Dr. Paul Zweng, a portfolio manager with Resource Venture Advisors in Beverly Hills, Calif., has managed to make some big things happen with small companies. By investing in the tiniest of resource companies, he has grown the fund from about $2 million (M) in 2009 to more than $20M today. In this exclusive interview with The Gold Report, Zweng tells why his biggest asset is his cast-iron stomach.
The Gold Report: Paul, the fund you manage for Resource Venture Advisors focuses on nano caps. What are the advantages of investing in the smallest of the small players?
Dr. Paul Zweng: We invest in companies with market caps from less than $10M up to $75M for two principal reasons: These companies have the greatest potential for outsize performance. You can literally generate 10x returns with these tiny companies. Second, it is a niche where we can be competitive.
We can be competitive with underfollowed companies that have little to no research because we understand geology and exploration. That's what my background is in.
I've been in exploration for a long time. And I've actually run/co-founded Canadian juniors with successful outcomes (e.g., QGX and Antares). We wanted to follow the companies that the multiple-discriminant analysts, the certified financial analysts and the sell-side analysts are largely ignoring because if we can find a good one, two or three here—we typically have about 10 companies in our portfolio at any one time—and if they execute on the so-called promise, then there's the chance for outsize performance.
TGR: Are the companies in this space more risky than small caps?
PZ: Yes. Most people would consider a small cap to have above $1 billion (B) in market cap. In the Canadian juniors sector, by the time a company is at $1B, it has an NI 43-101 and proven ounces or pounds in the ground. It is producing metal, generating revenues, profits, etc.
Even once a company gets above a $100M market cap, it generally has an NI 43-101. That takes a whole lot of risk out of the investment. But does that mean that you are home free? There is a lot to be said regarding the so-called quality of those ounces of gold or silver, or those pounds of copper, lead and zinc, or those tons of coal or iron ore. Those are different considerations than when you are investing in a little $10M or $20M market-cap company that literally has nothing but a good management team and some good prospects.
There is a considerable amount of risk and that is why you really need to understand the geology, the prospectivity and the management team. Are these people who can husband their money and their resources carefully? If they can't, you're probably going to be in for a bad investment.
TGR: Your master's thesis focused on porphyry-copper deposits in Peru. Do you have a greater comfort level investing in micro caps with porphyry copper and porphyry copper-gold deposits?
PZ: By studying the Toquepala deposit as well as working in the industry at both a mine and in exploration of porphyry copper, I feel very comfortable there. That is the theme of our fund. We try to invest in those types of deposits and those commodities in which we have actual, direct experience. We have direct industry experience working with gold, silver, porphyry-copper and sediment-hosted copper.
TGR: You certainly have had experience on both sides—exploring for these deposits and then turning around and selling them. What are you looking for when you research a project based on that experience?
PZ: We are looking for juniors that can take a piece of ground, drill it and develop it—and then continue to derisk the project by doing metallurgical studies and preliminary economic assessments. We want to focus on those companies that can develop large deposits and be taken over.
We are less interested in vein deposits. If you look at most gold majors, I do not think they are mining vein deposits. We are looking for large-scale, open-pit, low-grade deposits.
In coal, we are also looking for large, open-pit and, preferably, metallurgical coal deposits. That is where you have the potential to make that 10x return.
TGR: There has been a lot of volatility in the markets recently and the U.S. economy looks like it could be headed back into another recession. How are you managing your fund differently compared to the beginning of the year?
PZ: Probably 90% of your audience will disagree with what I am about to say, but this is really a tenet of our fund: We just ignore the macro picture. What is special about our fund is that we focus on the nano caps. These are companies that I jokingly say have two mules, a rock hammer and a pair of worn-out boots for assets. If a company drills a hole that delivers 200 meters of one-gram gold, I don't care if the price of gold drops $25/ounce (oz.) the day it comes out with that press release, this company's stock is likely to go up 10%, if not 20%. Where we invest, we are able to literally ignore the macro picture and that is a great comfort. If the price of gold goes down, but a company continues to build ounces, we are going to do just fine.
TGR: You use your industry knowledge to make your investment decisions. What are some off-the-radar resources that everyday investors could use to help them better understand resource companies coming into the market?
PZ: I use a lot of the same resources as everyone else. I start my day by going to kitco.com. But one resource that a lot of your readers don't know about is a blog by this guy who goes by the alias "Otto" at www.incakolanews.blogspot.com. I find it is a very useful blog. Inca Kola is on a jihad of exposing the bad hats in our sector. It is wonderful insight. He's not a geologist, but he's very good at vetting management teams. He has a good eye for these really early-stage companies. That's something that I look at on a daily basis. And a lot of it is a free service.
TGR: What investment advice do you have for our readers before we go?
PZ: Investors need to make sure that they take the time to understand what they are buying. Do some math—calculate how many cents or dollars per-share this thing is actually worth. Then compare that to what it is trading at and hopefully there is a big delta.
Next, find a good management team with a good project that has a number of catalysts that will serve for promotion. Try to understand the catalysts. Understand what a management team is going to do in the next six months to a year. And follow that company to see if it is delivering on those catalysts. Without catalysts, share price appreciation is not going to happen.
Ignore the macro picture. All it is going to do is make investors get overly confident, buy at the highs, get overly depressed at the lows and sell at precisely the wrong times. Investors need to develop a cast-iron stomach so they can handle the absolute extreme volatility that this sector offers. Investors literally want to be buying when they are throwing up, when they can no longer look at their portfolio. When they are at a cocktail party bragging to all their friends about how smart they are for buying this stock at $0.10 and now it's at $3.00, that is when investors should want to sell. It is so counterintuitive, but that is what they have to do. It is about discipline. Investing is not about being smart, although obviously having smarts helps.
TGR: That's really good. Thanks, Paul. It's been a pleasure.
Dr. Zweng is currently interim COE of Bellhaven Copper & Gold Inc. and a managing member of Resource Venture Advisors, LLC, the general partner to Resource Venture Partners LP, an investment partnership designed to invest in early-stage exploration companies. He was the COO and later President/CEO of QGX Ltd., a TSX-listed company with mineral projects in Mongolia. Dr. Zweng received two B.S. degrees with distinction in geology and applied earth sciences (Mineral Economics) from Stanford University in 1980, an M.S. degree in geology from Queen's University, Ontario in 1984, and a Ph.D. in applied earth sciences (Ore Deposits) from Stanford University in 1993. Dr. Zweng has published several articles and abstracts on geology and ore deposits in two languages in scientific journals. Dr. Zweng was a director and a founder of Antares Minerals Inc. (TSX-V: ANM) before Antares was purchased last December by First Quantum Minerals (TSX: FM).
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