Bruno Kaiser, Head of Metals & Mining for Desjardins, Discusses the Impact of Passive Funds on Mining Investments

Trevor Hall [00:00:05] Good day, everybody. Welcome to Mining Stock Daily. This is Trevor Hall and today is Friday, November 15th. We have another in-depth interview to wrap up our week. We welcome Bruno Kaiser. He's the managing director and head of Metals and ining from Desjardins in Toronto. And a great conversation about the impact of passive funds in the mining sector. So you will want to pay attention to that closely. If you are listening to this interview on Amazon Alexa you are listening to an abbreviated version and obviously the full interview can't be found practically anywhere else you receive your podcasts. One quick mention to our sponsors. Thank you so much to the Association for Mineral Exploration, Integra Resources, Pacific Empire Minerals and Western Copper and Gold for your continued support of mining stock daily. We really appreciate it. And we really can't do it without you.

Trevor Hall [00:01:01] So without further ado, this is just a wonderful conversation about not only the impact of investors and kind of the lack of capital going into the industry, but also what the inflow of ETF capital means for the junior small cap space and also how the rules of change that we all need to be aware of. Whether you're a company or a speculator. So without further ado, here is my conversation with Bruno. Have yourself a great weekend. We'll talk to you again on Monday.

Trevor Hall [00:01:37] And welcome to Mining Stock. Daly This is Trevor Hall, and today I am joined by Bruno Kaiser. He is the Managing Director and Head of Metals and Mining for Desjardins Capital Markets, and he is based in Toronto. Bruno, good to chat with you once again. Welcome to Mining Stock Daily. How are you this? Oh, I guess I can say holiday season already.

Brunon Kaiser [00:01:56] Yeah, unfortunately it feels like it with the weather. I am very good. And it's a pleasure to speak with you.

Trevor Hall [00:02:02] We are going to talk a lot about the impact of passive funds in junior mining while mining in general, but also how the investor has changed in mining. You've been speaking pretty frequently about this wealth since actually almost a year ago when I first met you when we were on a panel together in New York. But before we kind of get into that conversation, can you give our listeners a little bit of a rundown of your background and kind of how you found yourself in the position you're in specifically with in mining?

Brunon Kaiser [00:02:31] Sure. So I've been in the business for 27 years. I have a Bachelor of Commerce, an MBA and humanities degree. And I sort of found my way into mining in the early 90s by accident because I speak a number of languages and travel well. And at the time, I was working for CIBC World Markets, which was called CIBC Wood Gundy, and they said, you know, you're perfect for mining. You have a given analytical, scientific type of bend to you and you can pick it up and you're the right character for the industry. So it found me sort of by accident. I started in research for a number of years. I was at CIBC for about five years and then moved on to investment banking, first with Rothschilds and then Morgan Stanley in London, where I was actually not focused on mining. I was focused on more or less every industry other than the financial services group pardon me. And I was there for, as I said, about five years, moved back to Canada, a national bank financial where there are some old Wood Gundy ties and helped helped drive the growth of the business there, and then moved on to Paradigm Capital, which was a very mining focused boutique and led the mining initiative there. I was there for about seven years, at which point I was recruited here to build up the mining franchise that Desjardins, which is a little bit of an unknown financial institution in Canada, because it's a it's a co-operative structure, but size wise it is about the same size as CIBC. So it's about the fourth largest banker or are equivalent to the fourth largest public bank in Canada with almost 300 billion in assets and 46000 employees. So it's a large institution and historically has always had some ties to the mining industry. But my job has been to deepen and broaden it. I've been here for about two, two and half years now.

Trevor Hall [00:04:31] When did you start with CIBC? Within the kind of the mining spectrum. What year was that?

Brunon Kaiser [00:04:39] 92.

[00:04:39] So you've seen a couple cycles. Yes. Yeah. Yeah, quite. Do you like. Yeah. And I just kind of curious. I'm sure many of our listeners who are maybe, maybe have not been following the commodities and precious metals and mining industry for that long. Can you kind of walk us through where we're at now in this this cycle we're at as compared to previous cycles you've experienced?

