markets index. Our country and company weightings do not even roughly match the index. In fact, Kuroto Fund has an active share of 99% (see graph). In other words, 99% of our portfolio is different than the MSCI EM index.

It is also worth pointing out that our process of identifying superior, undervalued businesses is essentially at odds with the momentum bias of indices, which channel money into large securities irrespective of their fundamentals. The growing concentration of fund flows into indices has obviously been a drag on our short-term performance. Over time, however, this bias in the way indices channel money is generating a growing list of truly superior businesses at increasingly discounted prices.

The remainder of this letter highlights the attractive combination of quality, value, and growth found in our top five holdings.

top five holdings

FPT

FPT is a Vietnamese conglomerate consisting of two principal businesses: IT outsourcing and broadband internet.

FPT’s outsourcing clients are mostly foreign, with overseas clients accounting for two-thirds of the division’s revenue. The largest concentration of these clients is in Japan, with Japanese clients currently accounting for a little over half of FPT’s overseas business. While FPT’s IT services are not differentiated from a technical perspective, FPT has trained an unusually large population of Japanese-speaking employees. This language advantage in combination with Vietnam’s low cost labor makes FPT’s offering very competitive globally.

Unlike IT outsourcing, FPT’s broadband business is purely domestic. A member of a three-company oligopoly, FPT generates superior returns and growth by focusing on customer service and bundling their pay TV with a broadband offering. Over the years, FPT has consistently received the best customer reviews in Vietnam and now has almost half of its broadband subscribers choosing to add pay TV to their bundle.

Going forward, we expect FPT to grow their core businesses at a low-teens rate while generating a ~20% ROE. Given the company’s valuations, returns on capital, and dividend yield, FPT is an attractive long-term investment.

Aramex

Aramex is the FedEx of the Middle East.

Grana y Montero

Grana y Montero is the largest engineering and construction company in Peru.

Two years ago, Grana lost their investment in an Odebrecht led concession. This loss left Grana with debt from the concession but not the corresponding asset. This outcome in turn shook the market’s confidence in Grana’s strategy and gave us an opportunity to invest in the company at a substantial discount to liquidation value even with the Odebrecht investment written down to zero.

As we expected, Grana has been able to work through almost all of the issues related to their lost Odebrecht concession. First, they sold hundreds of millions of dollars of assets and used the proceeds to pay off most of the company’s debt. Second, they raised equity to remove the remaining debt overhang. Third, the government specified the maximum fine Grana could face if found guilty of collusion with Odebrecht. Fourth, the company has won new business from private enterprises. Finally, it is increasingly clear that the government will repay Grana for the concession.

On this last point, we expect Grana to collect ~$400 million dollars from the Peruvian government in 2023/2024. Even with the market giving Grana no value for this award, the stock is conservatively worth 50% more than the value for which it is currently trading. And, this 50% rerating assumes no real uptick in infrastructure and mining project spending in Peru.

Garanti Bank

Garanti Bank is the largest and best run private sector bank in Turkey.

In 2018, Garanti Bank performed extraordinarily well despite the ongoing economic turbulence in Turkey. The company began aggressively provisioning for the coming credit cycle and significantly increased credit spreads on new loans. In 2019, we expect Garanti’s profitability to trough at a low-teens return on equity as their cost of risk rises to 2% and their NPL’s peak between 6% and 7% of their loan book.

In 2019, we expect Turkey to present a challenging economic backdrop once again. Specifically, Erdogan’s administration will likely attempt material reforms after the municipal elections in the spring. If the market deems these reforms either insufficient or unorthodox, we could see further weakness in the Turkish lira and higher domestic interest rates. If, however, Turkey gets its macroeconomic policy right, we should see interest rates fall by year-end and a stable Turkish lira. Garanti Bank is well prepared for either scenario and should be in a position to generate returns on equity of close to 20% beginning in 2020.

MTN Ghana

MTN is the dominant cellular telecom and mobile money provider in Ghana.

In Ghana, MTN has over a 50% market share in mobile data and voice and a 94% share in mobile money. The company’s two closest competitors are each individually less than half MTN’s size. MTN’s dominant market share allows them to re-invest more than their competitors, which in turn reinforces their competitive advantage.

We believe that MTN’s mobile money service, MOMO for short, is particularly valuable. The product’s value proposition is obvious. Ghanaians with a MOMO account can earn a better interest rate than they would receive at most banks, purchase incremental minutes directly from MTN, consummate retail transactions, and transfer money to other MOMO account holders. As a result, MOMO account holders have an incredibly sticky relationship with MTN. Over time, as customers use mobile money for more of their daily transactions, we expect that MTN Ghana’s competitive advantages will continue to grow.

organization

Please make note of the contact details for SEI/Archway:

Email: equinox@archwayfo.zendesk.com (this is the preferred method of contact)

SEI AFO

8888 Keystone Crossing, Suite 1400

Indianapolis, IN 46240

Sincerely,

Sean Fieler

Daniel Gittes

END NOTES

Equinox Partners Precious Metals, L.P. - Q3 2018 Letter

Thu, 15 Nov 2018 17:32:47 GMT

Dear Partners and Friends,

Central Banks and Gold

For decades, Western central banks have been careful not to demonstrate any enthusiasm for their gold holdings. Throughout the 1990s, they aggressively reduced their physical stockpiles of gold and pronounced themselves eager to divest from this ‘non-earning’ asset. In 1999, the group of sixteen central banks who accounted for the vast majority of the official sales in the 1990s, even entered into a joint agreement to cap their annual divestiture to 400 tonnes per year ostensibly to ensure an orderly exit from the yellow metal. When gold threatened to rise, however, central bankers quickly shifted their focus to gold as potentially unwelcome monetary competition. In his 1998 Congressional testimony, Chairman Greenspan famously quipped that, “[c]entral banks stand ready to lease gold in increasing quantities should the price rise.”

By 2005, Western central bank selling had slowed significantly, and they largely stopped discussing their gold reserves. It was clear that there was simply not the appetite to support further official sales of any size. And, while the Washington Agreement on Gold was extended for a second five-year term in 2004, the signatories failed to meet this supposed cap. By 2009, it was clear that central bank selling had exhausted itself.

Beginning in 2010, central banks became official net acquirers of gold. Initially, Russia and China were the only buyers of any size. But, in recent years they have been joined by Turkey and Egypt. Moreover, this year, India, Poland, and Hungry have joined the ranks of countries building their official gold reserves. At last count, central banks had bought a total of 264 metric tons of gold for the year to date, “by far the most at this stage of the year of any period in the last six years”. The question is, why now?

As a rule, central banks are not helpful in answering this question. They typically reference “asset diversification” as their underlying motivation for purchasing gold, and some central banks, like China, don’t even necessarily report their purchases. The Hungarian Central Bank, however, when purchasing gold for the first time in 32 years, broke with this practice. In their August 11, 2018 press release, the Hungarian Central Bank flat out rejected asset diversification as the reason for their recent purchases and stated that “…there were not investment considerations behind holding gold reserves.” Instead, The Hungarian Central Bank noted “The importance of gold in national and economic policy strategy has increased recently,”

While we don’t see central banks as particularly astute investors in general, and we don’t know any more about the Hungarian Central Bank’s motivation than what they’ve put in their press release, we believe their press release is important. It is significant that an increasing fraction of central banks are once again buyers of gold and for reasons that transcend narrow economic interests. In our opinion, the decisions of countries like Poland and Hungry to buy gold reflect an uneasiness with the permanence of today’s dollar, euro, yen centric monetary system, and an effort to prepare for the future they see on the horizon. We also suspect that Russia and China’s effort to acquire gold more aggressively in recent years is beginning to provoke a response.

The best and the worst

The balance of this letter highlights two of our best performing and two of our worst performing stocks since April 2016 as a way of providing insight in what types of companies are doing better and worse in the current environment.

Our Worst Performers

- Tahoe Resources (-72.3%)

In July of 2017, the Guatemalan Constitutional court forced Tahoe Resources to shut down its Escobal mine, and in November of 2018, Tahoe announced the sale of the entire company to Pan American Silver. This sale brings to a close the long road for Tahoe shareholders and recognizes a victory for anti-mining activists. Interestingly, the Guatemalan Constitutional court never found Tahoe guilty of any wrongdoing. Rather, they based their decision on the Guatemalan Mining Ministry’s failure to consult an indigenous tribe that does not live anywhere near the mine site. Pan American, seeing the quality of Tahoe’s flagship asset Escobal, pounced on the opportunity. They paid an upfront 55% premium to the Tahoe’s price, with an additional 32% to be paid out when Escobal resumes operations. While we believe that the Escobal saga was going to resolve in Tahoe’s favor within six months to a year, we think it reasonable to embrace Pan American’s offer, as we expect the market to do as well.

- Premier Gold (-51.3%)

Premier owns a 50% of a joint venture in Ontario with Centerra, 40% of a JV in Nevada with Barrick, and a handful of 100% owned assets in Nevada and Mexico. The company trades at just 4x cash flow in 2019, and is poised to grow their attributable production 100,000 oz per year to over 300,000 oz per year over the next three years. We like the capital and G&A light joint venture approach that management has taken, and we think the market is seriously misvaluing the company. This oversight is largely due to the current year’s decline in ounces produced.

Our Best Performers

- Gold Road Resources (+40.4%)

Gold Road’s main asset is a 50/50 JV with one of the largest and most experienced gold companies in the world, Gold Fields. Their JV is expected to begin commercial production in the second quarter of 2019, ramping up to 270,000 ounces of gold per year with a 13 year mine life. Given the minimal execution risk going forward—largely due to Gold Fields operating the mine, and the fact that Gold Road is currently net cash itself—the project should generate substantial amounts of cash which can and should be returned to shareholders. In addition, former CEO and current Board member Ian Murray’s $6 million stake should align management with shareholders. With the project being fully funded and on track for production in the near term, the market has begun to value Gold Road more as a producer than an exploration company.

- Dundee Precious Metals (+44.4%)

With its second mine in commissioning this December and no significant capital investment obligations going forward, Dundee is poised to generate $150 million USD in free cash flow per year on average for the next five years. With a market capitalization of $470 million, Dundee trades at a free cash flow yield of 32%. Assuming no multiple expansion, no return on exploration investment, and the deployment of the company’s free cash flow evenly amongst dividends, share repurchases, and exploration, the company would yield 10.6% and shrink its shares outstanding by 10.6% per year. We have no assurance that the board will take this path, but management did make it clear on their most recent quarterly conference call that they are comparing all new investment opportunities against the incredible opportunity to reinvest capital back into their own shares. That’s a 32% current free cash flow hurdle against which new investments must compete for capital.

Sincerely,

Sean Fieler

Equinox Partners, L.P. - Q3 2018 Letter

Thu, 15 Nov 2018 16:38:05 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners declined -10.1% in the third quarter of 2018. Through October 31, the fund was down -32.6% for the year to date.

As of October 31, our operating companies were trading at 10.7x estimated ’19 earnings, our mining companies at 4.1x estimated ’19 cash flow, and our energy companies at 4.7x estimated ’19 cash flow. During the third quarter, we purchased two companies in Turkey and sold a global ship brokering company and an Eastern European bank.

Most since 1999

Equinox is on track to post its worst result in 24 years. With 25 of our 30 long equity positions down for the year to date, equity markets increasingly remind us of 1999 when we purchased shares in R.J. Reynolds at ~2.5x after-tax, cash earnings. At the time, our investors found it hard to believe that R.J. Reynolds could trade at a ~40% free cash flow yield at the end of a massive, multi-year bull market. But, it did. The tech boom of the late 90s bred indifference to high-quality businesses that weren’t part of the mania.

It was not just R.J. Reynold’s that was cheap in 1999; our entire portfolio was as hated. Oil traded at a low of $9.68 a barrel, gold traded at a low of $253 per ounce, and emerging markets were coming off a 57% peak-to-trough decline in USD terms. Investors simply could not fathom why they would want to own energy, gold, or emerging markets when they could own the NASDAQ 100 index fund that not only represented the future but also appreciated every year.

