Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Datt Capital principal Emanuel Datt reveals how he's counting on his 2 largest holdings doubling in value in the coming year.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Emanuel Datt: Datt Capital seeks to identify high growth and special situation opportunities within Australian markets with no institutional constraint. We aim to exploit informational, analytical, behavioural and structural edges in a high prediction environment over time to really try and capture the right feel risks out there. Overall, we're opportunistic and disciplined, with a strong emphasis on risk control.
The fund basically blends longer duration holding, which we anticipate compounds over time, interspersed with shorter term catalyst-orientated opportunities. We recognise that time arbitrage can be a huge advantage if exploited appropriately in a disciplined manner, so accordingly the funds may have a longer duration holding profile than typical.
The fund invests in a concentrated manner. It could be holding [fewer] than 20 positions and with the flexibility to invest across asset classes. Ultimately, we aim to hold at least 70% of the portfolio in our top 10 positions.
Biggest convictions
MF: What are your two biggest holdings?
ED: The first one would have to be Adriatic Metals PLC (ASX: ADT), which has found and advanced just a remarkable high-grade polymetallic mineral deposit in Bosnia. Polymetallic means multiple metals, basically. It also holds base metal assets in Serbia.
In a nutshell, we consider this to be the best undeveloped mineral asset globally. It trades at a material discount at a transaction price of similar deposits that we consider to be quite inferior to this one. We believe a lot of this situation is largely due to the fact that Bosnia is not well known as a mining jurisdiction, [but] we consider it quite comparable to Serbia, which is right next door and has major companies like Rio Tinto Limited (ASX: RIO).
When we first bought Adriatic, it was in the low $1s. It's gone up about 3x.
But notwithstanding, the project since that time has advanced to the point of a final investment decision and project financing, so we expect this to occur imminently. Also, basically, the project is now shovel ready. It's just a matter of pulling the trigger for development.
We still consider the company to be materially undervalued. We think that their value is about double the current price of about $3, and that's really driven by the projected financial metrics, which are just absolutely incredible. On a post-tax basis, the net present value, NPV, using a discount rate of 8%, is over US$1 billion dollars. That gives it a post-tax IRR [internal rate of return] of 134%.
The project CAPEX [capital expenditure] has been paid back after only 8 months of operation, so this is just absolutely amazing, this deposit. [And] that's only for the flagship deposit, so it really allows for the significant exploration upside because they hold all the surrounding area as well as the Serbian-based metal assets, which we think would be worth at least $100 million in the current price environment.
That's why we think that it's probably only been trading at about half of the price it should. And that's why I'd say it's our biggest holding at this point in time.
MF: What's your second biggest?
ED: Second biggest is a company called Metals X Limited (ASX: MLX). Metal X's core asset is a 50% interest in the Renison Tin Mine and a tin development project known as Rentails. These assets are located in Tasmania. The company itself is only 1 of 2 listed tin producers globally.
That's because tin itself is a unique but very, very important niche market. Tin [is] an unsubstitutable ingredient in solder, which is used for stuff like circuit boards. The whole shift toward clean energy and a greater emphasis on technology really drives demand for circuit boards, and hence tin.
Basically, the forward projection for tin market supply is very highly constrained in terms of supply. The market itself has been in deficit for many, many years now, but there's always been sort of a stockpile to draw down upon. But the strategic stockpile is now depleted.
Basically, growing demand has been driven by the adoption of the new technologies, and stable, or trickling, supply has just caused the tin price to explode over the last 6 months or so.
One important factor that we should point out is the price component. Tin, within a finished good — like a computer — is just very, very minimal. Maybe for an iPhone, it's probably about 20 cents of an iPhone's total cost. So when you consider that the price can really go up multiples without too much impact on the end price of the finished good…
One thing that's really held back the company is that historically the company has tried to go into other commodities like copper and nickel. But basically, it started to shed all these non-tin assets that were accumulated by past management teams.
It should be a pure tin player by the end of the year.
A lot of change has really been driven by its major shareholder. They're an Asian-based shareholder known as APAC Resources. The management team are Australian, but they come from APAC Resources.
We think that Metals X is materially undervalued by a large factor given the strong outputs of tin, and generating a hell of a lot of cash at the moment. There's quite a number of monetisable assets on its balance sheet, as well. I think at the moment it's trading about 35 cents, so it really wouldn't be a surprise to see it double over the next 6 months to a year.