Brunon Kaiser [00:05:07] Well, I think first of all, let's let's predicate this by saying where we are in the gold cycle as differentiated from the other mined commodities. And the other most important one would be copper. I think where we are with respect to gold as the commodity itself, separating it from the underlying companies that produce the gold, I'd say we're in a fairly strong, stable to bullish environment. If I look back at it historically, there was definitely a period of time and perhaps a number of cycles or periods of time since I've started in the industry where gold was very much forgotten. And of course, the late 90s comes to mind, you know, 99 to sort of 0 2. And and even I would say in the in the commodity downturn of, you know, 2012 to, you know, this year, it wasn't forgotten as much. It was it was very much tossed aside in the late 90s. So right now, from a commodity price perspective, I'd say we're we're quite healthy. Obviously, we'd always like to see it higher and stronger, but we're at a point where those that are in production are are making strong cash flows. Balance sheets are healthy, and they can live quite well with the current price that we're in. And and if you if course, it's always difficult to say what really drives the gold price. Many people have tried and few are very successful at predicting it. But if you'd just generically say that it's it's an insurance policy against the financial world as it is itself a currency. I'd say that maybe troublingly so. The rest of the world is has got some tremors that we should be keeping an eye out on. And that would bode well for gold. With respect to copper and and other base metals, you know, the story for for those mined commodities, I think is very interesting now with the context of people talking about climate change and and trying to reduce dependency on on fossil fuels, with every degree that we try to focus away from fossil fuels, we need to intensify our focus on mined commodities. And I'm not sure that that has completely sunk into the world at large. And and so I think that bodes well for copper in the really long term. It's really hard to say on the short term because it's much more effected by, you know, trade discussions between China and the U.S. and in the industrial cycle. But from a supercycle perspective, copper, nickel, cobalt, you know, even zinc, I think should be should be should be quite strong and healthy. And and and they're simply not being explored for as readily as they were in the past. And therefore, the supply side is probably going to be more constrained in the longer term.

Trevor Hall [00:07:56] Mm hmm. Speaking specifically about gold bull markets and just kind of referring back to what we've seen thus far in 2019 when we saw gold, the low prices really kind of move up, putting up as much as 250, 275 dollars per ounce of gold. Obviously, we're seeing a little bit of a correction and consolidation right now as we speak. I guess referring back to previous upward swings in gold price that you've been a part of. Has it typically kind of gone gangbusters up as we saw in 2019 with a correction? It's just somewhat of an normal observation from from your experience or have you ever seen a time where it's just slow and steady upward growth, as most you know, obviously any share price or any spot price would really wants to see?

Brunon Kaiser [00:08:51] Yeah. You know, gold is funny. It is a very you know, if we if we sort of humanize it, it's a very emotional commodity. And so it tends to have violent moves upwards and downwards. And and, you know, historically, you know, at least over the course of my career, this has this has been a very strong movement, upwards off of, you know, through where it's been in 2019. But we saw similar in the end of or in the early part of 2011, I would say. Wasn't it? You know, it was. It was a similarly strong move. We saw the same sort of move in in 0 7. We saw it off the bounce in 0 8. And then of course, in 0 5 0 6, it was a very prolonged period of near, you know, steady state upward, upward drive. So what what we see here is not is not uncommon. I'd say it's very common for gold when it moves to move in in Russia's. What I would say if we. If we translate it over to the capital markets, into gold stocks, what we haven't seen this time is the corresponding move in gold stocks. Yes, they've gone up. But if you look at the sort of exuberance and the the the flurry of new issuances and the pace of of activity and on the corporate sector and and amongst investors to hustle into the sector, we just haven't seen it this year. And that's one of the reasons, you know, I've sort of observed it for the last couple of years and was wondering whether it was a function of a flat gold market. It wasn't so much negative and bearish. It was kind of flat really over the last three or four years. And that's what that's what prompted my interest in looking deeper to see what the malaise is all about.

Trevor Hall [00:10:44] That's actually really good transition into what we really want to talk about. And that's the impact of passive funds. Give us a kind of a 30000 foot overview of what you have found out as far as investors involvement in passive funds rather than individual mining stocks. And why is this so significant for the mining industry?

