Marin Katusa on Special Situations with GDXJ and the Russell 3000

Outsider Club founder Nick Hodge interviews Marin Katusa about how to capitalize on gold ETF changes and Russell 3000 rebalancing.

Nick Hodge: Hi, this is Nick Hodge, founder of The Outsider Club. I have for you a wonderful guest today. It's Marin Katusa. He's president of Katusa Research, also a highly successful resource fund manager. He's arranged over a $1 billion in financings, he's written a New York Times bestseller called "The Colder War" and he's visited over 500 resource projects in more than 100 countries, so I think he qualifies as an expert, since we're going to be discussing resource stocks today. Marin, thanks for joining us.Marin Katusa

Marin Katusa: It's my pleasure, Nick.

Nick Hodge: Now, Marin, there's a couple of situations happening in the resource space, especially as it relates to funds, that I wanted to get you on the phone and talk about today. You've written a little bit about this over the past week or so, and it pertains to the highly popular VanEck Vectors Junior Gold Miners ETF and that, of course, trades under the ticker GDXJ. As it happens, it's gotten a little bit too popular for its own good and it ended up having to buy some stocks that weren't necessarily a part of its mandate, some stocks that were larger than juniors. I won't give it all away but do you want to give us a little bit of background on how this fund got in this position and then we'll do some follow ups from there?

Marin Katusa: Yeah, well you kind of hit it on the head there, so if you look at ... In 2010, they had over $1 billion in assets and as the market grew, people were going, "Jeez, you know, it might be easier to just buy an index of these things" and the GDXJ was always founded on buying these juniors but what happened was, from 2010 to, say, 2016, the GDXJ grew by over 300% and it got to almost $5 billion of the market cap. Now, that might not seem like a lot of money but the junior index, the whole universe of all the market caps is about $20 billion, so clearly the GDXJ's mandate, they started buying up the 20%, just under 20% of these juniors and they realized, "Uh oh. We have a fundamental problem here," so they started buying bigger and bigger companies, so companies that started having $300, $400, $500 million dollar market caps, then a $1 billion market cap and they've realized that, "Oh my god, how do you get out of these things?" So what happened then was they're basically turning the GDXJ for junior to basically a GDX, really big mid-tier to small major because they're buying Kinross and Harmony Gold and they're not buying these juniors so they have to dispose of the shares of these juniors into the market.

Now, normally, when the GDXJ started, this wouldn't be a big deal but because the index funds now have to report everything that they do, the short funds come in and make the trade before GDXJ has to happen, so a domino or a trigger effect happens in the market. So if you're in the GDXJ, now that GDXJ is basically changing their mandate to bigger companies, they're going to be selling a lot of these smaller companies and the liquidity in the market's not there, compound that issue with the short sellers who are selling before GDXJ, so it creates like a double selling effect and there's many funds, Nick, I know many, many fund managers in the industry that their performance is based off of the GDXJ so they kind of have to play the best of the GDXJ and now that the GDXJ is basically changing the rules, they also have to change their fund rules so that's going to cause even more selling, so it's like a trifecta of selling.

Nick Hodge: So, when do you see all of this playing out? Is there a certain date? When does GDXJ have to dispose of their junior shares?

Marin Katusa: Well, it's started already because of the other fund managers and the short funds, who... I basically published a chart on my website saying, "Hey, if you own any of these 20 companies, be careful because the funds are going to be selling it and at some point it's going to become a buy" so the GDXJ's just starting now the process but it's going to really effect in June. That's when the real selling's going to start, in about three weeks.

GDXJ Rebalance
Nick Hodge: But this is an opportunity, right? Because, ultimately, what's going to happen is there's going to be some stocks that end up-

Marin Katusa: A washout...

Nick Hodge: Yeah, there's going to be some stocks that end up getting sold for below their intrinsic value and not only that, there's going to be a new junior ETF from what I understand that's going to be created, that's going to, I think, eventually come in and have to buy some of these equities, so, you know, how are you viewing this situation for your fund and for your subscribers?

Marin Katusa: Well, we published our hit list that we're viewing that we think if it gets to price X, where it's at X plus one right now, we're definitely going to be buying our favorite producers. I've told our subscribers to be about half cash right now, that's what I am in my fund and what I believe's going to happen, Nick, is very similar to your thoughts. There's going to be a washout in June, July, August, and then by September, October, I expect the new GDXJ to come up to replace the old GDXJ, so GDXJ 2.0 and they're going to have a new mandate, like, for example, the GDXJ now you have to have 90 days of trading of over a million dollars a day, on average, for 90 days of trading. Well, many, many of these juniors just don't have that, so they're going to get excluded from the GDXJ. So there's going to be some new rules for the GDXJ 2.0 and then you're going to see the same process go happen again.

