From inception in February 2008 through year-end 2010, Exploration Insights' performance was strong, returning an average gain of 173% on the unsold positions and a gain of 319% on positions held at year-end. In 2011, the mining sector, and particularly the junior sector as measured by the Junior Gold Miners Index (GDXJ), collapsed, falling 26% in 2011, 23% in 2012, and a further 59% in 2013. By comparison, the Exploration Insights portfolio showed a loss of 2% in 2011, was down 14% in 2012, and off 18% in 2013.
For 2014, mining and metals were down again, with the Gold Bug Index (HUI) off ~18% (~38% from 2014 high) and the S&P/TSX Global Mining Index (TXGM) down ~15% on the year (~26% from 2014 high). For our purposes here at EI, the Van Ecke Junior Gold Index (GDXJ) is probably the closest proxy for our portfolio. The GDXJ also had another bad year: off ~25% and down ~45% from its July peak. Worse, the GDXJ has now fallen a remarkable 86% from its high set in early 2011.
The unweighted performance of the Exploration Insights portfolio for 2014 was a positive 18%. Our strong performance reflects the sale of a few companies that had made metal discoveries before 2014, and a strong discipline to sell companies when results do not meet our investment thesis.
2015 was a dismal year for miners, metals, and nearly all commodities and the major markets. The Bloomberg Commodity Index was off 26%, metal demand was down 5.1%, and base metal prices off 25 to 30%. The precious metal indexes were also down (HUI -32%, GDXJ -20%) while the TSX Venture exchange hit an all-time low. The Exploration Insights portfolio finally succumbed to the bear market, showing an unweighted loss of 6%.
In November, our cautious strategy turned somewhat more aggressive towards gold producers and explorers, to position ourselves for the future by owning solid companies and assets rather than betting on a rising tide. In December, Joe joined Exploration Insights because we thought 2016 would prove to be the year to actively buy the few high-quality deposits, mines, and management teams available.
The strategy paid off: we added three mid-tier gold producers and a couple of explorers before the end of 2015 and, by December 2016, we had actively recycled our portfolio, closing 23 positions while adding 20 new positions, resulting in 24 open positions. The open positions provided us a 63% average return, while the realized gain for our closed positions was 107%.
Success in a good market can be biased if the performance is not compared to benchmarks; this avoids the tendency to confuse intelligence with a “bull market”. Our analysis indicates that our open and closed positions outperformed their respective benchmarks by 60% and 74%. Furthermore, our investment strategy bore fruit, with majors acquiring five of the companies in our portfolio.
In 2017, we saw a need to move down the food chain into earlier stage projects that could develop into a significant discovery. This approach meant higher risk and higher reward plays that required careful analysis of exploration results and a commitment to cut bait quickly if results fail to meet our investment thesis. By applying this process consistently, we hoped to continue to reap returns that exceed the benchmarks.
The letter was fairly active in 2017 closing 18 positions via 22 transactions and opening 12 positions in 9 new companies, including 2 cash flowing gold companies (producer and streamer), 6 explorers seeking gold, copper, zinc, and lithium, and 4 prospect generators focused on precious and base metals in the Americas.
Positions closed in 2017 translated into an average weighted return of 80% and outperformed their benchmark by 60%.
In 2018, we focused on the early side of the investment cycle due to the lack of exploration, especially in the gold sector, by major producers. The majority of our open positions were in prospect or royalty generators, while the remainder was in grassroots gold, copper, zinc, and lithium explorers, and gold developers, producers, or streamers.
We were also active in 2018 adding 16 new positions, 10 of which were in new companies, while divesting of 7 positions in 6 companies. The sales generated an average return of 140%. However, at the time our open positions generated an unrealized return of only 6%.
After making numerous adjustments to the portfolio during 2019, including the closing of 17 positions in 10 companies and the addition of 7 new positions in 7 new companies, the open positions currently comprise 30 holds in 20 companies. By the end of 2019, the open positions had generated an unrecognized average return of 18% since being added and a 30-35% return during 2019 alone. The overall return from the closed positions in 2019 was only 2%.
At the end of 2020, of the 23 miners in the portfolio (in 29 positions), 20 are listed in North America (TSX, TSX-V, and CSE) and three in the Australian Securities Exchange (ASX), providing exposure predominantly to precious metals (gold and silver) and less so to industrial metals (copper, nickel, palladium) and uranium. The average unrecognized return from the Open positions at the end of 2020 was 70%, which on average exceeded their respective benchmarks by 25%. I was fairly active in 2020 as I added nine positions and sold 15 positions in 11 companies for an average recognized return of 39%. The closed positions exceeded their respective benchmarks by 13% on average.
Good luck in 2021!
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