Jayant Bhandari | How to Profit from Arbitrage in Junior Mining Stocks

A unique and often over-looked way to profit through investing in the junior resource sector is by taking advantage of arbitrage opportunities. These opportunities occur stunningly frequently in the sector and provide the astute investor a lower risk avenue to consistently make high returns in an otherwise volatile sector. In this interview, Jayant Bhandari of Anarcho Capital Inc. explains how to profit from arbitrage in junior mining stocks. Jayant is one of the foremost voices in junior resources teaching about and lifting up arbitrage opportunities within the sector. Previously, he has worked for well-known natural resource investors Doug Casey and Frank Holmes. Currently, he advises institutional investors regarding investing in the junior mining sector. This interview is a must-listen for savvy investors! You can find the transcript of the interview below.

Topics Covered:
0:05 Introduction of topic and guest
1:45 How Jayant came to focus on junior mining stocks
2:50 Why Jayant focuses on arbitrage opportunities
3:35 Why arbitrage occurs in junior mining stocks
4:35 Where arbitrage occurs most frequently in junior resources
7:55 How many significant arbitrage opportunities occur each year
8:20 Past arbitrage opportunity of Sunridge Gold explained
10:50 Why arbitrage can grow over time in junior resources
11:43 What % arbitrage upside Jayant looks for before investing
13:30 What factors/risks to examine in an arbitrage opportunity
17:25 Profitable arbitrage trades Jayant has made
21:30 Final advice on profiting from arbitrage in junior resources

Note: Transcript edited for readability and clarity.

Bill: Thank you for tuning in for another expert interview. I’m Bill Powers with MiningStockEducation.com. The topic of today’s discussion centers around profiting from arbitrage opportunities in the junior resource sector.

In economics theory, the efficient market hypothesis suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. According to this hypothesis, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else. My guest today will specifically demonstrate that this theory is not correct in the junior resource sector.

Arbitrage exists as a result of market inefficiencies. It is a trade that profits by exploiting price differences of identical or similar financial instruments on different markets or in different forms. The trader or investor capitalizing on arbitrage opportunities buys an asset in one location where it’s cheap, then immediately turns around and sells it in a place where it commands a higher price. In its purest definition, arbitrage is a “risk-free” profit opportunity.

Joining me today is Jayant Bhandari of Anarcho Capital Inc. Jayant holds an MBA from Manchester Business School in the United Kingdom. Throughout his career he has worked for well-known natural resource investors Doug Casey and Frank Holmes. Currently, he advises institutional investors regarding investing in the natural resource sector. Jayant’s focus is on junior mining companies and within that focus he is one of the unique voices educating regarding and lifting up arbitrage opportunities in junior resource sector from which the average retail investor can profit. Jayant, thank you for coming on the program to share your insights.

Jayant: Thank you very much for having me, Bill.

Bill: Could you begin by sharing your journey of how and why you came to focus on investing in junior mining stocks?

Jayant: In 2003, I immigrated to Canada and I came across Doug Casey who offered me a job to work for him. In those days I did not have a job. I was close to being broke. He was kind enough to give me a job. He put me in touch with relevant people in the industry and because of him I got trained in analyzing junior mining companies. Thereafter, I came across Frank Holmes who was an amazing person and an amazing company to work for. He trained me. He spent a fortune sending me around the world to look at mine sites and projects to understand the junior mining industry. And that is how I came into the industry and I stayed on in this industry.

Bill: How did you come to focus on looking for arbitrage opportunities within the junior mining sector?

Jayant: I am an investor and speculator within the junior mining industry. Now if I can get something cheaper by twenty or thirty percent, why should I not do that? And that automatically takes me to arbitrage opportunities. Now arbitrage opportunities offer you a huge upside, sometimes exactly in companies I might want to invest in anyway. And an extra 30% or 40% is a very exciting upside that helps me make extra money.

