Jayant Bhandari: Why You Must Use Arbitrage In Your Investments

Date: 14 Feb 2016

Guest: Mr. Jayant Bhandari

Host: Maurice Jackson 

jayantbhandari.com

Maurice Jackson:  Welcome to Proven & Probable. I’m your host, Maurice Jackson, and joining me today is an adviser to Institutional Investors on Investing in the junior mining companies. His name is Jayant Bhandari. Jayant, thank you for joining us today.

 

Jayant Bhandari:  Maurice, thank you very much for having me today.

 

Maurice Jackson:  Sir, you have a reputation of being one of the most respected names in the natural resource space. Would you mind sharing with the audience your background, please?

 

Jayant Bhandari:  Well, I grew up in India and the reason I left India was because I was sick and tired of the corruption in that country. I moved to Canada in 2003 and I lived in Canada for about 8 years. I started working in the junior mining sector as an analyst for a newsletter writer, Doug Casey, who still continues to be my philosophical mentor. Then I worked for about 6 years for then I worked for an institutional investor called US Global Investors, Frank Holmes’ company, for about 6 years.

 

And for both of these people, I did junior mining company analysis work. I travelled the world for these people. And since leaving Frank Holmes’ company, I have continued to do that on my own for the last 3 or 4 years now.

 

Maurice Jackson:  Yes. I’ve noticed her recently you were in Peru andVancouver. You’ve been quite busy in just the calendar year of 2016.

 

Jayant Bhandari:  I travel more than I ever did before and that is the necessary part of this job because you have to understand what is happening around the world. You have to go and look at these projects. You have to look at how these economies actually work. So, travelling is a necessary part of what I do.

 

Maurice Jackson:  You mentioned traveling around the world. Why is it paramount for investors to be aware of geopolitical events and demographics as it applies to supply and demand in the natural resource space? Because I always find it astounding when speaking to investors that most of their concerns are germane only to the United States and they don’t recognize that we live in a global economy. I think the ignorance of these factors and the lack of reasoning can have duplicitous effects on their portfolio. Would you agree?

 

Jayant Bhandari:  Absolutely. But, again, you have to understand that Americans are intellectually very honest people, so they accept that they as a society is very inward-looking. But absolutely every society in the world is very inward-looking and they are more inward-looking than people in America are. So, for example, in India, every foreigner is considered a person from London. When you go somewhere foreign, it’s synonymous with London to them. So, if you ask them where Washington was, they would not know. So, really, Americans are self-critical but this is a problem everywhere in the world.

 

However, if you want to do anything that requires an understanding of the future and you can’t really predict the future, but if you want to attempt projecting the future, trying to understand what might happen into the future when it comes to career opportunities or with investing, you have to really understand what’s happening around the world particularly when what might happen in other countries can affect what you are working on.

 

So if I am, let’s say, in copper space, I should try to understand what’s happening in Democratic Republic of Congo because that’s where some of the best copper projects are. If I’m in information technology, probably it does not really matter what happens in Democratic Republic of Congo because that country doesn’t really do much in IT sector.

 

So, understanding the world is an extremely important part of trying to understand what might happen into the future. You will still be wrong, but that’s the best you have got.

 

Maurice Jackson:  Absolutely. You know, you and I were talking offline earlier and you had mentioned iron ore as another example. Would you mind sharing that with the audience as well?

 

Jayant Bhandari:  Well, I was—you know, anyone who wants to invest in iron ore should, again, go to some of the major areas where iron ore is produced. And if you go to Pilbara area of Northwestern Australia, you understand that trying to mine iron ore, let’s say, in Canada or maybe in Ukraine might make absolutely no sense particularly if you are producing that iron ore for export purposes.

 

So one company in Canada, let’s say, might go into production at a cost of $60 per ton of iron ore. Now if Australia can produce the same iron ore for $20 a ton and if they can produce whatever volume the world wants, there is no way for you to compete with those people. So, it is very important to understand that while iron ore prices, let’s say, 7 or 8 years back were very high, but anyone who knew what was happening in Northwestern Australia could project that iron ore prices were not sustainable at $150 a ton. They knew that they would fall back to much lower than $100 per ton, a price at which many Canadian iron ore operations are not economical. So those projects should never have been financed.