As it turned out, investors’ confidence in the future was mostly justified but their confidence in the predictability of the future was wildly misplaced. Technological change did generate enormous winners, like Amazon, that would soon shrug off their turn-of-the-century correction. But, for every Amazon, there were several tech companies that would never again come close to their peak valuation. With the stock market more overvalued today than it was in 1999 by some measures (see graph), we suspect that another brutal sorting process is not far off. As in the past, some of today’s high flyers will undoubtedly be more valuable in a decade, but some of today’s highly-regarded companies will be worth less and some worthless.

There are, of course, enormous structural differences between 2018 and 1999. Most obviously, it is not at all clear that the Federal Reserve can once again cut rates and induce a debt-fueled boom as they did when the tech bubble burst in 2000. Less obviously, but perhaps more importantly, it is also not clear that the world’s largest economies will once again choose to work together to stave off a global downturn. In the past, this cooperation entailed unlimited swap lines from the Fed, a collective willingness to not politicize large changes in currency cross rates, and the coordinated leasing and selling of gold.

If a steep decline in financial assets were to happen today, such coordinated action amongst the world’s leading economies would be much harder, if not impossible, to muster. In fact, the last time we endured a financial downturn in the context of such palpable international tensions was the late 1960s. Not coincidently, that was also the last time America ran a series of sizable, late-cycle fiscal deficits during a period of economic growth and low unemployment.

The breakdown of the London Gold Pool in March 1968 was the clearest sign that the financial status quo would not be preserved. Rather than continuing to lend and sell gold as they had in the past, Pool members were actively redomiciling gold and adding to their reserves as their faith in the sustainability of the Bretton Woods system waned. After the British government was forced to suspend the London gold market on March 15, 1968 due to massive withdrawals, the Bretton Woods System limped on for another three years, but the unwillingness of the world’s leading economies to cooperate eventually led to the onset of a very dramatic bull market in gold in 1971.

While gold clearly lacks the monetary centrality it had in the Bretton Woods era, the physical dynamics of the gold market remain an important potential flash point when relations amongst countries deteriorate. Gold is a monetary insurance policy that countries buy more of when their faith in the international financial system flags. With this in mind, it is interesting to note that in 2009 central banks became uncoordinated net purchasers of gold for the first time in over forty years, and that the number of countries purchasing gold has increased meaningfully since then. From Hungry to Poland, to Russia, to India, and China, the pattern of behavior is the opposite of what we witnessed at the turn of the century and very similar to the behavior of the late ‘60s.

In the early 1970s, the unmoored gold price quickly unsettled other commodity markets, most significantly the oil market. Here is where our loose comparison with the late ’60s fails, and we are, consequently, much less bullish on oil prices than we are on the price of gold. A rising gold price today simply does not imply the obvious devaluation of the dollar as it did in the ‘70s. So, while we believe that there should be more of a political premium in the oil price given the rise in geo-political tensions, we do not expect oil prices to follow gold prices upward in the short term.

Not only are gold and energy companies not anticipating an upturn in the price of gold and oil, but the companies are trading at ever-more depressed valuations. The gold miner indices are off ~80% from their 2011 peaks and trading at 15-year lows, while the U.S. and Canadian E&P indices are off 56% and 65% respectively from their mid-2014 peak, and trading at 8-year lows. As value investors, we have become increasingly optimistic about the prospects of our gold miners and E&P companies as their valuations compress. To properly communicate this enthusiasm, we thought it would be useful to highlight two of our current holdings, that while in very different businesses, we believe offer a similar investment opportunity to RJR in 1999.

Dundee precious metals

paramount resources

With double digit production growth and rising mix of higher value liquids, Paramount is poised to grow cash flow from $290 million this year to over $1 billion by 2021. Given Paramount’s past operational disappointments and the current energy pricing differentials in Western Canada, the market remains skeptical of these figures and is pricing Paramount’s stock accordingly. We, however, think there is good reason to be optimistic. First, we believe that the worst of the operational miscues are behind them. By partnering with Keyera, one of the top midstream companies in Canada, Paramount has radically reduced their execution risk. In fact, all of Paramount’s incremental production growth for 2019 will be delivered to a plant Keyera is building. Second, with respect to condensate differentials, given that Canada is still a sizable net importer of condensate, we expect the differentials with the US to close quickly.

Orag ization

In September, Arthur Melkonian replaced Massimo Devellis as COO, and our CFO, Denise Alejo, assumed CCO duties. Arthur, who ran our middle office for the past seven years, has hit the ground running and already identified some operational efficiencies. We also recruited two new mining analysts to replace Marco Locascio. Stephen Saroki, a past summer intern, joined us in October, and we expect to add a Canadian mining specialist in January.

Both Massimo and Marco were long-standing partners, and we wish them the best in their new endeavors. Massimo has taken on an operations role at a multi-family office in New York, and Marco is now running a junior diamond mining company.

Sincerely,

Sean Fieler Daniel Gittes

^{[1] Sector exposures shown as a percentage of 10.31.18 pre-redemption AUM. Performance contribution derived in US dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L included in Fixed Income. P&L on cash excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data derived from internal analysis, company presentations, or Bloomberg. All values as of 10.31.18 unless otherwise noted.}

^[2] ^{E.g., Board of Governors of the Federal Reserve System, 2001 Annual Report, pp 4, 113; “Central Bank Liquidity Swaps” <https://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm>.}

^[3] ^{E.g., Greenspan’s comment that central banks “stand ready to lease gold in increasing quantities should the price rise” <https://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm>; and BIS economist William R. White’s comment, in his opening remarks to the 4th BIS Annual Conference held in February 2006, that one of the ultimate objectives of central bank cooperation is “the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful” <https://www.bis.org/publ/bppdf/bispap27.pdf>.}

^[4] ^{In 1968, the US federal government ran a 2.7% budget deficit while unemployment trended downward to 3.4% and US GDP grew 9.8% (source: FRED data)}

^[5] ^{Central banks became net sellers of gold in 1966 and, by 2008, had sold 28% of the collective gold reserves they held in 1965. Apart from 1998, there was no year between 1966 and 2008 in which central banks collectively increased their gold reserves by more than 1.5%. (Source: World Gold Council data, <https://bit.ly/2PsnLU3>, <https://bit.ly/2K2tBFJ>)}

^[6] ^{Hungary increased its gold reserves by 10x in October <https://bloom.bg/2CNwdXa>, while Poland’s purchases of gold in July and August are their first since 1998 and, indeed, the first gold purchase by a European central bank this century <https://on.ft.com/2xHXVR9>. Russia has been steadily buying gold while at the same time dramatically reducing its exposure to US debt. This year, India has purchased gold for the first time since 2009 <https://bit.ly/2K0gipj>.}

^[7] ^{According to World Gold Council data, central banks were net collective sellers of gold from 2000 until 2009 <https://bit.ly/2Dng0HV>.}

Kuroto Fund, L.P. - Q3 2018 Letter

Thu, 15 Nov 2018 16:00:20 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

turkey

As capital allocators to undervalued, better businesses in emerging markets, we are always looking for instances in which negative market sentiment overwhelms underlying financial and political reality. This past summer, as Turkey fell squarely into that category, we made our first investment there in more than a decade.

To be clear, Turkey has serious problems. After surviving a poorly conceived coup attempt in 2016, President Erdogan became increasingly authoritarian. He arrested large swaths of the opposition and reallocated local media assets to friendly hands. As his circle of trusted advisors shrunk, he leaned more heavily on his family. Most notably, he elevated his son-in-law to finance minister in July. This move and his administration’s ham-handed approach to the economic crisis greatly aggravated the situation. There is also the issue of Turkey’s unnecessary provocation of the United States. The arrest and inflammatory indictment of Pastor Brunson, money laundering for Iran, and purchase of Russia’s S-400 missile defense system are obviously all incompatible with Turkey’s sizable dollar-denominated foreign debt.

In short, Turkey’s bear case is tip of tongue for emerging market investors, which is why the Turkish lira was off 45% for the year to date by mid-August, and foreigners were aggressively selling obviously cheap Turkish equities. The rapid decline in the Turkish lira in turn produced inflationary pressures. At last measure, Turkish inflation was running at 25% year-on-year, and the monetary response to this spike in the price level has guaranteed a deep recession [2] . Local banks have raised their corporate lending rates in lira to 35%+ [3] and are holding their loan books flat on an FX-adjusted basis. [4] At these interest rates, Turkish corporations are shrinking their balance sheets, reducing working capital, and preparing for a severe recession. And, while the Turkish economy has yet to formally tip into a contraction, the most economically sensitive sectors of the economy have already tanked: e.g. domestic tractor sales are down 45% year on year as of last count. [5]

While Turkey is certainly not on the right path, it is also not on the path to becoming the next Venezuela. There are significant domestic factors that militate against a collapse of Turkey economically or politically. First, it is worth recalling that Erdogan came to power 16 years ago as an economic reformer attacking a bloated secularist, socialist regime and embracing market-oriented reforms. Second, for all his bluster, Erdogan is no dictator. He leads a coalition government that depends upon the support of the National Movement Party to pass legislation, including the annual budget. Finally, by all informed accounts, Erdogan is a wily politician who is highly sensitive to public opinion. He is currently fixated on wining the municipal elections scheduled for April 2019 and has a demonstrated history of policy flexibility in order to stay in power.

There are equally significant external constraints helping to keep Turkey’s political and economic policies bounded. As a NATO member, Turkey is dependent upon U.S. support for much of its military capability. Most notably, Turkey’s maintenance of its fleet of over 200 F-16s demands continued military cooperation with the U.S. Turkey also depends upon an assortment of foreign banks—especially European and American banks—for its short-term dollar funding requirements. This dependence on Europe and America goes both ways. Most notably, the E.U. relies on Turkey to manage the flow of refugees from the Middle East into Europe, while the U.S. leans on Turkey to contain Russian influence in Syria. Without belaboring the obvious, Turkey is in a geopolitically important location and has a complex web of relationships with the world’s most powerful nations.

Given the sum total of positives and negatives, Turkey presents a challenging but not uninvestable environment for better-business value investors. Accordingly, we have taken three trips to Turkey in the last fourteen months as the Turkish stock market and currency fell. We began investing in late May and added significantly to our positions over the summer as local equity prices began discounting a near worst-case scenario.

Our investment focus has been on Turkey’s concentrated, well-run private banking sector. The sector’s combination of rational pricing, sound underwriting culture, and low leverage helped generate a track record of high, consistent returns. These same characteristics attracted strong, foreign partners over the years. Garanti Bank, for instance, was formerly controlled by GE Finance and is currently controlled by BBVA. As a result, their systems and processes are similar in quality to what we see in the best Brazilian and Indian private sector banks.

Banking, even very sound banking, necessarily involves leverage, and leverage poses a particular set of challenges in moments of economic crisis. This summer, after the Turkish lira dropped 20% in a single month, Goldman Sachs issued a research report detailing the resulting reduction in Turkish bank capital. In particular, Goldman’s report stated that a Turkish lira/USD rate of 7.1 would exhaust the excess regulatory capital at the big four banks, which is accurate. What the report failed to highlight is that even with no excess regulatory capital, the large Turkish banks were still very well capitalized by global standards. At the end of the third quarter, the four large

private-sector Turkish banks posted an average capital adequacy ratio of 11.7%, excluding regulatory forbearance measures. [6] By way of comparison, this is nearly 50% more capital than the 10 largest U.S. banks have in relationship to their assets. [7] Nevertheless, the solvency of the best Turkish banks had been called into question, and investors panicked.

This panic gave us the opportunity to buy shares in Garanti Bank at less than 50% of book value. Garanti Bank has the best loan book, the best technology platform, and the best underwriting standards of Turkey’s four principal private sector banks. With just 2% of their loan book exposed to the real estate construction sector that will likely be at the heart of Turkey’s looming non-performing loans cycle, we believe that Garanti will not just weather the economic downturn, but produce mid-teens ROE’s throughout. When the economy eventually normalizes, Garanti should again produce ROE’s in excess of 20%.