Bill: Why does arbitrage occur specifically in junior mining stocks?

Jayant: Arbitrage occurs everywhere in life. You want to buy the same can of milk. And if you go to two different stores you will get very different prices. In fact, if you want to get diesel for your car, or gasoline for your car, and if you go and visit two gas stations on two sides of the same street they have very different prices, sometimes as much as 5% to 10% difference from each other. Arbitrage exists in these extremely liquid commodities and the junior mining industry is an extremely illiquid industry which means that arbitrage opportunities are even better and offer you even more upside in this industry.

Bill: Where does arbitrage occur most frequently within the junior resource sector?

Jayant: Mostly when a liquid company tries to acquire an illiquid company; I see a very nice arbitrage opportunity and the reason is that when you try to acquire an illiquid company, big investors do not pay much attention to the illiquid companies. Retail investors, people who can bid for a smaller amount of shares, have an opportunity in such situations. Also, when you have an acquiring company that has very tired share holders who have stuck with that company for a very long time and who want to get out of that company as soon as possible. When a merger is announced, they get a liquidity event which they exploit without actually sometimes doing simple math on what the creation of the merger is and they sell in this liquid event, leaving a lot of money on the table for people who might want to exploit this arbitrage opportunity. But also one of the best and most exciting arbitrages I have seen is when the two companies are in completely different jurisdictions. So when a Canadian company wants to acquire an Australian company, or an Australian company wants to acquire a company listed in London that creates a very exciting arbitrage opportunities and the reason is that a lot of people who invest in Canada do not want to owe shares in Australia or cannot trade in Australia because of the brokerage they use. And a lot of people are in these kinds of situations. As a result, when a merger of this kind happens people in one of the two markets tend to sell their stock as soon as possible. They dump their stock and that creates sometimes extraordinary arbitrage opportunities for an astute investor.

Bill: So if I could summarize, the best arbitrage opportunities are found in mergers and acquisitions and some of the underlying reasons are that “smart money” or institutional investors are not interested in these small, illiquid companies. And then the “dumb money,” so to speak, the retail investors are frankly too lazy and too ignorant to see the opportunity. Would that be correct?

Jayant: That is absolutely correct, except that I won’t necessarily call retail money “dumb money.” Institutional money can be very dumb as well. I have consistently seen—travelling with institutional investors—that they are more interested in drinking and womanizing when they go on site visits, so I don’t necessarily call retail money “dumb money,” but it is something they should pay attention to.

Bill: I stand corrected on that. Regarding arbitrage opportunities, how many significant opportunities in the junior sector do you see on average per year?

Jayant: Very easily I have about 4-5 opportunities I am looking at at any point of time. I would say a minimum of 20-30 arbitrage opportunities pass my desk every year.

Bill: Recently in Vancouver you gave an excellent lecture regarding arbitrage opportunities in the junior sector and in that lecture you lifted up Sunridge Gold and the arbitrage opportunity that occurred in late 2015 and early 2016. Could you please share with listeners what occurred there?

Jayant: This was one of the stories I shared and I expanded on this story to convey to people the kind of opportunities that can come to exist and stay in this industry for a very long time; and how you can benefit from it by being patient and if you agree to do some simple math on these mergers and acquisitions. Now in November 2015, Sunridge released news that they were going to be acquired by a Chinese entity and they were going to get paid a certain amount of money which Sunridge said in the news release would be transferred immediately to the share holders of the company and that the company would be closed. Now, depending on how you calculated the numbers, this money was going to be anything between $0.37-$0.42 per share of Sunridge. Now Sunridge traded for between $0.24 to $0.27 per share for the next six months, which meant that if you accumulated Sunridge over those six months, you would have positioned yourself for anything between 40-60% arbitrage upside. Now that is an amazing arbitrage upside, particularly when you are getting cash for what you are buying. Arbitrage upside of 40-60% existed over six months and this continued. Most people might think that such opportunities would exist for only a few days or few hours but this can exist for months. That is why one should be very patient and try to accumulate and get these shares for as cheap of a price as they can.