 

Maurice Jackson:  And that sounds somewhat similar to what we’re experiencing right now in oil. Whereas, you know, the US’s ability to produce oil and now that we realize their cost really to sustain themselves is roughly between $60 to $80 and they won’t be able to sustain themselves more or less a year from now if the price of oil continues to remain low. So, I think what you’re saying is don’t listen to the salesmanship or the propaganda of a company, but just step back and take a 10,000-foot level and look at the fundamentals of something as you just mentioned here. Is that probably a good way to summarize what you just mentioned there?

 

Jayant Bhandari:  Absolutely. And companies do propaganda because they get away with it. The reason why they get away with that is because investors invest in something they don’t really understand. So the most important thing is that if you want to invest in something, spend time, try to understand what you’re doing; otherwise, it makes no sense to invest in that thing. You’re doing no better job than playing in a casino.

 

Maurice Jackson:  Point well-taken. Now, in your traveling when you’re looking at companies, you’re actually focusing more on the junior mining companies, correct?

 

Jayant Bhandari:  Absolutely. That’s the only thing I focus on.

 

Maurice Jackson:  Okay. Now, in your understanding in the application of the aforementioned concepts we just discussed, would you like to share how investors could benefit from the methodology you employ via arbitrage specifically in the junior mining sector as a key strategy in your portfolio, you’re one of the most respected names in natural resource space. Why does arbitrage appeal to you? But if I may, before we begin that, I realize this may sound a little convoluted here, for the audience members that are not familiar with the concept of arbitrage and optionality and take-over, could you briefly give just some simple definitions for them?

 

Jayant Bhandari:  Sure. So, what has been happening, Maurice, for the last 3 or 4 years in the junior mining sector is that a consolidation is in progress in this sector, which means that Company A would make a bid on Company B. They would want to acquire that company and merge with that company. And the reason why they might do that is because it reduces the overall general and administrative costs. There might be some synergies. There might be all sorts of values they can create through the mergers.

 

Now, let’s say Company A offers 1 share of Company A to each shareholder of Company B. Now, of course, it’s usually not 1:1 ratio, but you can do the math. I’m just explaining the principles here. So if Company A offers 1 share of Company A to each shareholder of Company B, and let’s say Company A is trading at $1.00 and Company B is trading at $0.50, you actually have almost 100% upside, an arbitrage upside in owning Company B because once the merger is over, you will be owning Company A and your share price hopefully will be $1.00.

 

Maurice Jackson:  Yes.

 

Jayant Bhandari:  So that is what arbitrage is all about. Now, what I have said is a bit simplistic because you have to foresee what might happen once the merger is complete because after the merger, if the share price of Company A falls, then you might not make the profit you anticipate right now.

 

You can do many things to make up for it. You can buy Company B and you can short Company A while you do that. If you have done enough work on both the companies and if you can see that there is some inherent value in owning Company B anyway, if there’s inherent value in owning Company A as well, then you might actually just buy Company B for not only arbitrage opportunity but also to invest in Company A and Company B at the same time. So, this is what arbitrage is about.

 

Now, the funny thing is that there is a concept in economics called perfect market theory. Is that correct, Maurice? Or something like that.

 

Maurice Jackson:  Yes.

 

Jayant Bhandari:  Which basically means that if there is a $10 note lying on the ground, it can’t be there because what if there is someone else who would have picked it up. It’s a completely useless theorem because not only arbitrage opportunities exist, they continue to exist for months after an announcement is made public. Why it happens? I have absolutely no clue because those people who are selling their stock of Company B and those people who are buying Company A right now should be thinking “What are they doing?” You should not be selling Company B and I’m going back to the earlier example I was giving to you. You should not be buying Company A. You should be buying Company B instead. And that’s—and I don’t—I can never understand why it happens, but I have been going through this for the last 4 years and it’s an amazing way to make money.

 

Maurice Jackson:  Point well-taken. Would you also share optionality? A brief definition of how you—

 

Jayant Bhandari:  Well, I am not a big fan of optionality and—but let me explain to you what optionality means in this market. What someone might say—let’s say there is a project that makes gold at $1000 and let’s say gold is trading at $1100 which means that the profit that this company makes is about $100 per ounce of gold.