Brunon Kaiser [00:11:06] Well, I'm going to take a quick step back and and attribute this to the capital markets at large, because it's not a phenomenon that is solely affecting the mining industry. I'll tell you why in a moment. Why it impacts mining a street quite, quite starkly. For the past 10 years or so, there has been a very steady, very secular move away from actively managed funds and into passively managed funds. I'm looking at a chart and if you've seen the presentation, you've seen the presentation that we sort of jointly worked on together. I've got a chart that goes from 1995 to 2018 in 1995. The assets under management and passive funds was about 5 percent under 5 percent. And and now it's estimated to be about 50 percent. And that is a straight slope. There's basically never been a drop. It's a steady rise. And and of course, it's coming at the expense of, well, two sources. Net new funds tend to be moving into passive funds. And then there is a shift out of active funds. And by active funds, I mean, where there is a portfolio manager or a team that are making active investment decisions, they do research on stocks. And, you know, they may have a strategy, be it value or growth or whatever. But, you know, they're actively managing it. Passive funds are by definition. Exactly. That they are passive in the most widely probably engaged in method of passive passive investing. Now is the ETF, which is an exchange traded fund. And what that is, is basically a fund that, you know, let's call it trades like a stock that mimics the the investments in that fund are stocks that are components of an index typically. So, for example, one of the longest, longest, you know, ETFs in existence is the SPDR, which is the S&P 500 and it's an S&P 500 ETF. And the ETF simply mimics the 500 stocks by weight allocation in the ETF to the S&P 500. And every time that ETF is bought or sold, the underlying constituents have to be bought and sold. And so there is the need for there to be a very low degree of tracking error between the ETF and the underlying index is important. So what that means is that ETF don't typically get created in stock, soaring indices that have relatively illiquid underlying components. And typically the relationship between sides of a company and liquidity is is a positive one in the sense that larger companies are more liquid. So you'll tend to see ETF favor larger companies. And you know, that's a bit of a subjective measure because what exactly is a large company? I think, you know, with time that that almost by definition grows because as the amount of money in ETF increases, you know, there's more money chasing the ETF. So therefore they have to have more liquid underlying underlying components in order to minimize their tracking errors. So so that impacts the capital markets at large. And I think that's partially, you know, to be explained why we see the very, very large mega cap companies, the Apples and the Microsoft and stuff. You know, they are massively owned by basically every ETF on the planet and they beget investment because they're large in some cases. You know, I'm really oversimplifying things, but the problem is also it impacts the companies and the industries at the opposite end of the spectrum, which is that small cap stocks, microcap stocks get ignored because they don't attract ETF money. And the problem is, is that those remaining fund managers that are active fund managers in large part. There's a huge component of their investments that, you know, are the same investment constituencies, the ETF. They don't tend to deviate massively from them. There certainly are those fund managers that do. But let's say that there's a 50 to 70 percent overlap of what an active fund manager is going to own and what an ETF is going to contain. That means that at the end of the day, the market at large is is very rapidly ignoring the smaller capitalization end of the spectrum. Now, that impacts every industry, as I said. But the problem with mining is, is that we have a dispute on the TSX, for example, there are over eleven hundred listed mining and exploration companies TSX and TSX V. The overwhelming number of those are far too small to be ETF and passive fund eligible. And as a consequence, they are also really not being looked at by active fund managers. And therein lies the problem. First of all, ETF don't participate in capital raisings. They only participate in secondary trading. So if a company comes to market, even if it's a company that's a component of an ETF. An ETF is not putting in a subscription order and two, to be part of that capital raising, they have to only participate once those funds, those shares hit the trading register. And and then, of course, the impact is, is that, you know, now with almost 50 percent of the market being being passive, you know, there's much on us, you know. Yes. The equity capital markets pool has grown as low as as a whole, but not as quickly as the ETF drives to passive funds has grown. So the net net is that it is created, in my opinion, a smaller pool of capital that's that's allocated by active fund managers. And then they themselves have to drive it into a smaller number of companies. And that's that's been if you trace it right back to where I said the activity on the capital raising front has not been as as active as it was in compared to previous gold price moves. I attribute it to that. The long winded answer, I know, but it requires some back explanation.

Trevor Hall [00:17:25] Well, I am trying to think of an appropriate way because I think there's a number of different directions on which you can approach this. And I think. Do you approach it from the investor side of the spectrum or do you approach it from the small cap junior company's side on how to make things better? But I think what really hit home and kind of what made me thinking a little bit more, as you said, there's over 1100 companies publicly traded in Toronto on the TSX and the venture alone. But as an as an investor, I mean, that just screams at me. How do you how do you decide what companies different from the others, especially in these small cap type of junior companies? When the actual industry work cycles, we produce these geologists, they go find a project, that company fails. Now these geologists have to go find another land package, do the same cycle, bring another geologist to work. And so as the as the as the geologists in the and in the industry continue to build and as projects fail as a prone to do and they move on to other projects. But yet the original companies still stay publicly traded. We're just exponentially growing the number of companies that are being traded without any movement whatsoever. And so, you know, Ken, is the investor at fault here? Can you blame the investor for passively wanting to invest money when the when the breakdown of how the industry actually operates is one that's convoluted, it's saturated, and it's hard to decipher which which companies have good projects or not.