Bill: One of the fascinating things you said in your recent lecture was that these arbitrage opportunities can or they tend to grow as the months and the weeks pass. I just find that fascinating. The efficient market theory says they should lessen but in your experience you have observed that the arbitrage can grow.

Jayant: Absolutely. What happens is that sometimes in the initial days when liquidity of the two companies is very high, arbitrage can be very small. But as liquidity of one of the companies dries up, arbitrage tends to increase and for the retail investor this actually creates a fabulous opportunity to slowly acquire such companies.

Bill: When you are looking to invest and take advantage of an arbitrage opportunity, what percentage profit upside do you look for before you will invest?

Jayant: As much as possible, but I tend to look for anything between 20-50% arbitrage upside. I am very patient so I will always bid for something that offers me at least 20% upside. But if the deal gets closer to the finalization date then I might even buy something for 5-10% arbitrage opportunity because if I can make 5% or 10% in a week’s time I don’t really worry so much about it.

Bill: That makes sense. What are some key factors that either increase or decrease the arbitrage potential in the junior resource stocks?

Jayant: Well, again, as I said what increases arbitrage is the lack of liquidity in these companies. The fact that some of the share holders might be very tired who want to dump the shares as soon as they can and this creates this very exciting arbitrage opportunity for people who have done simple math. Now it is very important to understand that when a merger is announced all you have to do is to do a very simple one or two line math to figure out what kind of arbitrage exists in that merger or acquisition and you position yourself to make that money then.

Bill: After you find the merger and acquisition to analyze, you do the math and the math makes sense, what other factors do you look at and what risks are still there for the investor?

Jayant: The two biggest risks are: one is that while the merger is happening, even if there is an arbitrage opportunity, the company that is acquiring the smaller company might actually suffer a share price loss. The second problem would be that the deal might not go through. In both cases you stand to lose money if the merger does not happen or if the share price of the buying company falls. What you can do in these two cases is that you firstly have to be reasonably sure that the underlying value of the company that you are buying and the value of the merged entity actually makes sense. So that is very important for you to do and work on to make sure that you are reasonably confident about the asset and the management of the two companies. The second thing you can do is that if you think that the share price of the bigger entity that is acquiring this smaller entity might fall, you might even want to short sell the stock of the bigger entity to cover yourself from the possibility of drop in share price of the bigger entity. Yes, so you should do some kind of work on the valuation on the underlying assets.

Bill: Do you analyze the underlying assets differently when you are looking to invest for arbitrage purpose rather than long-term purposes?

Jayant: I should actually ideally do a full analysis on these companies as well. However, when the upside is so nice and there might be an opportunity to short-sell the bigger entity, I might refrain from doing a full analysis. But the underlying message stays the same: you should feel responsibly confident about the underlying assets and about the management that run these two companies. Now what I have seen on a couple of occasions is that some of the announced mergers were actually fraudulent. And you cannot really do anything about these managements because if two friends in two different companies decide to merge their companies and announce it when they actually never intended to do the merger, they might have news released just to get excitement in the market for the two companies. And then they might later decide not to do the merger. You cannot really take such management to court and it is therefore very important that you understand the motivation of the management. And you do some kind of valuation of the underlying assets.

Bill: So do you normally speak to the CEO’s or at least the investor relationship person when you are researching these mergers and acquisitions?

Jayant: Absolutely. These junior mining company CEO’s are happy to talk with just about anyone who gives them a call. These are so illiquid companies that whosoever calls gets to talk with the CEO’s. And you should try to talk with the CEO’s because the tone of their voice, how they talk, what kind of information they give you tells you so much about their character and personalities.

Bill: Other than Sunridge Gold, the example you just shared, what were some of your most profitable arbitrage trades that you’ve experienced in junior resources?