 

Now, if gold price goes up to $1300, which is only about 17% or 18% increase in gold price, what happens is that it’s anticipated that profit that you would make would go up from $100 to $300, which means that your share price should increase by 200%. All right? So, while gold price might just go up by 20%, your profit might go up by 200%. So that is what optionality means and a lot of people invest for that kind of optionality.

 

Now here’s the problem, Maurice, and this is what I have seen again and again. When gold price goes up, the cost of making gold usually goes up. Understanding these numbers becomes an extremely complex affair if you try to invest in a gold equity for optionality in gold price. If you want to do it, you’re probably better off trading in futures and options of gold as a commodity. Avoid investing in gold equities for optionality unless you really understand what those specific projects and if you really can understand what’s happening in those projects.

 

For example, some of the run-of-the-mine heap leach operations, their cost of mining does not actually change much with change in gold price. So, there is maybe optionality in those projects, but you have to be very careful when you invest for optionality.

 

Maurice Jackson:  And thank you for making that clarification between the two because sometimes I hear the terms used as synonyms and they’re not as you’ve just clearly pointed out. Are there any companies, Jayant, that come to mind in this current environment that investors could apply arbitrage to?

 

Jayant Bhandari:  Oh, I can tell you and this is so funny, Maurice, and I’m just amazed at the kind of things that happen in the market. So, let me tell you about as many companies as you want. Stop me when you want me to stop, but I’ll tell you some names here. So there’s a company called Kobex Capital. Their ticker is KXM. It’s trading for about $0.53. They have about $0.70 in cash per share. Now that offers you about 25% arbitrage upside. The company has promised to either do a deal or return this $.68- .$70  back to the shareholders. So in about 1-1/2 months, you might make 25%.

 

Now, of course, a lot can go wrong so you have to do your own due diligence. You have to really understand. Make sure you cover yourself for risks. But let’s go to another company. Sunridge Gold is another company. Ticker is SGC. It’s trading at about $0.27. The company is getting sold to a Chinese entity which should give you about $0.35 or more in cash. This will happen in less than 6 months. So if you buy the share for $0.27, $0.28, you position yourself to make about 35% to 40% profit.

 

Now, there’s another merger that was announced a couple of days back, Maurice, and that is the merger between a company called VMS Ventures and a company called Royal Nickel. Now, if you look at, they are doing—it’s a rather complicated deal. But depending on what option you choose in terms of the cash that this company is going to return to you and the shares it’s going to offer to you, you can make anything. At today’s share prices, you can make anything between 20% to 40% arbitrage profit by investing in VMS Ventures.

 

Now, again, I am amused that people are buying Royal Nickel. They should actually be buying VMS Ventures. What is very important here is to understand in a company like VMS Ventures and Royal Nickel, to understand the underlying value of these companies because if they are overvalued, if both the companies are overvalued already, you should be buying VMS Ventures and shorting Royal Gold.

 

If we talk about another company called Argentex Mining which came out with a merger news yesterday, it’s offering to merge with another company called Austral Gold. So, Argentex has a ticker of ATX and Austral Gold ticker is AGD. Now, Austral Gold trades in Australia and Argentex trade in Canada. The arbitrage upside is a mind-blowing 85%.

 

Maurice Jackson:  That’s amazing. In this environment?

 

Jayant Bhandari:  In this environment. Now, I am not buying these companies though and I’ll tell you why. I don’t understand Austral Gold, so ideally I should be buying—because I don’t understand the underlying value, I should be buying Argentex Mining and I should be shorting Austral Gold as I explained to you earlier. And if I managed to do that, I fix my arbitrage upside. I fix my arbitrage upside at $0.85. Unfortunately, Austral Gold is very tightly held and you cannot find shares to short in that company, so I’m better off not investing.

 

Very important for me is to preserve my capital. I might lose the chance to make the 60% or 80% upside, but I don’t want to risk my capital.

 

Maurice Jackson:  I think most investors would agree with that sentiment as well. How about Helio Resources?