While the shares of Garanti Bank have rallied since our initial purchase, even at today’s valuation the bank trades at 70% of liquidation value and just 4 times this year’s earnings, making Garanti Bank one of the cheapest companies we own. The bank recently reported third quarter results: as expected, NPLs are up, but they still posted a 17% return on equity. When Turkish uncertainty subsides, we believe that this bank should once again trade on a high single-digit multiple to earnings and at comfortably more than liquidation value.

The Turkish lira has also recovered from its August lows of 7.4 to a current rate of 5.8. We anticipate significant further weakness in the Turkish economy after their municipal elections in April 2019. That said, we do not expect this future weakness to once again coincide with a sharp deterioration in U.S.-Turkish relations as occurred over the past summer. More broadly, we believe that the discounted valuations of our Turkish investments more than account for a very negative path forward for Turkey both politically and economically. Accordingly, Turkey now represents almost 8% of our portfolio.

organization

Sincerely,

Sean Fieler

Daniel Gittes

END NOTES

[1] Performance stated for Kuroto Fund, L.P. Class A on a net basis. An investor’s performance may differ based on timing of contributions, withdrawals, share class, and participation in new issues. Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, or Bloomberg. Company valuations and exposures as of 10.31.18.

[2] https://www.reuters.com/article/us-turkey-economy-inflation/turkey-inflation-surges-to-nearly-25-pct-in-sept-highest-in-15-years-idUSKCN1MD0TP

[3] WOOD company research, bank websites

[4] Garanti 3Q2018 Investor Presentation, pg 6, https://www.garantiinvestorrelations.com/en/images/pdf/3q18__BRSA_Unconsolidated_Earnings_PresentationV2.pdf

[5] Turk Traktor 3Q2018 Investor Presentation, pg 20, http://turktraktor.com.tr/pdf/7422018_3Q_eng.pdf

[6] Akbank, Garanti, Isbank, Yapi Kredi 3Q financial statements

[7] JP Morgan Perspectives: Ten Years after the Global Financial Crisis, pg 138, Figure 1

Equinox Partners Precious Metals, L.P. - Q2 2018 Letter

Tue, 31 Jul 2018 17:31:54 GMT

Dear Partners and Friends,

Mining Company Engagement

Our experience investing in mining companies has taught us that partnering with better-managed, better-governed mining companies is the key to performing well in the long run. As a general rule, this strategy entails identifying better executives and board members and then letting them do their job. That said, our involvement in board construction at MAG Silver and Ferreycorp positions us to take a proactive approach with companies when the opportunity arises. The following letter highlights three recent instances in which we have been more active as shareholders.

orezone gold

One year ago, following the departure of the long-time CEO, Ron Little, we became concerned that the Orezone board might be tempted to sell the company at a low price and move on. Happily, our initial concern proved to be unfounded: Orezone’s new CEO, Patrick Downey, has laid out a clear way forward for the five million ounce project. An engineer by background, Patrick spearheaded a redesign that is economic at $1,200 gold. He also brought in a leading private equity firm, Resource Capital Funds, to help finance the project and lend credibility to his strategy.

Our intensive conversations with Patrick over the past year led to a recent, formal offer to join the board. With the company entering a critical phase of financing and construction, this was a good opportunity to ensure that the interests of existing investors were well represented. Accordingly, we accepted and Marco LoCascio joined the Orezone board in June, after serving for an extended period as a non-voting observer. As a board member, we have continued to advocate for a conservative, simple capital structure that preserves the per share ownership of Orezone’s existing equity holders.

Bear Creek Mining

Bear Creek owns a large, undeveloped silver deposit in Peru. The asset is now construction ready, but the company is unable to finance the project with silver prices below $16. For the time being, Bear Creek must balance the local community’s eagerness to proceed with the investors’ desire to wait for a more opportune moment to finance the project. Given this delicate balance, we have been in regular conversation with the company.

Like the other sizable investors in Bear Creek, we are attracted to the company’s 200+ million ounces of silver and 4.5 billion total pounds of lead and zinc. At current prices, we estimate that the company’s Corani deposit holds over $5 billion of recoverable metals. Such a large resource requires a sizable capital expenditure to exploit economically. Bear Creek estimates that it will cost $600 million to develop its Corani asset—an impossible figure for a $150 million market cap company.

Rather than attempt to string the $600 million together through a combination of debt, streams, equity, and off-take agreements, we are encouraging the management to spend the money they currently have on hand to maintain their mining license and strong relationship with the local community. This strategy requires patience and diplomacy, but it is clearly in the best interest of the shareholders. We have shared our outlook with both the board and the CEO in person.

Dundee Precious MEtals

Dundee is our largest position because it is so undervalued. The company has a market cap of $400 million, and will generate cash flow of $150 million in 2019. The company has little debt and can buy back more than 20% of its stock over the next 18 months without taking on additional debt.

Dundee’s extraordinary low valuation reflects the market’s concern that the company will not allocate its free cash flow wisely. The company’s capital allocation decision is simple: The company can take advantage of its low stock price to reduce its share count, or it can press ahead with an acquisition. At this valuation, however, any new capital commitment will be grossly inferior to a share buyback. We’ve communicated that message repeatedly to the management. In particular, we’ve emphasized that Dundee needs to be sensitive to new projects given its history of capital intensive investments.

For more than a decade, Dundee was forced to invest in a smelter it acquired to process the ore from its Chelopech mine in Bulgaria. At the time, the company argued that these investments would generate good returns, but Dundee’s smelter business has only ever been breakeven. In addition to hurting the company’s returns, these investments damaged the company’s credibility as a capital allocator.

Given this history and the proximity of sizeable free cash flow, we initiated a dialogue with both the management and board about the best use of the company’s future free cash flow. Specifically, we have encouraged the company to adopt a policy of avoiding new projects until the market offers Dundee a much lower cost of capital. Our efforts resulted in a formal letter to the board detailing our analysis of the attractiveness of share buybacks relative to an acquisition. As several board members are large owners of stock, we are therefore optimistic that they will make a wise decision.

conclusion

We remain focused on ensuring that our companies are good stewards of their cash flows. In a handful of cases we’ve oriented our relationship with boards and executives around this particular goal.

Sincerely,

Sean Fieler

Equinox Partners, L.P. - Q2 2018 Letter

Tue, 31 Jul 2018 15:48:08 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners declined -4.4% in the second quarter of 2018. Through July 30, the fund was down -16.7% for the year to date.

While our fund has performed poorly for the year to date, the companies we own are performing well. Accordingly, the valuation of our portfolio is compressing. As of June 30, our operating companies were trading at 12.7x estimated ’19 earnings, our mining companies at 3.7x estimated ’19 cash flow, and our energy companies at 4.6x estimated ’19 cash flow. During the second quarter, we purchased two precious metals miners, a bank in Georgia, an energy company operating in the U.S., and sold short a U.S. tech company. We also exited a Mexican mining company and reduced our operating company long exposure from 32.5% to 28.7%.

gold

“Even if it works, you’re a jerk.” — Charlie Munger on gold

Conventional wisdom is that gold investors hope bad things will happen. They pine for a trade war, uncontained inflation, central bank missteps, or more or less anything awful that will drive investors to buy gold in droves. Gold investors not only hope for the worst but are incapable of appreciating the progress humanity has made, which is why they cling to their antiquated monetary technology. In Munger’s opinion, this antisocial worldview is so distasteful that it merits opprobrium even if proven right.

Needless to say, we disagree with Munger. The gold investors we know, like more or less everyone else, hope for the best. But, unlike most everyone else, gold investors refuse to believe in the end of financial history. For gold investors, there is nothing novel about government efforts to free our financial system from the credit cycle. Financial history is replete with such attempts. Financial history is also replete with their failure and evidence that these noble undertakings tend to fail spectacularly just when the ever-upward slope of progress seems to be a foregone conclusion.

As global investors, we are regularly reminded that progress is not linear and that the economic cycle has not been repealed. This conviction comes from having lived through more economic cycles than most domestic investors even notice. From the Asia Crisis of 1997, to the Russia Crisis of 1998, to the end of the Real Plan in 2002, to the Argentine Crisis of 2006, to the European Bond Crisis of 2011, to the Turkey Crisis of 2018, we see no evidence that economic cycles are a thing of the past. Moreover, our analysis of these crises reveals two common ingredients: over confidence and over leverage—two qualities that the developed world currently has in spades.

Economic cycles, which remain an accepted fact of life in emerging markets, are increasingly viewed as an avoidable policy error in the developed world. It is almost as if there are two types of countries which are fundamentally unequal. There are countries that remain subject to cyclical vagaries, and there are a handful of core developed world countries subject to a new set of more benign economic rules. Chief among these new rules is that financial stress always benefits the core. This is true even if the stress originates in the core. For example, were the United States to run a large, pro-cyclical fiscal deficit, it would place stress on the U.S. Treasury market which in turn would put even more stress on foreign dollar borrowers which would drive a flight to safety which would in turn buoy the U.S. Treasury market.

While we certainly appreciate the well-worn trading patterns underlying these new economic rules, we are quick to point out that the developed world’s elevated status in global capital markets is not a result of superior policy making. Rather, at its heart, the developed world’s privileged status stems from its ability to take on ever more debt without spooking creditors. This accident waiting to happen, in our opinion, has now gone on so long that many observers actually mistake it for progress. But, why, we ask, must progress involve quite so much debt? Why, for example, nine years into a global, synchronized economic expansion must the world add $8 trillion of debt in a single quarter? From our perspective, this continued reckless accumulation of debt does not signal uninterrupted progress, but instead a deeply destabilizing force with which few market participants are inclined to grapple. Dave Rosenberg’s commentaries, to his credit, have been an exception to this rule:

This entire cycle was built on a mountain of debt that likely never does get repaid, but has to be serviced nonetheless. Consider that at the peak of the last credit bubble, the level of outstanding debt at all levels of society – household, business, and government – totaled $27 trillion or about 225% relative to GDP. Fast forward to today and that number has soared to nearly $50 trillion or 250% of GDP. So look at what happened – the USA merely added more debt to an existing debt bubble. For all the bravado about this long cycle we have enjoyed, it was accomplished on a credit bubble that makes what happened in the 2002-07 mortgage mania look like a walk in the park. The main message being that the economy is more susceptible today to even moderately higher interest rates, which is what we are now experiencing, that at any other time in modern history. Just remember – interest rates exert peak impact with lags. My advice therefore is to not extrapolate what we just saw in the second quarter GDP report, but to instead treat it as a fond memory.

- Breakfast With Dave, July 31, 2018

Amidst this rapid increase in debt, it is galling, but not surprising, that the Federal Reserve has chosen to champion its commitment to financial stability. Galling because if there is one thing a central bank should do to maintain financial stability it is to contain system-wide debt. After all, if adding more debt was a sustainable way to achieve financial stability, why didn’t central bankers of the past also pursue this course? The flippant answer is that in the past the bond market wouldn’t let them. The more troubling answer is that past central bankers weren’t arrogant enough to believe that they could subdue the economic cycle or brazen enough to paper over downturn after downturn knowing full well that the resulting increase in debt would inevitably cause a larger future problem.

The age-old tradeoff between pain today in lieu of more pain tomorrow now seems passé, but this tradeoff was largely why central banks of the past accepted or even initiated recessions. They knew that as painful as a recession might be that financial retrenchment was sounder than the alternative. Today’s central bankers, by contrast, argue that the right policy can simultaneously optimize employment, inflation, and financial system stability indefinitely. Seasoned investors sense that not only is this too good to be true but the effort to achieve this combination of outcomes will eventually create problems that even central bankers cannot solve. That said, after a decade of central bankers’ successful management of the economic cycle, most investors have given up waiting for the eventual failure of their policies.

For those who have not given up, gold is just one among many ways of registering disbelief in the sustainability of the status quo. So, why are gold investors singled out for criticism by Munger and others?

Trivially, short-sellers and traders of derivatives are buying what Wall Street is selling. So, while they don’t agree with the consensus, they are still participating in the financial ecosystem. Gold investors, by contrast, are signaling that something is wrong not just with asset prices but with the financial system itself. For many, this is seen as unhelpful. It is one thing to say that financial assets are overvalued, it is an entirely different thing to say that the very structure of the market is deeply flawed, with the latter offense being antisocial enough to merit condemnation even if it is right.

