The Commodity Discovery Fund is a unique fund. It is one of only a handful of global mutual funds with an emphasis on new raw material discoveries. And it is the only one with a global focus. When discovering a new location with economically interesting concentrations of precious metals (gold, silver, platinum), base metals (copper, nickel, zinc), or other mineral resources (uranium, diamond, phosphate), billions in value are created each year. It doesn't matter if such discoveries are made in Australia, the United States or Canada. As long as they create value for our participants.
Exploration companies with a significant discovery are often taken over within a few years.We call this form of investing “Discovery Investing”. As a result of this strategy, at least one company in our portfolio has been acquired on average every quarter. Usually by a larger mining company looking for additional reserves. Since inception, this has occurred dozens of times. At Takeovers you will find the complete list.
We invest mainly in the first phase, the discovery phase, and during the start-up of production. We also invest in ETFs and so-called royalty or streaming companies. At Portfolio you will find more information about this.
A successful mining project goes through several phases. Before a discovery, we speak of the pre-discovery phase. The "discovery" itself is a fact when drilling proves the mineral discovery. Next comes a period (development) in which feasibility and environmental studies must be conducted and financing arranged. And finally, the mine is built and production is started. For value investors, like us, the discovery phase and the beginning of the production phase are particularly interesting. In both periods, we usually see a very strong increase in stock market value. That is where the focus of our investments lies.
The horizontal axis shows the time, while the value development of the position can be read on the vertical axis. Each circle in the graph represents one of our investments.
The exploration company has yet to start drilling
Most mines were not accidentally discovered because someone stumbled upon a nugget. Even though that did indeed occur in early mining history, as with the large gold mines around Johannesburg. Most of the time, however, years go by during which extensive geological and geophysical research is required before drilling can be started. Because of the significant risks, we normally avoid this phase.
Drilling demonstrates a significant discovery
The real discovery usually starts with a “discovery hole”, the first drill hole showing, for example, a gold vein or copper field. A great deal of value can be created during this phase. Especially if mineralization is demonstrated in more and more drill holes. A relatively worthless piece of land can suddenly become worth billions. For example, the valuation of Arquipa's shares rose from $2 to $32 in 1996, after only nine boreholes. Within a year of its discovery, the company was taken over by Barrick Gold. Another special example is Aurelian Resources, which Willem bought as a private investment for 30 cents per share, in 2006. In late 2008, the company, by then accredited with a major gold discovery in Ecuador, was acquired by Kinross for $1 billion. The stock then traded at $43.
Studies must demonstrate the feasibility of the project
During the development phase, several economic studies, such as the Preliminary Economic Assessment (PEA) or Prefeasibility Study (PFS), as well as environmental reports, must be completed before banks and investors are willing to finance the construction of a new mine. At the end of this period, companies are often taken over and therefore interesting for us to keep in the portfolio, even though the valuation of the company often decreases significantly. We usually strongly reduce our position at the end of the discovery phase.
During the development phase, several economic studies, such as the Preliminary Economic Assessment (PEA) or Prefeasibility Study (PFS), as well as environmental reports, must be completed before banks and investors are willing to finance the construction of a new mine. At the end of this period, companies are often acquired and therefore companies are still interesting to hold in the portfolio. However, we usually reduce our positions sharply at the end of the discovery phase.
Successful start-up of production increases the stock market value
When production finally starts and cash starts to flow, we often see a significant revaluation of the company. According to a study by the Oxford Mining Club, this can reach several hundred percent. That is why we also focus on this phase of the mining cycles.
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