Jayant: As I said, there are about 20-40 arbitrage opportunities that I see on a yearly basis. Now I can give you some of the names in which I benefited from investing in these companies. Sunridge actually offered me three different arbitrage opportunities. I could invest in the shares. I could invest in the warrants. The warrants were going to be acquired by the company for $0.02/share and the warrants were trading for $0.015/share. They offered me a 33% upside. I could actually buy Sunridge Gold in the USA once they had paid off most of the money, and this Sunridge that was still trading in the USA offered me between 50%-100% arbitrage upside. There was a company, Kiska Metals, that was going to get acquired by AuRico Metals that offered me about 10-15% arbitrage upside. Another company, Treasury Metals, which was acquiring Goldeye made me about 20% of my investment. And this happened over a duration of a few weeks to a couple of months. Paramount Gold Nevada was a very exciting opportunity for me. I bought a lot of underlying of Calico Resources which was going to be acquired by Paramount. And again these were in two different jurisdictions. Calico Resources was in Canada and Paramount Gold Nevada was in the USA. You could even short-sell Paramount Gold Nevada if you wanted to cover yourself. The arbitrage opportunity was very exciting: 30-50% over those two or three months that the process was going on. There was a very exciting arbitrage when two Australian listed companies where merging, Gryphon Minerals merging with Teranga Gold. Similarly when True Gold was being acquired by Endeavour Mining and the arbitrage was about 30% so you can have very exciting arbitrage opportunity if you decide to do some simple math on these companies.

Bill: Thank you for sharing that. When I think about the commodities and the mining sector, it is so volatile and the cycles so extreme that it is hard to profit in a commodity down-cycle with mining companies. You could short stocks. You could invest in an explorer that makes a discovery. Or the new way that you are sharing with listeners today, if they are not aware of it already, you can take advantage of these arbitrage opportunities. In your investing career is this the primary way you have profited in commodity down-cycles?

Jayant: I mostly invest in the junior mining industry as an investor and as a speculator. However, arbitrage does make a lot of money if you pay attention to it and over the last several years increasingly my focus has shifted to arbitrage opportunities. I would say about 20-40% of my money gets invested in arbitrage opportunities.

Bill: Thank you for being so generous to share this knowledge and even specific opportunities that you are looking at. I have listened and read some of the transcripts over the years when you’ve been interviewed regarding this subject and I have to say you are very generous with sharing with the common man your knowledge. So thank you for that. Are there any other ideas or tips regarding profiting from arbitrage that you would like to share with the listener before we conclude?

Jayant: Have a brokerage account where you can have London-listed stocks, Canadian-listed stocks and Australian-listed stocks, which means that when there is a merger happening between a Canadian company and an Australian company and if you buy a Canadian company and if after the merger it becomes an Australian listed stock, you won’t really face any problems if you have a brokerage that trades on all the three exchanges. So have a brokerage account for these arbitrage opportunities. You might pay some extra commissions to have such a brokerage account but that would position you to benefit from arbitrage opportunities when the merger is between companies trading in different jurisdictions.

Bill: Excellent advice. Before you go, can you please share with listeners regarding the work that you do, any upcoming events and how listeners can follow you.

Jayant: I advise institutional investors on investing in the junior mining industry. This is exactly what I do with my own money. I run a philosophy seminar, Capitalism and Morality, in Vancouver, British Columbia, Canada every year and the next one is on July 29, 2017. I look forward to this day. We have a full day of discussion on free markets and morality; all the things that the world must discuss, but somehow refuses to discuss. So that is a great event. Please come for it if you can.

Bill: What is the website for that event?

Jayant: My personal website is www.JayantBhandari.com and within that website is a tab called “Capitalism and Morality” which is the name of my seminar. You can get all the details on that page.

Bill: Jayant, thank you very much for joining me today.

Jayant: Thank you very much for the opportunity, Bill.