Equinox Partners, of course, owns no gold, only gold and silver mining companies. As we’ve written before, this strategy has enabled us to add value while we wait for gold’s unique financial attributes to regain wider appreciation. While the topline results of our mining investments have been disappointing, we’ve undisputedly added value over the past seven years. Specifically, from its monthly peak in 2011 through June 30, 2018, the gold mining stock index (HUI) has declined 67.6%. Over that same period, our gold and silver investments are down just 12.5%.

Having preserved our partners’ capital through the depths of an extended and severe bear market in gold and silver mining companies, we are particularly well positioned to benefit from a recovery in the sector. Most notably, the long-term partnerships we’ve developed with the better-managed, better-governed companies that have resulted in our outperformance in the ongoing bear market in precious metals miners should also translate into our outperformance in the next bull market.

Sincerely,

Sean Fieler Daniel Gittes

^{[1] Sector exposures shown as a percentage of 06.30.18 pre-redemption AUM. Performance contribution derived in US dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L included in Fixed Income. P&L on cash excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data derived from internal analysis, company presentations, or Bloomberg. All values as of 06.30.18 unless otherwise noted.}

^{[2] IIF,} ^{Global Debt Monitor} ^{– July 2018}

^[3] The junior gold mining index, GDXJ, by comparison, is down 76.9% from its month-end April 2011 peak through June 30, 2018.

Kuroto Fund, L.P. - Q2 2018 Letter

Tue, 31 Jul 2018 15:08:39 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund declined -8.1% in the second quarter of 2018. The EM index lost -7.9% over the same period. For the year to date through July 30, Kuroto Fund was down -8.6% while the index was down -4.2%. [1]

During the second quarter, we sold our stakes in an African telecom and a Colombian consumer business based on their valuations. We also initiated investments in a Nigerian bank, a Turkish industrial, and a Georgian bank. At the end of the quarter, Kuroto owned 30 companies.

technology and our portfolio

From artificial intelligence to smart phones, technology is changing the world. Over the past decade, this change has reshaped equity markets, including those in the emerging world. Technology companies, which a decade ago comprised just 10% of the emerging market index, today represent 27% of the same. While direct investments in technology companies represent only 12% of Kuroto’s portfolio, we carefully think through how technology is changing the way our companies do business.

In some instances, our businesses have been beneficiaries of technological change, while in other cases it has produced headwinds. The effects of technological change can be broad or company and country specific. Sometimes technological change that has impacted businesses in the developed world maps neatly onto the emerging world. In other cases, businesses in the emerging world have remained insulated from changes sweeping the developed world. And, in some cases, the adoption of technology in the emerging world has preceded the adoption of that same technology in the developed world. Given these variations, rather than attempt to discuss technological change in generalities, we thought it would be more valuable to highlight specific ways in which technological change is reshaping our portfolio companies.

A headwind for our auto parts distributor in eastern Europe

We own Inter Cars, the leading distributor of aftermarket auto parts in Poland and Central and Eastern Europe (CEE). Accordingly, we watched with great interest as the entrance of Amazon into the auto parts business in the United States led to a sharp downward rerating of Advanced Auto Parts, O’Reilly and AutoZone. While Inter Cars’ business model is similar to these three American auto parts companies, the competitive situation Inter Cars faces is very different than that in the U.S. Most notably, Amazon’s success in auto parts is concentrated in the do-it-yourself market (DIY), not the do-it-for-me market (DIFM) that predominates in the CEE.

In the DIFM segment, price and speed of delivery are two factors critical to success. On both counts, Inter Cars retains a clear advantage over all of its competitors. And, unlike the U.S. where Amazon is investing in the infrastructure necessary for hourly delivery, in the CEE none of the e-tailers can plausibly invest in this capability. That said, it would be foolish to conclude that these new competitors will not impact Inter Cars’ business over time. Online competition will certainly be a future headwind, but that future is still at least five years away, and even then it is unclear if these competitors can achieve a cost advantage vis-a-vis Inter Cars.

Another long-term technological threat to Inter Cars’ business is a change in the way that cars are used and built. The combination of ridesharing apps and electric cars, ceteris paribus, will lead to fewer cars with fewer parts. However, even in the U.S., these dynamics will still take years to meaningfully dampen the consumption of auto parts. In Poland in particular and the CEE more generally, we expect a significant lag in the adoption of these two technologies. First, given Poland’s wide distribution of population across many small cities, a reduction in car ownership will be slow in coming. Second, so long as Poles retain the habit of buying used foreign cars, Poland will remain home to the “car trash of Europe” and at least a full life-cycle of cars behind Western Europe.

Finally, technology is far from purely negative for Inter Cars. The company has invested in an online platform that allows their customers to order directly via website or mobile app. This has saved the company money through a smaller telesales force and a reduction in the number of its printed catalogs. Furthermore, Inter Cars’ ERP system has allowed the company to add the significant operational complexities necessary for expansion into new business lines and geographies. The company is also optimizing its internal IT system to achieve further purchasing efficiencies. As these examples show, Inter Cars is getting smarter and more efficient operationally thanks to tech.

The rapid adoption of mobile money in the emerging world

Over the past two years, we’ve made and exited investments in mobile-money platforms in both Africa and Asia. Specifically, we bought Safaricom in Kenya, a cell phone carrier with a dominant mobile-money offering. And, in Bangladesh, we bought BRAC Bank, a bank with a dominant local mobile-money offering.

While mobile money is ripe for expansion throughout the emerging word, we have focused our attention on the few countries that have a more laissez-faire regulatory environment for mobile money. In some instances, like Kenya, this regulatory approach has resulted in a cell phone carrier going to scale quickly without effective push back from the banks. In other countries, like Bangladesh, a bank was the first mover. These two examples stand in contrast to most markets where banks have blocked the cell phone carriers from offering mobile money while not offering a scalable product of their own.

When regulators have supported competition amongst the banks and cell phone carriers, the first mover is often able to achieve winner-take-all economics. Accordingly, in Kenya, Safaricom has 80% market share [2] , while BRAC Bank has 70% market share in Bangladesh [3] . Not only do these companies’ dominant networks become phenomenally profitable once established, but they also have a long-term growth opportunity as they take share from both cash and traditional demand deposits.

A dominant mobile-money business also generates positive effects for the affiliated business, whether it is a bank or a cellphone carrier. Safaricom’s mobile-money solution, m-pesa, supplements its dominance in the cellphone market by increasing customer stickiness, thereby decreasing the customer churn that the company faces. Similarly, BRAC Bank’s mobile money, bKash, helps BRAC Bank retain and acquire traditional banking customers.

We remain enthusiastic about the business prospects of both BRAC Bank and Safaricom, but have exited both positions due to valuation. We sold Safaricom at 21x earnings and BRAC Bank at 17x. While not unattractive, these multiples are discounting a majority of the value of m-pesa and bKash respectively. We currently have a position in another African mobile-money company and are investing in one more. The shares of these two dominant mobile-money companies trade at ~12x this year’s earnings, a surprisingly low valuation for such high-quality franchises.

Sincerely,

Sean Fieler

Daniel Gittes

END NOTES

[1] Performance stated for Kuroto Fund, L.P. Class A on a net basis. An investor’s performance may differ based on timing of contributions, withdrawals, share class, and participation in new issues. Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, or Bloomberg. Company valuations and exposures as of 6.30.18.

[2] Telecommunications Competition Market Study in Kenya, Page 19, 20 February 2018

[3] Meeting with bKash CFO, 15 October 2017

Equinox Partners Precious Metals, L.P. - Q1 2018 Letter

Thu, 03 May 2018 17:45:28 GMT

Dear Partners and Friends,

portfolio comparison to the GDXJ

Our performance over the past two years has tracked the GDXJ and HUI. There are, however, several substantial differences between our portfolios and the indices. None of our companies are found in the HUI, while fewer than half of our companies are held in the GDXJ. Moreover, our companies that do overlap with the GDXJ have substantially higher weightings in our more concentrated portfolio of 21 companies. The GDXJ, by comparison, is comprised of 73 companies.

On a like-for-like basis, our portfolio trades at a substantial discount to the GDXJ. Our producers trade at 5.4x this year’s cash flow, whereas the producers in the GDXJ trade for 7.2x. Our royalty companies trade at 14.9x this year’s cash flow, whereas the royalty companies in the GDXJ trade at 20.5x this year’s cash flow. Finally, our developers trade at $64 per resource ounce, which is similar to the index at $61.

The composition of our portfolios amongst the categories of producers, royalty companies, and developers is also a significant point of difference. Producers account for 91% of the GDXJ’s value, with developers at just 6% and royalty companies at 2.8%. By comparison, our portfolios are comprised of 49% producers, 40% developers and 11% royalty companies.

As value investors, we are pleased that our portfolios trade at a discount to the GDXJ. That said, we are better business value investors, and there are many mines we would not own at any prices. Our set of priorities for selecting companies is as follows:

1) The quality of management

2) The quality of governance

3) The quality of the underlying asset(s)

4) Valuation

Experience has taught us to discard ideas that don’t measure up on the first three points even if the valuation is particularly attractive. While marginal assets, managements and board often appear exceedingly attractive on a spread sheet, in practice they often underperform over any meaningful period of time. The run-of-the-mill gold and silver mining company is a bad business that tends to destroy capital over a cycle. Moreover, rather than simply riding out the cycle, the more marginal companies tend to practice highly pro-cyclical behavior, selling assets and hoarding cash in bear markets and spending recklessly in bull markets. As a result of habitually selling cheaply and buying dearly, these companies tend not to retain the leverage to gold or silver that the spread sheet predicts.

Our overweight in developers is also grounded in experience. Specifically, we found that developers are, on average, better able to preserve their value through the cycle than producers. Since the gold price’s most recent peak in 2011, producers have spent the better part of a decade cutting costs and depleting reserves to eke out slim margins on the ounces they produce. When gold prices turn, these companies will find themselves forced to address the dwindling life of their assets. Well-managed developers, by contrast, have an easier time reducing their level of activity and preserving the per share value of their companies. They incur some ongoing spend and dilution, but these costs tend to be predictable and manageable. And, when the cycle does turn, their assets are perfectly positioned to benefit from sustained higher precious metals prices.

With respect to the producers and royalty companies that we do own, in each case we believe that these companies will behave significantly better than their industry peers. The reasons vary for each company, but overall and over time we are confident that our managers will grow the per-share value of their companies and that this growth will be very levered to higher gold and silver prices.

Sincerely,

Sean Fieler

Equinox Partners, L.P. - Q1 2018 Letter

Thu, 12 Apr 2018 17:58:16 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners declined -11.6% in the first quarter of 2018. Through April 12, the fund was down -4.2% for the year to date.

Our energy companies accounted for half of our loss through the first quarter. During the quarter, these companies were off 28% on no material news. Not surprisingly, the shares of these same companies rebounded sharply in early April along with the rest of the portfolio.

discounting political change

In our third quarter 2016 letter, we noted that we were living through a still opaque turning point in history. Fifteen months later, it is clear that the post-Cold War status quo is over. The details of the change have been diligently chronicled in the press, but the larger implications have yet to be discounted in the market. The market’s hesitancy to factor in the fundamental alteration in the geopolitical landscape raises pressing questions for investors: What are the broad contours of these changes, and how will they effect the valuation of securities? While wrestling with these difficult questions, most investors have become skittish without fundamentally rethinking their investment strategy. This, we believe, is a mistake. Accordingly, we will outline our impressions of the geopolitical environment and the implications for our global portfolio of securities.

The election of President Trump structurally altered the geopolitical landscape. Under his leadership, America is treating China and Russia as strategic rivals in a way that the previous three American Presidents did not. So far, this means that America has ignored Chinese and Russian domestic political repression, but not their territorial expansion or mercantilism. President Trump, for example, congratulated President Putin on his reelection while simultaneously sanctioning Russian oligarchs close to President Putin, attacking Russian mercenaries in Syria, and expelling sixty Russian diplomats from the United States. The wisdom of this particular combination of policies is open for debate. But, together these actions reflect an effort on the part of the Trump Administration to delineate the geopolitical terms in which it wishes to engage with Russia.