 

Jayant Bhandari:  Well, Helio Resource is a very interesting project in Tanzania. It’s trading for anything between $0.02 Canadian or $0.03 Canadian. It has—it’s a very interesting project with some high-grade rock in that project. Now, this project is about 8 kilometers from an operating mine of a company called Shanta Gold. Shanta Gold trades in the UK.

 

In my view, the project of Helio Resource should eventually become a part of Shanta Gold. A merger should happen at some point of time. It’s a matter of pricing. At the current share price of about $0.02 per Helio Resource share, I think you should make some profit when the merger happens. It should be a multiple of the current share price.

 

Maurice Jackson:  Well, thank you for sharing that. You know, most experts in your—and I’m going to call you an expert because I believe you’ve earned the title. I know you’re a very humble person. You may not feel that way, but for you to share that information with the audience, I know we are all very grateful because most experts don’t share that information, certainly not simply for just listening. There’s a fee associated with that. So thank you so much from all of us here.

 

I like to switch gears here. I have noticed a common theme among serially successful investors such as yourself in the natural resource space and that is a shared appreciation for Liberty. Now, why do you believe that there is a shared vision and ideology regarding Liberty in this what I would call an elite group of investors to which you belong? I’d like to hear your thoughts on that.

 

Jayant Bhandari:  Well, I have talked with a lot of socialists in my life and I’m sure you have done the same thing, Maurice. And within about 1 to 3 hours, you can show flaw after flaw after flaw in their thinking.

 

Maurice Jackson:  Yes.

 

Jayant Bhandari:  And it does not take much time that the only reason socialists exist is because they don’t want to address irrationality in their thought process. And you can challenge them and you might convince them about irrationality in their thoughts but next morning, they revert back to their own normal.

 

Now, the difference is that capitalist is a rational way of living and socialist is immoral and irrational. So, any rational way of thinking gives you a rational way of thinking. It positions you to understand future, understand the present more accurately than an irrational person equips himself with. And I think any person who is rational and intelligent eventually comes to a conclusion that free market, Liberty and capitalism is the way society should be run.

 

Maurice Jackson:  Well-said, very well-said. Would you mind just sharing with the audience, for those that may not have the political—may not know that their political ties may be a certain way. It may be towards socialism versus Liberty. Let’s try to give an example at least of how government from a socialist standpoint, their view is versus our view in Liberty.

 

Jayant Bhandari:  Very important thing is that I don’t want to control other people’s lives. Now I don’t believe in taking drugs or encouraging prostitution, but it’s none of my job, Maurice, what you and other people do with their lives. I might offer as a friend some suggestions if you invite me to, but my job is not to force you to live your life my way. But this is what a lot of governments try to do. They want to impose controls on you. They want to impose controls on what you can eat and drink, how you live, how you spend your time, and they actually steal half of what you and I own—

 

Maurice Jackson:  Yes.

 

Jayant Bhandari:  –as taxes and they impose horrendous regulatory control on us, which basically means that we are all slaves, and I don’t like that kind of state of affairs. Now, maybe some of the things I needed, maybe there are some good things about— As I said, I don’t like drugs and I don’t like prostitution, but I have no reason to impose it on other people. I can still make a moral judgment about it. I can still speak about it and we should all do the same thing, but I have absolutely no reason to impose my views on you.

 

Maurice Jackson:  You know, when you mentioned government and how it tries to control, it does so by what we hate the most is probably which is taxes. In America, one of the challenges we have is we tend to listen to what the media tells us is our largest expense in life, which is a home. That is incorrect. Your largest expense in life, ladies and gentlemen, are taxes. It is not a home. So, that’s one of the reasons I began my views towards Liberty in that regard because I was like— you know, taxes is theft. If I were to go to your house, Jayant, and I took a lamp out of your house, I would be arrested. But if the government comes and does it and it calls it taxes, it’s legal. In either situation, you no longer have your lamp.

 

Jayant Bhandari:  And that’s what government is all about today and that is why government is probably and in my view the worst institution human beings have created. It not only steals my wealth, it creates a huge—it has a huge corrupting influence on the society because when they steal money from me, they entrench people who work for the government because they get paid out from the stolen money and they give some of the crumbs to people in the society who get entrenched as well.