Brunon Kaiser [00:19:06] Yeah. It's it's always been a challenge when you're looking at the expiration side of companies of the investment spectrum to see and determine which companies are going to be successful in their programs and find know value adding projects. I think, look, it's there's a harsh reality that we all have to face in this absolutely affects everybody. It impacts, you know, people in my position in my industry. And the investment dealer side certainly impacts investors and obviously it impacts companies. And that is if the premise is correct and that is that the capital pool has shrunk and and is simply no, the public capital pool right now in jeopardy. You know, the pool that can invest in public companies has has narrowed its focus. Let's say it's not shrunk, but but by need of survival, it's narrowed its focus into larger companies. I think what that means is that there's simply going to be a Darwinian speeding up of a Darwinian event where a great number of those eleven hundred companies are going to need to cease to exist, because if they haven't added value, if they haven't found projects, they're not going to attract capital and they can't go on. I mean, they can maybe fund themselves through friends and family for a while. But realistically speaking, with the cost of exploration and compliance that companies face these days, that's hard to. That's hard to to successfully find things. Secondly is by definition, then, if the companies that are attracting company are larger ones, they would be looking for larger projects. Right. So the feedstock of exploration targets that they're looking at juniors to be successful in finding are going to need to be larger. And and so maybe I'm just hypothesizing here and I don't mean for people hearing this to to think that I'm dumping on the whole sector and saying this is this is doomed to failure, but maybe it is that, you know, the world simply doesn't have a need for 30000, 40000 ounce gold producers anymore. Maybe the reality is, is in order to be a viable public company with the. As I said, with the costs of compliance and the ever increasing burdens of regulations and and and and the need to be relevant to to investors on a public sense, you know, maybe that is you've got to be 100, you know, started 100 hundred and fifty thousand ounces. And if you're an exploration company, it means you better be looking for things that can you you better drill to kill. In other words, if you're looking and finding things that are looking like they're tiny projects, do yourself a favor and move on. That could be what the markets are telling us. And that would send out the. And that would from one end, it would spin out those eleven hundred companies into a more realistically successful group. The Darwinian effect, shall we say. And then on the other end of that, strategically speaking, we'll see more emanate combinations that'll that'll grow the companies and make them more apt to be investor friendly.

Trevor Hall [00:22:09] Yeah. No, that's I'm glad you mentioned it because I do want to bring that up as well. A kind of backtrack. It's it's funny. You you and you and I, you know, people in this industry like we've made a living and we used to watching these stories unfold every day and things change every day. But, you know, for people who aren't directly involved in mining or junior mining and resources that literally just don't have the time to give to follow these when things change, like, you know, it's no surprise to me that, you know, that they do want to play in this space, that the they will go to the ETF because that's probably a safer bet for the time that they can allocate their own capital. Right. So I don't think that.

Brunon Kaiser [00:22:49] And it's the same for every other industry.

[00:22:52] Yeah, yeah, yeah. That is very much true. No anomaly there, I guess. So let's talk about. We kind of talked about this. We need to kind of downsize as far as how many companies are smaller. Companies need to get bigger. An appropriate way to do that would be some sort of merger together. Maybe, maybe, you know, smaller, smaller projects. But a higher quantitative higher higher quantity of smaller projects could be a way to go. You know, I know Rick Rule has been preaching this for years about how, you know, there needs to be a come to Jesus moment with a lot of these companies. But I think that's all it's it's always just been talk. We actually haven't necessarily seen a big shift there yet. But in your mind, what's it going to take for these companies, specifically management companies of juniors, to be like, you know, let's take a step back and figure out where these partnerships and positions might actually lie?