Perhaps as important as Trump’s election and new policy direction is President Xi’s and President Putin’s successful consolidation of power domestically. In March, President Xi oversaw changes to the Chinese constitution that allow him to serve an unlimited number of consecutive terms, and President Putin won a rigged reelection with 80% of the vote and 67% turnout. In both cases, Xi and Putin have achieved a concentration of power that their countries have not seen in decades. Their successful consolidation of power begs the question: What will they do with it?

By all accounts, President Xi and President Putin have ambitions of leading their respective countries to their destiny. Each sees himself as the historic leader capable of delivering on those objectives. This shared ambition, however, is translating in to two very different paths forward. In China’s case, a continuation of their harmonious rise strategy remains the default setting. If China can avoid a domestic financial crisis, grow their economy, achieve technological parity with the West, and opportunistically assert their interests abroad, then they will likely rival, and perhaps surpass, America economically and militarily in the decades to come. Accordingly, China’s best strategy is to stay the course, grow, and avoid unnecessary confrontations with the West. This, not coincidently, is exactly the vision that President Xi laid out in his recent 3 hour and 23 minute speech this spring entitled, “Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era.”

President Putin’s ability to deliver on Russia’s ‘destiny’ as a first-tier world power is less straightforward and more problematic for America in the short run. With low growth, catastrophic demographics, and almost no appetite for the potentially destabilizing effects of economic reform at home, it is difficult to see how Russia can achieve its destiny by rising harmoniously. Instead, Russia’s most realistic path to a stronger geopolitical position involves America losing power. While logical, Russia’s zero-sum view of its rivalry with the United States is also problematic. This particular competitive framework, for example, lends credibility to the rumors that Russia helped North Korea achieve its improbably quick mastery of multistage missile technology.

The rapidly unfolding geopolitical competition amongst America, China, and Russia, and the newly important personal dynamics amongst Presidents Trump, Xi, and Putin, leave little doubt that we are living in a fundamentally changed environment. Gone are the days in which Russia was able to retake Crimea and China could militarize the South China Sea without risking a direct conflict with the United States. Going forward, the geopolitical competition amongst the United States, Russia, and China promises to generate significantly more geopolitical friction. For not only is Russia strategically incentivized to disrupt the status quo, but so too is the Trump Administration. Specifically, we expect America will look for tactical opportunities to challenge China. American tariffs on Chinese goods are just the first salvo of what will likely be a multipronged strategy. We, for example, would not be surprised if the U.S. Navy becomes significantly more aggressive in its freedom of navigation operations in the South China Sea.

Today’s over-leveraged world seems particularly ill-suited for a return of this sort of geopolitical brinksmanship. With China’s debt to GDP having skyrocketed to 295% and much of the developed world reporting even higher figures, it does not take much imagination to envision how the pricing-in of geopolitical risk could quickly translate into financial stress. While this risk is obvious, market participants have remained surprisingly blasé about the shifting geopolitical landscape. We believe the market’s misplaced confidence comes from a combination of the lingering effects of one of the longest running bull markets in history as well as the related belief that policy makers will act to preserve the financial status quo if need be.

Put bluntly, the past thirty years of financial history have instilled investors with a deep confidence that the world’s central bankers will do whatever it takes to preserve stability. The almost unthinkable alternative of central bankers standing aside while the market metes out rough justice would constitute a complete repudiation of the central banker consensus regarding crisis management. Although the long-run costs of episodic, but ever larger, interventions may eventually outweigh the benefits, we know of no currently serving central banker willing to stay on the sidelines and make that argument. Accordingly, we expect that the cost of preserving financial stability will need to be clearly prohibitive before central bankers will convincingly back away from their strategy of what still appears to be successful market manipulation.

The more proximate short-term risk to financial stability, as we’ve attempted to lay out in this letter, is that other policymakers do not share central bankers’ strong preference for stability. Specifically, as we game out the newly minted geopolitical landscape, we are struck by the extent to which the fate of the world lies in the hands of Trump, Xi, and Putin, rather than the world’s central bankers. We are equally struck by the reality that ever-higher financial asset prices are a means to an end, not the actual end sought by Presidents Trump, Xi, or Putin. All other things being equal, each would prefer ever-ascending financial asset prices. But, all other things are never equal.

In today’s particular geopolitical and financial context, we believe that our portfolio is exceptionally well positioned. Gold and silver continue to price in central banker omnipotence. So, any hint of central bank impotence would do wonders for the prices of monetary metals and our companies in particular. Our Western Canadian energy companies are also significantly undervalued. These E&P companies are being priced as if their location in North America near the Pacific Ocean is a structural liability rather than a strategic asset. The government bonds we are short continue to provide investors with either a negligible or negative real yield. The bond investors are justifying these low yields with the hope that the next crisis will extend, rather than curtail, the thirty-five year bull market in these fundamentally overvalued securities. Finally, our reduced portfolio of superior operating companies should continue to compound intrinsic value despite the rise in geopolitical tension.

Sincerely,

Sean Fieler Daniel Gittes

^[1] Sector exposures shown as a percentage of 3.31.18 pre-redemption AUM. Performance contribution derived in US dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L included in Fixed Income. P&L on cash excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data derived from internal analysis, company presentations, or Bloomberg. All values as of 3.31.18 unless otherwise noted.

Kuroto Fund, L.P. - Q1 2018 Letter

Thu, 12 Apr 2018 15:11:10 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

discounting political change

In today’s particular geopolitical and financial context, we believe that our portfolio is well positioned geographically, fundamentally, and in terms of valuation. We continue to own a geographically diverse collection of 27 companies, only 3 of which are included in the EM index. Furthermore, these businesses have idiosyncratic risks and opportunities which should be the drivers of their intrinsic value, and are largely insulated from growing geopolitical volatility between the US, Russia, and China. Finally, we have increased the fund’s cash position in order to take advantage of any buying opportunities that may arise.

Sincerely,

Sean Fieler

Daniel Gittes

END NOTES

[1] Performance stated for Kuroto Fund, L.P. Class A on a net basis. An investor’s performance may differ based on timing of contributions, withdrawals, share class, and participation in new issues. Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, or Bloomberg. Company valuations and exposures expressed as of 3.31.18.

Equinox Partners, L.P. - Q4 2017 Letter

Tue, 23 Jan 2018 18:12:38 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners declined -0.8% in the fourth quarter of 2017 and gained +11.5% for the full year. Through January 19, the fund is down -0.8% for the year-to-date 2018. ^[1]

Our global operating businesses and precious metals miners were responsible for more than all of our gains last year. Our operating companies appreciated 41% in 2017 while our mining companies were up 14.5%. Our fixed income shorts generated a small loss while our E&P companies declined 19%. The price of our E&P companies fell sharply as their multiples compressed and the price of natural gas in Western Canada fell.

Throughout the year, we actively sold shares in our best performing companies as they approached full value. We redeployed this capital into significantly undervalued companies as well as new short positions. As a result, we reduced our weighting in global operating businesses from 43% to 33%. Our E&P weighting also declined from 29% to 21% despite our purchases in the sector. We increased our weighting in gold and silver mining from 41% to 46%. And, on the short side, we increased our short bond positon from 77% gross to 83% gross, inclusive of our corporate bond shorts.

We sold significant portions of two of our largest positions during the year, Aramex and Ferreycorp. As a result of these sales, Aramex is no longer a top five position. Amongst the positions in which we invested additional capital, Crew Energy topped the list. Crew remains one of our largest long positions, and we invested aggressively in this company as its share price fell last year.

TOP-FIVE HOLDINGS

With our four largest equity positions accounting for 32% of partners’ capital and our fixed income short position equivalent to -68% (net), this top-five letter offers insight into our decision-making process as well as the portfolio as a whole. With the exception of Aramex, the portfolio’s top positions are the same as last year. We did not, however, include our fifth largest long equity position, Bear Creek, but instead included a write up of our short fixed income position which is, on an absolute basis, our largest position.

Mag Silver - 9.5% of the fund

MAG Silver, through their JV partnership with Fresnillo, is the 44% owner of the best undeveloped silver mine in the world. Juanicipio is among the highest grade deposits in the world as shown in the graph below. ^[2]

Last fall, MAG announced the expansion of the Juancipio mine plan from 2,400 tonnes per day to 4,000 tonnes per day. This rightsizing of the mine incorporates the expanded orebody while preserving a 19-year mine plan. While this expansion is an enormous positive development, the updated feasibility required the companies to push back the construction timeline by six months. Under this new timeline, we expect the Juancipio feasibility study to be released early in 2018 and a construction decision in the first half of 2018. More importantly, the Juanicipio mine is on track for production by early 2020.

MAG’s preliminary economic assessment demonstrates the value of its stake in the Juanicipio JV. This study incorporates the exploration success of the last few years and shows a resource 250% larger than the previous study released in 2012. There are now 172m oz of silver and 600k oz of gold in the joint venture mine plan. The study estimates that MAG will receive just over $100MM in the early years of the project at current silver prices. Accordingly, with a market valuation of just $1 billion, we think MAG remains undervalued.

The higher throughput for the Juanicipio mine increased the initial capital required for the project. As a result, the MAG board elected to raise an additional $48MM in equity in order to fully fund their portion of the development capital. While we believe the company could have raised the capital more cheaply had they waited until construction began, we continue to hold MAG’s board in high regard.

Going forward, we expect the Juancipio orebody will grow further and that new mineralization will be discovered on the MAG-Fresnillo joint-venture property. With decades of free cash flow ahead from Juancipio and the likelihood of new investment opportunities, we are encouraging the company to communicate a clear capital allocation policy for the future. We believe that a clear articulation of MAG’s corporate position as an investor, not an operator, of high-quality assets is the best way for the company to obtain the premium valuation it deserves.

Paramount Resources - 7.8% of the fund

Paramount entered 2017 with a large, high-quality land package, 12k bpd of production, and a $566MM cash balance. As of the end of 2017, Paramount was producing 95k bpd and carrying more than $500MM of net debt. As its strong share price suggests, Paramount’s rapid transformation occurred on incredibly favorable terms.

Having entered last year in a position of extraordinary financial strength, Paramount was perfectly positioned to take advantage of the distressed market for E&P assets. The result of their effort was two major transactions. First, Paramount purchased Apache’s Canadian operations for just 3.3x annualized cash flow. Paramount followed up this purchase by merging with its sister company, Trilogy, which held assets adjacent to the property sold by Apache. Simultaneous to these two transactions, Paramount began to develop some of its own high-quality acreage.

Paramount is now on track to grow its production to over 200k bpd by 2021 while reducing financial leverage. This desirable combination of growth and deleveraging is possible because Paramount’s mix-shift towards more liquids production will drive corporate margins higher. This year, we expect liquids will account for three-fourths of Paramount’s total revenue. As a result, when production doubles, the company’s cash flow should triple. Through Paramount, we own self-financing high-rates of production growth trading at 6.4x estimated 2018 cash flow and 2.4x cash flow at 200k bpd.

Given the challenges of going to scale, Jim Riddell, Paramount’s CEO, has rightly focused his attention on improving Paramount’s operational performance. Jim has brought in young talent with experience in the U.S. and has revamped the team structure so as to better incentivize performance and innovation. Thus far, the drilling results have been solid. While the company’s stock has performed well on a relative basis, the transformation at Paramount has yet to be fully recognized by the market.

Crew - 7.6% of the fund

In the fourth quarter of 2017, the futures contract for 2018 AECO natural gas was basically cut in half. At current AECO prices, Crew cannot internally finance production growth and will struggle to maintain its 2017 exit rate of production.

AECO gas prices have long traded at substantial discounts to Henry Hub and other North American markets. The differential from Canada to the U.S. has historically been less than $1/mcf. More recently, this differential has widened to almost $1.80/mcf as shown in the graph below. This widening is a result of insufficient local natural gas infrastructure.

