Palisade's New Guard - Matt Geiger, Value Investing In Resources
Palisade Research September 11, 2017 Category: Research
One year away from graduating from Wharton, Matt Geiger dropped out.
You can imagine the response from his parents, who met at Stanford and subsequently became entrenched in the world of Silicon Valley business.
Nonetheless, Matt was not your typical student, even for Ivy League standard, having just raised significant capital for a resource fund, and another $2 million to seed his tech-company he co-founded with a classmate and a childhood friend.
Its no surprise Matt found a career in technology, growing up in the affluent community of Los Altos, also home to tech moguls Jerry Yang and Sergey Brin. Running a resource fund may seem out of left field, but is definitely not a stretch, yielding a similar risk-to-reward profile to early stage tech ventures.
So is Matt a prodigy? He says no, but after hearing his story, it is apparent he very much is.
Matt Geiger began investing when he was 11, opening a Scottrade account with the help of his father, who did not know too much about stocks, but was supportive regardless.
Also at the same time, the Texas Hold'em poker craze was sweeping the nation, and Matt immersed himself into both worlds, obtaining a voracious appetite for risk and reward.
While Investing at such a young age is exceptional, it is not out of the ordinary, with plenty of kids dabbling in finance with the help of investments. Its Matt's investment discipline that stands out, becoming a student Benjamin Graham, the father of value investing, and memorizing his 725-page book, Security Analysis.
By extension, Matt also points to Warren Buffett, Joel Greenblatt, Seth Klarman, and Tobias Carlisle as major influencers in his investment approach. Matt has successfully applied the margin of safety principle in resource investing.
The margin of safety is the difference between how much an investor pays for a stock versus the actual intrinsic value of it. The larger the difference, the larger the margin of safety. This is particularly important in resource investing, where a margin of safety provides a much-needed cushion from market volatility.
Matt likes to point out Almadex Minerals as one of his partnership's investments that would "make Benjamin Graham proud". The stock came up on his radar in 2015, when it was trading at cash value. This means the stock was trading at its cash minus its debt divided by its shares outstanding. This also means that the market was giving absolutely no value to the company's assets, which at the time was a portfolio of over 20 properties that were either fully or jointly-owned, and over a dozen royalties, not to mention a management team with decades of success under their belts. Matt acquired Almadex at an average price of C$0.16. Shares now trade at C$1.20 and reached a high of C$2.00.
In high school Matt secured an internship with a value-based hedge fund, and was the given the assignment to dissect and value James River Coal. It was his first exposure to resources, and after in-depth research, realized it was a significant short opportunity. James River, like many other coal companies, self-destructed due to unsustainable debt and the shift to cleaner and cheaper alternative sources. The company declared bankruptcy just a couple of years later.
Matt's fascination in stocks and risk accompanied him to University, where he chose Wharton due to its reputation of placing graduates into Wall Street. Matt's plan was to follow the typical path to high-finance, grinding out his early years in investment banking, before making the leap to managing the real money. He read Michael Lewis' Liar's Poker, and fully intended on becoming a 'big swinging dick'.
However, his eagerness quickly became jaded. The Global Financial Crisis was just a couple of years removed, and a series of speakers and participants of the sub-prime fiasco maintained their innocence and even justified their actions. This became the ongoing theme and did not change throughout Matt's schooling. Wall Street's mentality was to do things 'approximately right' in pursuit of the dollar.
Delving more into portfolio management, Matt also realized that funds were also not immune to the ruthlessness of Wall Street, with the tyranny of fees destroying value all while lining the pockets of institutions. One study compares two hypothetical equity portfolios, one yielding 7%, and the other 7% with the typical 2% MER. Over a fifty-year period, the portfolio with the MER would have lost 63% of its earnings due to fees.
Thus, in early 2011, Matt decided to take things into his own hands, and began laying down the framework to manage his own fund with a low fee structure. Over 60 meetings later, a sophomore with no management experience raised enough funds to become a bonafide portfolio manager. Also adding to the almost impossibility of the situation, Matt convinced investors to agree to a self-described "draconian" lock-up period of ten years. However, Matt believed a longer than normal lock-up was needed especially for resource investing, where patience was needed to weather out the cyclical and volatile nature of the industry.
Also during school, Matt and his childhood friend, Akash Nigam, who was attending the University of Michigan, were incubating a tech deal. While on the backburner for most of college, the missing piece was discovered in Matt's classmate Evan Rosenbaum. Blend Systems, Inc. is described by Matt as a "tech prospect generator", and has developed four different products to date, each making a greater and greater splash. The company has now raised $10 million in five different rounds, including a $5 million institutional round which brought onboard some of the biggest names in Silicon Valley and Hollywood.
Matt dropped out of Wharton in 2013, spurred by Blend's successful seed round of $2 million. Akash followed suit, and Evan dropped out one year later. Matt moved back to San Francisco and dug in for what was going to be the longest and harshest resource bear market in history. 2012-2015 saw the chaotic destruction of capital, and many fund managers pivoted from dampening losses to simply trying to survive. Matt says he was lucky to experience such devastation early on his career, as it taught him the importance of "being the last man standing" in bear markets and verified that the 10-year lockup was the right move.
Matt counts Rick Rule as another major influence. And as Rick likes to say, it takes a unique fortitude to work through periods of devastation, and bear markets are the authors of bull markets. Matt believes successful entrepreneurs are always early to the table, and he began deploying capital again in 2014 and 2015, doubling and tripling down on opportunities. His fund's performance speaks for itself, in the year ended December 2016, it had a one-year performance of 94.51%, compared to the TSX Venture return of 45.03%. Matt was one of the last men standing in resource investing, and is now aggressively deploying in the best of the best deals.
We Ask Matt, What Are Your Favorite Stocks Right Now?
Northern Sphere (CNSX:NSM) looks particularly attractive at its current valuation of ~C$9 million on a fully diluted basis. I was originally drawn to the story due to the near-term production potential at the company's past producing Buckeye Silver Mine in Arizona.
The company recently completed a 9-hole program at Buckeye and assays will be announced imminently. Additionally, the company owns a past producing mine in Ontario named the Scadding Mine.
The Scadding Mine was put into production over a six-year period in the 1980's with an average head grade of 7.2 g/t Au. Today, the project is fully permitted for production. The company plans to initiate a 5,000-meter drill program in the upcoming weeks, followed by an updated NI 43-101 resource.
It is worth noting that Eric Sprott participated in an NSM placement just 5 months ago at a price of C$0.40. Investors currently have an opportunity to buy Northern Sphere shares at a 40% discount to Sprott's entry point.
Rover Metals (private) is currently completing the final tranche of a placement we have participated in. It looks like the company will be able to close ~C$1.0 million. The terms are attractive as the placement comes with a full 2-year warrant with no accelerator.
The company's Up Town Gold Project is located a stone's throw from Yellowknife, NWT and abuts TerraX's (CVE:TXR, Mkt Cap: $48M) growing land package. A 5,000-meter drill program was initiated in early August with first assays expected within the next month.
Tookie Angus (who until recently served as Chairman of Nevsun Resources) is an adviser and shareholder, while well-respected mining engineer Keith Minty serves as a director and provides technical advice. The company is currently private but plans to IPO by the end of the year after announcing initial drill results at Up Town.
Palisade Note: We are also investors in Rover Metals and will be providing a full initiation report when the stock IPOs. Stay tuned!