Brunon Kaiser [00:23:55] Well, I think on the one hand, yes, it's a complicated question because the answer I think is complicated and very unclear, and I wish I really had a definitive answer. But in the spirit of being an investment banker who always pretends to know it. All right. Doesn't know where it gives those. I will. I'll give it a shot. You know, I think there's Darwinian process is going to continue. You know, absent an absolutely mammoth move in the gold price, where what will happen if history is any guide is that the greed factor comes back in. And anything with a ticker might attract retail capital. You know, when you start hearing, you know, tips again from your dentist in your taxi driver and that type of thing. So that can always happen, which can keep things alive and moving along. But in the absence of that, I think it'll simply be the slow weaning out and attrition where people leave the industry. They don't bother starting up public companies to chase the, you know, the geochemical anomaly type of thing. And then and then the successful ones. I think the model that we've seen recently are those that can very professionally and in a very mutually trusting basis. Negotiate and manage relationships with larger companies that will take typically less than 20 percent, nineteen point nine percent or less. And act as a bit of a funding protector and lead order. And that has been a model that has been successfully employed by companies. I think maybe the most well-known of larger companies that is employed that model is Nico Eagle. They've done they've done a tremendous job over the course of decades now of of seeding or or rather nourishing junior companies and working collaboratively with them to help them be successful. Because if they're successful, then techniques can be successful. And I think other companies have taken that on and are trying to emulate Duncan some some sense. There are other situations like if I take, for example, Atlanta Gold, which was a very recent success story having been purchased by St. Barbara this summer, Atlantic Gold had a very wealthy, controlling shareholder that functioned in the same manner as a in in the same manner as they were there consistently to help backstop funding, gave confidence to the market that there was that there was something there and it was a real anchor for the company. So that's going to be necessary going forward. And it might require to two in three of those types of relationships. So it means a smaller shareholder register where you have you may have two or three controlling parties, if you will. And and it it changes the nature of things. You know, you don't have as many retail investors as you used to because going back to the ETF situation, part of the drive to ETF has been a nature change in the nature of investment dealers, advisors, banks, whatever you will wear. You know, they have all purchased fund management groups and over the course of years and they have themselves driven investors into funds as opposed to encouraging them to buy individual stocks. So the days of a retail broker, which are now called private wealth advisors, you know, calling you up and saying, here's a really good stock, ideas seem to be dying partially for compliance reasons. I think banks don't like to have their private wealth advisers recommending individual stocks because as much as they can go and do well, they can do poorly. And then there's a risk of losing the assets of of for sale, the asset base shrinks. And then the bigger risk is that you might lose the client or face a lawsuit or something where they may claim that you didn't do proper know your client investment recommendation. So it's a lot safer to drive people into funds, especially funds that you manage. So that's been a part of the part of the equation. So if retail starts to thin out on one end of the share register, it has to be made up in another way. And if projects are good, they will find money. I just think that there are a lot of companies out there with projects aren't good enough to attract the capital.

Trevor Hall [00:28:23] I've taken up a lot of your time and I do have one more question. It's just kind of a summary question. If you don't mind. I'd like to take this presentation and put it up on our Web site so people can have access to it, if that's OK. Sure. But it in in the summary, the last bullet points, you write that the goals are the end goals are still feasible, but it appears that the rules have changed and companies need to adapt. Right. If it does summary, you know, we've spent about 25 minutes talking about how this is how this all changed. But what is the most important, important aspect of change that junior small cap resource companies need to be aware of right now?

Brunon Kaiser [00:29:07] I think they simply need to be aware and and and realize that the investor pool has shrunk. And so if that is the case, if the investor pool is smaller, you can't go about it in the same way as you used to. And that's what I mean by companies needing to adopt. You know, if if you had the same sort of supply and demand dynamic between investors and companies, then you could go on. But that's changed dramatically. There's so many fewer investors. Specialist funds have disappeared. Retail has disappeared. And and generalists seem to be moving up campus, I'd mentioned. So if that's the case, you know, be honest in your assessment of the market and adapt your approach accordingly.

[00:29:52] Bruno, thank you so much for your time. It's good to have you on the show and speak with you once again. Always appreciate your conversations in the. And the feedback. If there is a way for people to reach out to you for any further questions. Would you mind sharing that information?

Brunon Kaiser [00:30:07] Sure. My email is Bruno Dot Kaiser at Desjardins dot com. That's d e s j a r d i n s dot com.

Trevor Hall [00:30:18] All right, Bruno. Have yourself a great weekend. We'll talk to you again and be well, my friend.

Brunon Kaiser [00:30:24] Thanks very much, Trevor. Keep during the great work you're doing.

Trevor Hall [00:30:27] Thank you. I really appreciate that.