To address this infrastructure bottleneck, TransCanada has scheduled an expansion of takeaway capacity which, in the short-term, has resulted in periodic shutdowns of the system. While these efforts will improve the gas price differentials over time, they have substantially widened the differential in the short term. With the precise timing of a remedy uncertain, the future price of gas in Western Canada is reflecting a never-ending series of repairs.

The market is also ignoring the growing likelihood of Canadian LNG as a response to these price differentials. Two projects, one led by Shell and another by Chevron, are nearing their final investment decision, and we should know as early as this year whether they will go ahead. If just one project goes ahead, it has the potential of reversing the discount Canadian producers receive, thereby increasing their cash flows tremendously. Even without LNG, several new pipelines are slated to be built in the coming years, which will result in more capacity and improved pricing.

Crew’s short-term situation would have been far worse had the company not systematically diversified their end markets for gas and improved their capital structure. As a result of these steps, less than half of Crew’s gas is directly impacted by the AECO differential, and $300MM of their $340MM of debt is in the form of a covenant-lite bond that is not due until 2024. The remaining $40MM of debt is a result of their partial drawdown on a $235MM bank line. Even at today’s gas prices, Crew’s overall debt to cash flow of just under 3x is not problematic.

Rather than simply waiting for their realized gas prices to improve, Crew is in the process of divesting several non-core properties to fund profitable growth. We believe the undeveloped assets the company could sell are alone worth more than the entire market cap of the company. Accordingly, were they to even partially monetize their land portfolio, we believe the market would quickly revalue the company. In addition, Crew is wisely focusing its capital spending on the most liquids-rich opportunities in the Septimus area, which generate north of a 50% IRR at current prices. By focusing exclusively on these high IRR liquids-rich wells, Crew can return to growth even at today’s depressed natural gas prices, albeit at a much slower pace than envisioned previously.

Going forward, Crew stands to gain from both the company’s own efforts to unlock value and from the closing of the differential for Canadian gas.

Ferreycorp – 7.3% of the fund

Ferreycorp is the exclusive Caterpillar dealer in Peru. The company boasts high market share in its core product categories, an extensive distribution and support network, and a highly profitable parts and services business. We estimate that the company’s earnings were essentially flat in 2017. While a rebound in commodity prices saw some improvement in sales of mining trucks, political infighting in Peru prevented a material increase in infrastructure spending and dampened private-sector construction demand. Heavy flooding in March of 2017 further weighed on economic activity in the country. In light of Ferreycorp’s strong share price performance, lack of earnings growth, and outsized weighting in the portfolio, we sold approximately half of our Ferreycorp position in October.

Over time, we expect the political situation in Peru to improve and the mining investment cycle to turn. While the failed effort to impeach President Pedro Pablo Kuczynski late last year highlights the current fractious state of Peruvian politics, the Peruvian economy remains fundamentally sound. Moreover, Ferreycorp’s opportunity to grow earnings and improve returns on capital by cutting costs and selling non-core assets is largely independent of the political and macroeconomic environment in Peru.

In our first quarter 2017 letter, we detailed the significant changes shareholders made to the board of directors at Ferreycorp last March. Over the past nine months, the board and management began to take important steps in the right direction. While the progress with respect to capital allocation has been slower than we had hoped, the company has stopped selling its treasury shares into the market. This was a highly visible decision and clear evidence that the new directors are committed to improving capital allocation at Ferreycorp.

Going forward, we expect the new directors will push the company to deemphasize less profitable businesses, streamline the balance sheet, and drive returns higher. With their strong market share, a large, recurring service business, and the strength of the Caterpillar brand, we believe that Ferreycorp can achieve a high-teens ROE. We hope to see further evidence of these improvements in 2018 which should lead to both growth in earnings and a higher multiple on those earnings.

Bond Shorts – (68.4%) net of the fund

As the bond bull market enters its 34th year, it is shocking to put the length of this rally in historical context. Recently published research from the Bank of England shows that we are living through the second longest bond bull market in recorded history and the longest since the 17th century. [3]

Despite offering low or nonexistent returns and with no guarantee that current exceptional monetary conditions will persist, government bonds at the center of this bull market are still regarded as a safe haven. Investors’ continued willingness to own these bonds under such conditions reflects a combination of excessive faith in the power of central bankers and a lack of experience with bond bear markets.

By way of preview of what a worldwide reversal of the current bull market in bonds might look like, we believe 1965-1969 provides a useful guide. There are striking parallels between the monetary environments of the mid-1960s and today. First, inflation was low and stable in the mid-sixties, hovering around 1.5% through the end of 1965. Second, the unemployment rate slid from 5.5% at the end of 1963 to 4% in 1965 and just 3.6% by the end of 1966, with active debate about the degree of remaining slack along the way. Third, the Kennedy tax cut enacted in February 1964, Great Society programs of 1965, and the Vietnam War produced an ill-advised fiscal stimulus. Fourth, the Federal Reserve raised rates tentatively.

It is worth emphasizing that in the period leading up to 1965, inflation estimate trends were stable and only began rising sharply in 1966. One of the more notable features of narrative accounts from the 1960’s is just how suddenly the public’s confidence in price stability was lost. Given the popular complacency regarding pent-up inflationary forces, we believe that conditions are present for a significant depreciation in the price of Treasuries, analogous to what happened in the late 1960s. And, given that the market is still pricing in a perfect execution of QE unwinding by central banks, the sovereign bond shorts remain a top 5 position.

We recently added a handful of corporate bonds to what remains our largely government bond short position. This addition reflects our expectation that not only will rates raise, but corporate spreads will increase as well. Given that the Federal Reserve’s bond buying led to tighter corporate credit spreads, it stands to reason that the Fed’s plan to shrink its balance sheet by ~$400 billion in 2018 will likely lead to wider corporate credit spreads. Moreover, corporate credit spreads are extraordinarily low. Using broad measures, investment grade spreads are back to 1997 levels. But, this is not a like-for-like comparison as a much larger fraction of today’s investment grade index is composed of BBB credits than in the past. These low-yielding, barely investment grade credits, have been the focus of our expansion into corporate bond shorts.

S incerely,

Sean Fieler Daniel Gittes

END NOTES

^[1] Exposures as a percentage of 12.31.17 pre-redemption AUM. All values as of 12.31.17 unless otherwise noted.Performance contribution derived in US dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L included in Fixed Income. P&L on cash excluded from the table as are market value exposures for derivatives. Unless otherwise noted, all company data derived from internal analysis, company presentations, or Bloomberg.

^[2] Mag Silver Company Presentation September 18,2017

^[3] Bank of England. Staff Working Paper No. 686 .

Kuroto Fund, L.P. - Q4 2017 Letter

Tue, 23 Jan 2018 16:15:39 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Kuroto Fund declined -1.3% in the first quarter of 2018. The EM index gained +1.4% over the same period. For the year to date through April 11, Kuroto Fund was up +0.4% with the index up +1.8%

discounting political change

Sincerely,

Sean Fieler

Daniel Gittes

Equinox Partners Precious Metals, L.P. - Q4 2017 Letter

Thu, 18 Jan 2018 18:47:49 GMT

Dear Partners and Friends,

purchases and sales

In the fourth quarter, we added a position in Integra Resources, an exploration company led by a successful management team that acquired a project from Kinross in Idaho. We also added a small amount to Beadell Resources. We exited Aurico Metals when the company announced a takeover by Centerra Gold. We trimmed positions in Gold Road Resources, Sandstorm Gold, and Endeavour Mining.

Top-Five HOldings

Gold Road Resources: 10.6% SL / 11.4% WP

Gold Road trades at 94% of NAV and a 11% discount to the price Goldfields paid for its joint venture stake in the company’s Gruyere project.

Construction of the Gruyere project is proceeding as expected and we estimate a first gold pour in 2019. While there is always uncertainty in the construction and ramp-up process, in this case, the financial risk for Gold Road is mitigated by the structure of the JV contract. Specifically, Goldfields is required to cover the first $50mm of any overruns on a 100% basis.

In addition to fully financing the Gruyere project, the JV generated a substantial cash balance on Gold Road’s balance sheet. The company has been judiciously deploying that cash into exploration on the property it holds surrounding the JV. While gold mineralization is pervasive on the property, the team has yet to demonstrate the potential for another deposit of sufficient size and scale to be economic. As a result, the outlook for the exploration upside is necessiarly worse than it was at the beginning of the year.

We will continue to carefully monitor the company’s approach to exploration in 2018. Last year’s results would suggest that a more cautious budget is warranted, and the company needs to demonstrate it will be a good steward of capital when Gruyere starts to generate cash flow.

Dundee precious Metals: 10.8% SL / 9.7% WP

Dundee Precious Metals is an integrated producer and refiner of copper-gold concentrate with operating assets in Bulgaria and Namibia. Dundee is the most attractively priced mining company we own, trading at just 4x estimated 2018 cash flow. With production growth expected to come from the construction of their Krumovgrad mine this year, we expect the company’s EV multiple to cash flow will drop to 1.5x in 2019.

Dundee is so extraordinarily cheap in large part because the company is finally exiting a period of very high investment. Several years ago, the company’s smelter in Namibia, called Tsumeb, was put up for sale when the owner was experiencing financial difficulties. Because there are few facilities globally that can process Chelopech’s concentrate, Dundee decided to buy the smelter. In the ensuing years, Dundee was obligated to invest hundreds of millions of dollars into the smelter to modernize the process and rehabilitate the site. This investment generated no returns for shareholders and forced the company to raise equity on several occasions. From a shareholder’s perspective it was a long nightmare.

The headaches at the smelter have obscured the impressive operational performance at the mines in Bulgaria. Dundee purchased Chelopech from the Bulgarian government and revamped the dated infrastructure and replaced the Soviet mentality among the workforce. Today, Chelopech is a modern, low-cost operation with industry-leading technology. And, after years spent getting community and government approvals, the company is in the process of constructing its Krumovgrad project. We believe this high-grade mine will generate substantial growth in cash flow in 2019.

We think the market will soon recognize that Dundee’s investments at the smelter are finished and the cash flow from Bulgaria will be put to more productive uses going forward. At these valuations, we believe the most productive use of capital for the company is to buy back stock. We are encouraging the company to divest of their stake in Sabina, another listed company previously spun out from Dundee, and use the proceeds to finance a major stock buyback.

Roxgold: 7.9% SL / 7.9% WP

Roxgold operates the Yaramoko mine in Burkina Faso. Yaramoko is a high-grade, low-cost mine that completed its first year of production in 2017. Roxgold trades for about 4.5x operating cash flow and 8x free cash flow in 2018. With an expansion slated for 2019, those numbers drop to 4x and 5x respectively on our estimates.

In November, we visited Roxgold’s operation as part of a tour of mines in Burkina Faso. The company has done an impressive job building and commissioning this asset, aided by the very small scale of the mine. Since Yaramoko has such high grades, the company only needs to process 750 tonnes per day to produce about 120,000 ounces annually. A smaller scale means less complexity, which has helped mitigate the risk of ramping up what is the first underground gold mine in the country.

In 2018, the company will undertake an expansion to add processing capacity at Yaramoko and build a second mine on a satellite deposit called Bagassi South. The biggest issue the company faces is a short mine life of ~8 years and Bagassi is a successful example of how they hope to address it. While only representing a few years of contribution to the production profile, these ounces deliver extremely high returns on incremental investment. Roxgold may never have a 15 year reserve life, but there is good potential to replace depletion over time through the addition of satellite deposits and as they go deeper on the main zone.

Strategically, the biggest question for the company is what to do next. The team has demonstrated an ability to execute a mine build and they could decide to add another development property to the portfolio funded with cash flow from Yaramoko. Alternatively, another company could try to acquire or merge with Roxgold. Fortunately, the board is strong and substantially invested in Roxgold shares, so we trust they will make a good decision when the time comes.

Altius minerals: 5.6% SL / 6.4% WP

Altius is both a royalty and prospect-generation company. As such, the company both generates and acquires royalties across different commodities. Altius is managed by a savvy and contrarian management team that has a phenomenal track record over the long term. The company trades for about 15x cash flow generated by the royalty portfolio.