 

Today, apparently, 50% of Americans are dependent, so-called dependent on the government which means that they are entrenched in this immoral system of stealing from wealth-generators and that creates a vicious cycle in democracy.

 

Maurice Jackson:  And as you mentioned earlier, they’re slaves and this is supposed to be the land of the free and yet they don’t realize it in their day-to-day activities that they’re losing their freedom more and more and becoming the salves that you mentioned earlier.

 

Jayant Bhandari:  Maurice, there are many places in the world that are much worse than the U.S. So U.S., yes, these people are indeed slaves and U.S. has many problems and they steal half my wealth in the U.S. But unfortunately, the world is a big slave place. This is the truth in most of the world unfortunately.

 

Maurice Jackson:  That is correct as well. I made my comments more specific to United States because I’m a resident here and this should be the land of the free. We should be the beacon of freedom and having a free market and we see that eroding day by day.

 

Jayant Bhandari:  Increasingly, it is not the land of the free.

 

Maurice Jackson:  Before we end today’s session, I would be remiss if I didn’t discuss your specific contributions to Liberty via your annual seminar Capitalism & Morality. For those that are not familiar with Capitalism & Morality, could you please tell us about it?

 

Jayant Bhandari:  Well, I hold this seminar every year. This has been going on for the last 7 years now. It is held in Vancouver, sometime in July in Vancouver and the next one will be on the 30th of July 2016. It’s a philosophy conference but, of course, oriented towards the concept of Liberty. I invite some of the best known philosophers to come and speak at my seminar. It is a seminar that promotes the concept of Liberty, but mostly, I want people to change their paradigms to what is rational. So I’m very open to argumentations and discussion in that seminar and it does a lot of good job on a lot of people. A lot of people keep coming back.

 

Maurice Jackson:  When I was at the Sprott-Stansberry conference where your seminar was conducted last year, that was one of the high points, I think, for everyone there. They were excited to—for the last day at the conference to attend the event and they wanted to see some of the guests you had, if you would please this past year.

 

Jayant Bhandari:  Well, I usually have my long-time mentor, Doug Casey, as a speaker. Rick Rule who is a very well-established institutional investor speaks at my seminar. He has been speaking for the last 4 or 5 years. Dr. Walter Block, who is a very famous libertarian, he is often a speaker. Dr. Michael Edelstein, who is a psychologist, he is a usual speaker at my seminar. There was a lady, Roslyn Ross, who actually got the highest points among all the speakers, is an absolutely amazing speaker and she spoke about how to bring up your children. So this is not an activist seminar. It’s a philosophy seminar and we talk about things like how you should raise your children.

 

Maurice Jackson:  Yes. If you’re not familiar with the work, ladies and gentlemen, it is not dry and mundane. This is something that will get you to really contemplate what is said and it’ll make your mind really consider, you know, your ideology towards whatever you feel right now and question it. And the speakers are just amazing.

 

Your previous seminars, they are available on YouTube, but I encourage you, there’s nothing like actually being in attendance, having other like-minded individuals there or individuals that may want to challenge and having a great discussion. It’s not negative. It just is very productive. I must add on to that, it’s very productive. I’ve enjoyed the work. It’s really changed my perspective on a lot of things in my life personally. So thank you for that.

 

Jayant Bhandari:  Yeah. Thank you very much for introducing my seminar, Maurice.

 

Maurice Jackson:  Well, in closing, if somebody wanted to contact you and learn more about your work, where can they go?

 

Jayant Bhandari:  I have a website. It’s my name in continuation .com. That is jayantbhandari.com and I link all my articles and my research reports on that website.

 

Maurice Jackson:  And, you know, again, the seminar is called Capitalism & Morality and you can find that again on YouTube. Jayant, it has been a pleasure having you this evening. I look forward to doing more interviews with you in the future. Thank you so much for your time.

 

Jayant Bhandari:  Thank you for the opportunity, Maurice. I appreciate that.

 

Maurice Jackson:  ‘Til next time, sir.

 

Jayant Bhandari:  Thank you.

 

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