Nick Hodge: Got it. So stay tuned for holdings of the GDXJ over the next month, month and a half, for some extreme buying opportunities, and that's only half the story, so turning to the Russell indexes for a second, Marin. The Russell traditionally rebalances or reconstitutes every June because market caps of small cap stocks get out of whack and so some end up making their index and some don't and, as it happens, that rebalancing is happening over the next month or so as well, can you fill us in a little bit on the Russell rebalancing and what that means?

Marin Katusa: For sure, so the Russell's a bit different from the GDXJ. First of all, it's in an order of magnitude larger, so this now happens. It's the GDXJ on steroids and they don't have these rules of it has to have a minimum trading volume for 90 days. It's strictly on market cap, so it's a much simpler thing to calculate and I project that it's going to be somewhere around $145 to $150 million market cap is going to be the cutoff and, again, same thing, and if you're in the Russell 3000 and then you don't make the cutoff, not only do you get the short funds sell you but the index itself sells you, so you're going to go down.

In the opposite, or the inverse, if you're now not in the Russell 3000 and you now qualify, you're going to have funds buy you in advance and then you're going to have the index itself, the Russell, buy you, but the buying is so much bigger than what we've seen in the Golds and GDXJ. So if you pick right and you buy a stock that is going to be included into the GDXJ, you can see 50 to 100% gains in less than 60 days.

Nick Hodge: And you and I both follow a stock in Uranium Energy Corp (NYSE: UEC) that, at least from my view, I think they're going to be included this year if the cutoff is where you say, $140, $145 million. They're sitting right now with about $180 million market cap, I looked this morning. What are your thoughts on them being included then maybe a little bit of historical perspective, because this has happened before.

Marin Katusa: Okay, so in 2009, UEC was included and it went literally in, I think it was less than 45 days, it went from $0.50 to $2.50, because of the buying and expectation of it being included into the Russell 3000, so that's some history there. I published a chart just on Wednesday to my subscribers, explaining why I'm such a large shareholder of UEC and what I expect's going to happen with the Russell 3000 and I concur 100% with what you're saying. I believe UEC's going to be in the Russell 3000 and that's going to compound the buying.

Secondly, you don't buy a stock just for that. It's got to have an intrinsic value. There's no stock in the U.S., in the uranium sector, better positioned for the coming boom in uranium than UEC. There's a reason why guys like Rick Rule, Peter Grosskopf, the Sprott brand are backing Amir and UEC. It's because this is a management team that has been doing this for over a decade.

I believe they're the best in the sector in the U.S. game. Look what they just did, a deal this past week on Reno Creek in the U.S., a permitted mine, buying it for a fraction of the cost that other people have put hard dollars recently in and it was a good deal for shareholders, but more importantly, is access to capital. Nick, we all know that building a mine and developing these assets, you know, uranium today at $23 is the contrarian bet but you've got to have the facility or the ability to be able to, when the rise comes, to be able to transact on deals, which we've seen the management team do, but also Li Ka-shing, which is one of the richest Asians whose resource fund is managed by a guy name Warren Gilman, who used to run Canada's largest resource bank, CIBC... he's got the backing of that group, also. Why does this company have backing from some of the biggest names in the sector? Because they believe that this is the company run by the best management team that are going to deliver and sell the largest win. It's all about return on capital. I've known Amir for 15 years, there is no one better in the sector than him to guide this ship in the current market. That's why I've got millions of dollars behind him.

Nick Hodge: And not to mention, to throw another name out there, he's got the former Energy Secretary, Spencer Abraham, on his board as well, so if it's all about people and access, that's definitely being able to get it done, that's for sure.

Marin, I appreciate you taking some time to talk to me today about the GDXJ rebalancing and the coming cutoff dates for the inclusion of new companies in the Russell 3000. Is there anything else you'd like to add as we head into summer here in the resource markets?

Marin Katusa: I think just be very careful what you're buying, understand why you're buying it and if the story changes, you have to change your bet, but I think that start with the right management teams, that's the fundamental basis, and, of course, they have to have the right assets and the right structure but, you know, go to these shows, go onto the website, watch the interviews and, when you look at a company like we were talking about UEC, look at the inside shareholdings. They're the largest shareholders of their own company. That's a good sign. It's just little things like that that anyone in the market can quickly Google and realize, so both you and I are betting big on UEC and I think it's going to be a... I'm sitting tight and I'm long and strong on that story because I believe big gains are coming in the near term.

Nick Hodge: Well, the numbers for the Russell 3000, the cutoff market caps come out this Friday, I think UEC will be included so we'll have to stay tuned. Marin, thanks a lot for your time today, I appreciate it.

Marin Katusa: Thanks a lot, Nick. Take care of yourself.

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