We own Altius because it is one of the few companies able to take advantage of the mining industry’s cyclicality by being counter-cyclical. The management of Altius brings the mentality of a value investor to mining. In the good parts of the cycle they are vendors of assets through their prospect generation business. In the downturns, they replenish the portfolio and look for royalties they can purchase at attractive valuations.

As a result, in the current depressed environment for gold mining companies, Altius is spending modest amounts of capital to develop a thesis for why its properties could host economic mineral deposits. In the next upcycle, Altius will find a line of junior companies with capital to test the hypothesis. Altius retains upside exposure should a discovery materialize through a combination of equity and royalty interests. In this manner, Altius maintains exposure to a large number of potential winners, without incurring the losses and dilution that are the most common outcome of early-stage exploration.

Altius has used the downturn of the last several years to dramatically increase its land holdings. 2017 saw the launch of Adventus, a spinout from Altius focusing on zinc exploration. Altius structured this spinout, recruiting management and several large institutional investors to back the new company. Altius’ equity in Adventus is now worth $10 million on paper even as the company spends to explore the properties Altius staked. It’s a good example of the company’s model and will likely be followed with a copper vehicle this year.

The company’s royalty portfolio, meanwhile, is performing extremely well due to rising commodity prices and operational performance at the underlying assets. Altius’ valuation gives little to no value beyond the royalty business, which is as safe a business as exists in the mining industry. The unique combination of a stable royalty company with the upside of a prospect generation business, managed by an exceptional team of executives, is what makes Altius such an attractive investment.

Sandstorm Gold: 5.4% SL / 5.2% WP

We wrote about Sandstorm in our previous letter. To review, Sandstorm is a royalty and streaming company that recently acquired Mariana Resources. Mariana owned a minority stake in a very high-grade asset in Turkey called Hot Maden. We believe that the Hot Maden stake is very close to a stream in its economics, and is set to double Sandstorm’s production when it starts up around 2021. Sandstorm trades for about 15x cash flow in 2018.

In December, Sandstorm announced the purchase of a 2% royalty on Endeavour’s Hounde mine in Burkina Faso. At $45 million, they paid a full price on the current reserves, but Endeavour is engaging in an aggressive exploration program targeting a doubling of reserves over the next few years. If they are successful, the price paid for the royalty will prove to be attractive.

In 2018, we expect more information about Hot Maden in the form of drill results and an economic study. Sandstorm’s Turkish partner, Lidya Madencilik, will move forward with preparations for the permitting needed to construct and operate the mine. Hot Maden represents 40% of the company’s value and its single most important asset.

Beyond Hot Maden, we expect Sandstorm to continue to look for opportunities to acquire new royalties. With net cash on the balance sheet, $150 million in capacity on their revolver, and expected cash flow from the portfolio, the company has ample liquidity to pursue more deals.

One other development bears mentioning: Early in 2018, a three way merger took place to form Equinox Gold. Equinox will use the combined resources to recommission the Aurizona mine in Brazil. Sandstorm previously owned a stream on Aurizona which they renegotiated into a royalty and stakes in the equity and convertible debt of the predecessor company, Trek, after the mine shut down due to low gold prices and lack of investment. The formation of Equinox Gold allows them to monetize the securities and should bring some value to the royalty interest. This episode shows one of the values of the royalty model: even when the underlying assets run into problems, the royalty owner retains exposure to the project. While the renegotiation resulted in the loss of value for Sandstorm, the experience was dramatically more painful for shareholders of Trek.

Sincerely,

Sean Fieler

Equinox Partners, L.P. - Q3 2017 Letter

Wed, 01 Nov 2017 17:31:11 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

Equinox Partners gained +10.0% in the third quarter of 2017. For the year to date through October 31, we estimate our fund was up +10.8%. [1]

In October, we sold half of our Ferreycorp position; it remains a sizeable holding. We also began shorting U.S. corporate bonds. In the third quarter, we made modest changes to several positions and fully exited Argentina.

portfolio construction

“We seek to own a concentrated portfolio of undervalued, high-quality businesses and sell short overpriced securities that offer an attractive risk/reward while positioning our fund on the right side of financial history.” —Equinox Partners monthly summary

Owning “…a concentrated portfolio of undervalued, high-quality businesses...” and shorting “… overpriced securities that offer an attractive risk/reward…” is a typical hedge fund strategy. And, positioning our fund on “the right side of financial history” is an implicit objective of long-term macro investors. But, marrying these micro and macro objectives in one fund, as we have for the past twenty-three years in Equinox Partners, is unusual.

The resulting portfolio is built to profit from both the financial status quo as well as its inevitable end. Specifically, we expect the undervalued, superior businesses we own to compound their intrinsic value during periods of relative macroeconomic stability. As such, we are conventional better-business value investors. We also believe that positioning our fund on the right side of financial history has never been more important. Herb Stein famously quipped that “if something cannot go on forever, it will stop.” The clearly unsustainable feature of the current macroeconomic environment can be summed up in just three words: too much debt.

For decades, the developed world has been on a historically unprecedented debt binge, and since 2008 much of the emerging world has joined the party. The result is a world awash in debt of every variety: government debt, central bank-owned debt, personal debt, structured debt, junk debt, shadow-bank debt, etc. Recent debt records include the $247 billion of CLOs issued in the first nine months of 2017, ^[2] and the year-to-date leveraged loan issuance of $1.25 trillion which eclipsed the previous full-year record set in 2013. ^[3] To put the current credit binge into perspective, the total amount of global debt today is 45% higher than it was when Lehman Brothers declared bankruptcy a decade ago. ^[4]

Paradoxically, and contrary to our expectations in the wake of the 2008 financial crisis, more debt has made the world both more stable and more fragile at the same time. Specifically, the world’s growing debt burden has resulted in unprecedented short-term financial stability by encouraging an unprecedented coordination amongst policy makers, especially central bankers. But, there is no free lunch, and this highly-engineered short-term stability has come at an enormous long-term cost. Specifically, stability is being purchased with ever more debt, and ever more debt leads to greater long-term fragility.

With policy makers successfully smothering every whiff of instability with more debt for ten years running, most market participants have been reduced to buying the dips rather than thinking about the long-term implications of this policy. This pattern, combined with sustained deflationary forces, has left few concerned that such high debt levels will prevent central bankers from raising rates to head off future inflation. So long as the market remains unconcerned about this still hypothetical constraint, the actual limit to the amount of debt that a society can support will likely remain remote.

Japan, with government debt to GDP over 250% and total debt to GDP well over 500%, is a case study in financial extremes and extreme complacency. ^[5] In fact, Japan’s dangerous debt load has not only corresponded with lower yields but also with a growing sense that there may be no upper bound to the amount of debt that a country can support. Emboldened by the market’s indifference to Japan’s financial path, the Abe administration recently walked back its plans to balance the budget by 2020 and added a super-dove to the BOJ board that makes Kuroda look hawkish. With the Japanese 10 year bond still hovering at just over a 0% yield to maturity, Japan is the most extreme example of what now passes for normal in the first world.

Even though today’s surreal combination of short-term stability and ever more debt is often treated as inevitable, it remains unwise in our opinion to make investments that depend on this status quo. Accordingly, we continue to broadly avoid heavily-indebted geographies. Our strategy of debt avoidance is prominently reflected in the country weightings on page two of our monthly fund summary. Our two top country weightings, Peru and the United Arab Emirates, are both notably underleveraged.

Our Canadian E&P investments are also well positioned to weather the end of the current debt bubble. While it is certainly true that increasing debt encourages consumption which is positive for oil and gas demand, it is equally true that cheap, abundant debt has also been used to develop marginal oil and gas assets. The development of these marginal reserves with easy money has applied an enormous downward pressure on oil and gas prices in recent years. Bill Thomas, the highly-regarded CEO of EOG, recently speculated that as many as half of the producing wells in North America are not sound full-cycle investments at $50 oil. Given the capital intensity of the E&P sector, it is no stretch to see how more disciplined capital markets could lead to higher energy prices. Moreover, our E&P companies, with conservative balance sheets and some of the lowest costs assets, can continue to grow quickly at current energy prices without any outside capital.

Together our emerging market and E&P investments account for 57% of partners’ capital. These investments are intended to prosper during the status quo as well as weather its inevitable end. Specifically, in a credit contraction, we even think these companies could outperform predictable blue chips such as Colgate-Palmolive or Proctor & Gamble. Even conceding that Colgate-Palmolive and Proctor & Gamble’s businesses will plod on in a difficult macroeconomic environment, paying over twenty times forward earnings for low-growth companies is risky. Our operating and energy investments by comparison trade at 11.7x forward earnings and 6.3x forward cash flow, respectively.

We’ve positioned the other half of our portfolio to capitalize on the world’s over-indebtedness rather than just manage through it. Our long investments in gold and silver mining and short positions in low yielding bonds are a reflection of our confidence that central banks will choose to preserve short-term stability rather than purchasing power if forced to decide between the two. We believe this preference, while seemingly irrelevant during times of stability, will become obvious during times of financial instability.

With respect to gold and silver, so long as the bias for stability and the low rates necessary to sustain it persist, monetary metals will remain attractive alternatives to first world money. Both gold and silver have appreciated substantially so far this century, a trend that we believe will continue until the problem of over-indebtedness is eventually resolved. Accordingly, as gold and silver miners declined post 2011, we have increased our position, making this our single largest sector weighting at 43%. Our portfolio of miners are attractive investments in a sideways metals price environment and are poised to perform exceptionally well when gold and silver prices rise.

With respect to our bond shorts, today’s combination of debt and rates has created a catch-22 for policy makers. If rates go up society cannot pay its debts. But, if rates don’t go up, society lacks the political will to reign in its debts. This dynamic has created an insoluble problem from a policy perspective and an attractive opportunity for short sellers. And, while rates have gone lower than we thought they would, shorting today’s low yielding debt is more attractive than it has ever been. We are accordingly increasing our fixed income short exposure.

There are, of course, a myriad of other ways that we could position our fund for the end of the great debt bubble. Cryptocurrencies, for example, have been top of mind for many investors. But, to be blunt, at this point, with Bitcoin up over 500x in 5 years, cryptocurrencies appear to be more a part of the problem than the solution. While unbacked digital money has been an excellent trade, it has also been a beneficiary of today’s liquidity driven bubble rather than being opposed to it.

Conclusion

With the humility that comes from having been wrong about macro outcomes for years, we believe that the end of the world’s enormous debt bubble is close at hand. The U.S. federal government is poised to embark upon a fiscal expansion on the back of eight years of economic expansion while the economy is at full employment. Specifically, the federal government is poised to increases its fiscal deficit by hundreds of billions of dollars as commodity prices and wage rates are showing new signs of life. ^[6] Perhaps the evil of inflation has been so permanently slayed that such factors no longer matter, but we seriously doubt it.

Sincerely,

Sean Fieler Daniel Gittes

END NOTES

^[1] Sector exposures calculated as a percentage of 9.30.17 pre-redemption AUM. Performance contribution in US dollars, gross of fees and fund expenses. Interest rate swaps notional value and P&L included in Fixed Income. P&L on cash and short proceeds and market value exposures for derivatives excluded. Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, or Bloomberg.

^[2] Whittall, Christopher, The Wall Street Journal, 10.22.17. Hunt for Yield Fuels Boom in Another Complex, Risky Security

^[3] Rennison, Joe and Platt, Eric, Financial Times, 10.29.17. Wall St banks ride boom in leveraged loans as volumes soar

^[4] Evans-Pritchard, Ambrose, The Telegraph, 06.28.17. Janet Yellen Courts Fate by Trumpeting End to Financial Crises

^[5] Trading Economics, source Japanese Ministry of Finance; Pimco, Seven Salient Left Tail Scenarios

^[6] Bureau of Labor Statistics, Employment Cost Index-September 2017. Release October 31, 2017.

Kuroto Fund, L.P. - Q3 2017 Letter

Wed, 01 Nov 2017 15:35:32 GMT

Dear Partners and Friends,

PERFORMANCE & PORTFOLIO

In the third quarter of 2017, Kuroto increased +2.0% while the MSCI Emerging Markets Index rose +8.0%. For the year to date through October 31, Kuroto was up +17.7% and the MSCI EM Index was up +32.5%. [1]

During the third quarter, we exited our investments in Moscow Exchange, an Argentinean holding company, a Vietnamese industrial, and a Peruvian financial. We made new investments in an Egyptian construction company, a South African services company, and a Chinese e-commerce company. More recently, we sold 40% of our position in Ferreycorp; it remains a sizeable position.

What’s an emerging market?

The MSCI emerging market index consists of over 800 companies domiciled in over 25 countries that contain over half of the world’s population. By design, this benchmark includes countries as diverse as India and Chile. The dissimilarities of such a diverse universe often outweigh the similarities. Accordingly, accurately describing emerging markets in generalities is a struggle, if not an arbitrary pursuit.

As company-specific investors, however, we do not focus on market generalities but instead comb through the universe of developing markets to find exceptional companies. Our strategy has tended to result in the ownership of relatively few companies that crossover with the MSCI emerging market index. This is one reason why we’ve been able to outperform the index by almost three fold over the last 19 years. To put some numbers around the overlap, today only 4 out of our 25 companies crossover with the 800+ companies in the index, resulting in just a 1% overlap with the index. This has been typical of our active share over time.

The obvious reason for our high active share is stock selection. We are principally invested in the same countries as the index but simply own different companies. Another important part of our portfolio’s differentiation comes from our willingness to invest in developing markets which aren’t categorized by MSCI as an emerging market.

MSCI considers a variety of factors in determining whether or not a country qualifies as an emerging market. Amongst the primary factors are overall economic development, market size, market liquidity, and market accessibility. These criteria, while sensible, are all backward looking. As a result, MSCI tends to downgrade countries after a market deterioration has occurred. For example, MSCI categorized Egypt as an emerging market from the Arab Spring in January 2011 until November of 2016. During the intervening five and a half years, the Egyptian pound depreciated 50% and Egypt deposed and imprisoned two presidents. In MSCI’s defense, they need a system, and no system is perfect. But, their rules-based approach creates opportunities for long-term investors like us.

By way of a forward-looking example, let’s examine MSCI’s decision to categorize Turkey as an emerging market and Vietnam as a frontier market, and our decision to invest in Vietnam but not Turkey. To begin with, there are defensible reasons for the MSCI categorization. The Turkish stock market has a larger market cap, a larger float, and more daily liquidity. Moreover, trade execution for foreigners is far easier in Turkey. It takes only a week or two to set up a trading account in Turkey, while in Vietnam this can easily take a month. Furthermore, in Vietnam, foreigners must prefund a trade with Vietnamese dong, thereby creating currency risk prior to any trade. Vietnam has also left market participants with no direct way to hedge their currency exposure. Finally, foreign investors have historically not been allowed to own more than 49% of any listed company in Vietnam.

While liquidity and market access are important, neither is the most important factor for long-term value investor when analyzing country risk. A country’s economic and political situation is far more important. When we analyze these data we find Vietnam to be clearly superior.

On most fundamental macroeconomic measures, Vietnam presents a more attractive investment backdrop than Turkey. To be clear, each country has its issues. Vietnam, for instance, has had two bouts of very high inflation in the last decade, but they’ve been diligent over the past six years in managing it. Turkey, on the other hand, has had persistently high, single-digit rates of inflation for most of this century, with no clear effort to bring it down. Moreover, Turkey’s persistent, sizeable current account deficit makes it perennially dependent on foreign capital flow in a way that Vietnam is not.

Politics are another important factor in our preference for Vietnam. True, the communist party of Vietnam doesn’t bother with the pretense of open elections, but the situation in Turkey is worse. While Turkey holds elections, since the coup in 2016, President Erdogan has led a concerted effort to imprison any political opponent (or anyone else deemed a terrorist). Even business executives in Turkey with whom we’ve spoken are well aware of the fact that they are under surveillance. The Turkish government has even gone so far as to nationalize some private companies whose owners were considered terrorists (read dissidents).

Conclusion

On occasion, we’ve been asked by prospective clients why we don’t manage large amounts of capital with better liquidity terms at lower fees. We explain that doing so would effectively force us into just owning the index, at which point our fund would lose what differentiates it. With modest amounts of capital and superior liquidity terms, we are confident that we can create a unique portfolio that will beat the market in the long run.

Sincerely,

Sean Fieler

Daniel Gittes

END NOTES

[1] Performance stated for Kuroto Fund, L.P. Class A on a net basis. An investor’s performance may differ based on timing of contributions, withdrawals, share class, and participation in new issues. Unless otherwise noted, all company-specific data derived from internal analysis, company presentations, or Bloomberg. Company valuations and exposures expressed as of 10.31.17.

Equinox Partners Precious Metals, L.P. - Q3 2017 Letter

Tue, 12 Sep 2017 17:50:18 GMT

Dear Partners and Friends,

purchases and sales

There were a few substantial developments in the portfolios in recent months. In May and June, in light of the dislocation caused by the rebalancing of the GDXJ index (see the attached letter), we added to positions in Bear Creek Mining and Beadell Resources. In addition, we initiated new positions in Sandstorm Gold, a diversified gold royalty company, and West African Resources, an exploration company in Burkina Faso. Sandstorm is currently a 4.9% position and West African is 3.9%.

To fund these purchases, we reduced positions in Aurico Metals, Fortuna Silver, MAG Silver, Premier Gold, Roxgold, Tahoe Resources, and Torex Gold.

Tahoe Resources’ recent trading is particularly noteworthy. The company’s shares sold off substantially in July when a court in Guatemala suspended their license to operate the Escobal mine. However, just yesterday that court reinstated the license and the stock rallied strongly on the news. We added about $1.5 million to the position in July after the news first broke. After today’s rally, Tahoe is 5.2% in the WP account and 5.0% in the SL account.

royalty companies, mag silver, and the case for sandstorm

Our initiation of a position in Sandstorm Gold was driven by the selloff of the stock on the heels of the GDXJ rebalancing and the company’s concurrent announcement of the acquisition of Mariana Resources. After several conversations with management, we became convinced that the transaction was a smart deal and that the company was undervalued—offering a rare combination of limited downside and good upside. But to fully understand the case for Sandstorm requires a discussion on the gold royalty companies more broadly.

Royalty companies tend to trade at a substantial premium to producing companies. We have historically owned them in the rare instances in which they have traded at reasonable valuations. Royalty companies get their premium by offering investors exposure to gold while avoiding the some of the pitfalls of mining companies. While there are many reasons one could cite, we believe the main ones are as follows:

1) Fixed Costs – Because they get a percentage of the revenue generated by the mines in which they have a royalty interest, the cost structure for royalty companies is fixed. Therefore, their margins and cash flow are substantially more predictable than the miners.

2) No Capital Spending – They are also beneficiaries of ongoing capital spending by miners to extend their reserves and increase production. These activities grow the NAV of royalty companies for free. As a result, whereas mining companies seem to be endlessly recycling their cash flow back into capital spending, royalty companies generate large amounts of free cash flow.

3) Diversification – By owning a portfolio of royalties, they reduce the risk of any given asset and thereby reduce the volatility that scares many investors away from owning mining companies.

4) Cost of Capital – As a result of their premium multiples, royalty companies have a low cost of capital compared to miners. This allows them to continually grow their portfolios by leveraging their cost of capital advantage.

Since there are substantial economies of scale in the royalty business, the companies to not need to increase headcount as their portfolio grows. It has therefore tended to be a consolidated space, dominated by Franco-Nevada, Royal Gold, and Wheaton Precious Metals. However, occasionally new companies, like Sandstorm, enter the space.

Nolan Watson, the CEO and founder of Sandstorm, was previously the CFO at Wheaton Precious Metals (then called Silver Wheaton). Nolan helped pioneer metal streaming at Wheaton, which he went on to replicate at Sandstorm. A metal stream is economically similar to a royalty, but it is generally more tax-efficient since the companies take possession of the metal and domicile their trading operations in low tax jurisdictions. Therefore, streaming has become an important business segment for all royalty companies. Using the knowledge he developed at Wheaton, Nolan started Sandstorm in order to focus on junior mining companies. We have followed Sandstorm for a number of years and have owned it in the past in Equinox Partners.

While Nolan was initially successful building a portfolio of streams on assets owned by junior companies, this model revealed some substantial flaws as the market turned down in 2013. As gold prices declined, Sandstorm’s counterparties found their margins squeezed and balance sheets stretched, and the largest producing asset in the portfolio eventually shut down as a result. Combined with investments in development assets that did not turn out well, these issues caused the company’s shares to decline dramatically. From a peak above $14 per share in late 2012, the stock fell all the way to $2. The uncertainty in the portfolio and volatility in the stock price contradicted the primary reason investors look to own royalty companies in the first place.

In response, Nolan and his team took steps to stabilize the portfolio. They acquired new, producing streams and royalties with better counterparties to bring stability to the portfolio. While these transactions were lower return, they were probably a necessary evil in order to put the company on a better footing. Nolan also significantly revamped the technical team responsible for due diligence, seeking to avoid some of the costly technical mistakes that had plagued earlier deals.

By late 2016, Sandstorm had largely stabilized and emerged with a stronger portfolio with less risk. As a result, the discount to its royalty peers began to close. However, Sandstorm is the only one of the group in the GDXJ and was thus affected by the rebalancing that was announced in April and took place in June. With investors already skittish due to this overhang, the company announced the acquisition of Mariana Resources.

Mariana owned a minority stake in the Hot Maden deposit in Turkey through a joint venture controlled by a Turkish mining company, Lidya Madencilik. Hot Maden is one of the most impressive discoveries made in the last few years, boasting extremely high grades of both copper and gold. Despite the fact that few dispute the quality of the asset, Mariana traded at a discount to the value of its stake in the JV due to the market’s unease with Turkey as a jurisdiction and concerns about the ability of management at Mariana to navigate the development of the deposit successfully.

The market’s reaction to the Mariana deal was not favorable despite seemingly accretive economics. The cost of the acquisition represented about 25% of Sandstorm’s market value, but once the asset goes into production, Sandstorm’s cash flow should more than double. However, Mariana’s interest in Hot Maden is not a royalty or stream. Investors viewed the deal as outside the bounds of what royalty companies are meant to do. While the upfront capital required to build Hot Maden is easily covered by Sandstorm’s existing cash and future cash flow, the market seems to be punishing Sandstorm for this future spending commitment.

To us, Mariana was reminiscent of another asset we have owned for nearly a decade, MAG Silver. MAG similarly owns a minority stake in a JV where the underlying asset is world class. We have argued for years that MAG effectively owns a silver stream: since the base metal by-products will more than cover the cost of production, MAG’s share of silver production is effectively free. We see a similar story at Hot Maden, where it is expected that copper revenue will more than cover the cost of mining.

While the market is presently concerned about permitting and development risk, we believe the risks are more than justified by the price Sandstorm paid. Because royalties are so attractive, and because the companies that own them receive high multiples, they tend to transact at high prices. Typical IRRs for large streaming or royalty deals tend to be around 5%. By comparison, even though Hot Maden is several years away from production, we estimate the IRR on this transaction to be better than 30%.

At the time we bought the position in Sandstorm, it was trading at a low teens cash flow multiple on the existing portfolio, accounting for the dilution to acquire Mariana. Most of the other royalty companies trade above twenty times cash flow. Furthermore, Sandstorm has by far the best growth prospects in the space, with some growth coming over the next few years before the big increase upon Hot Maden going into production. We would argue that at the current share price Sandstorm itself already makes a compelling acquisition target for the other royalty companies. With a stable portfolio underpinning this cash flow stream, we see little down side. But, if Hot Maden delivers, this will be a truly exceptional investment. Enticingly, Nolan is also exploring ways to convert the JV interest into an actual stream, which would simplify the operating structure for Lidya, may have tax benefits, and would address some of the lingering concerns other investors have about the transaction.

Sincerely,

Sean Fieler

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