VOXR - Ace River Capital Q4 2023 Quarterly Letter

2024-01-10 06:20:18 ET

Summary

• Ace River Capital returned 4.44% for the Q4 2023.
• We initiated a position in VOXR.
• RICK remains our top position.

Dear Partners & Friends,

For the fourth quarter 2023, Ace River Capital Partners, L.P. (the “Fund”) returned 4.44%. Over the same period, the S&P 500 ( SPX ) and Russel 2000 ( RTY ) Indexes returned 11.7% and 14%, respectively. With full year for the fund -28.61% vs 24% for S&P 500 and 15.9%

Strategy

My goal is to maintain a concentrated portfolio of small and micro-cap companies with unique advantages and growth potential within their respective industries. The aim is to hold them for the long term. Finding such companies requires significant time and effort. Due to the scarcity of suitable opportunities, constraints on time and resources, and opportunity costs, I will take substantial positions in the companies that meet my criteria and pass my risk/reward assessment. I do not subscribe to wide diversification and only research and follow a limited number of companies deeply. I will not spend much time on a company if I am unwilling to take a substantial position and have the conviction to add to that position on weakness. This approach requires a lot of research and patience. There will be long periods of inactivity with few trades, and I will rarely hold more than 5 companies at a time. I will normally aim to have one short position. The short position will usually target a much larger company than the small and micro-cap companies held as long positions. This strategy accepts short-term volatility in pursuit of higher, long-term, tax-efficient returns.

Top Position

The fund’s top position is RCI Hospitality (RICK). RICK is the only publicly traded owner of adult nightclubs in the US. Currently they own 56 clubs across 13 states and an additional 13 sports-bar restaurants with the “Bombshells” concept that has recently begun franchising. With few municipalities issuing new adult entertainment licenses these businesses function as local monopolies with excellent unit economics. With the construction of two Colorado casinos underway, the long runway of adult night club acquisition targets, the growth potential and spin off value of the Bombshells concept and finally the potential upside of the “admireMe” OnlyFans type website, I expect this to remain my top position for the foreseeable future.

New Position

I have been exploring companies involved in metals and mining, hoping to find an opportunity. I believe I found a company that fits with the strategy and looks to be a perfect fit for the fund in Vox Royalty Corp (VOXR).

Vox Royalty Corp operates in the alternative financing space of mining royalties. Mining royalties are flexible agreements where a company like Vox will provide a one-time payment for a share of future revenue produced. These are normally long-term projects and royalty contracts can change hands before the contract begins producing revenue.

This is attractive as an asymmetric risk/reward tied to commodity prices since Vox has a fixed cost and initial investment but will profit more as prices rise or operations become increasingly efficient with many of the contracts.

Vox has a proprietary database of information on 8500+ existing royalties.

Vox Database (Company Presentation)

This asset has already shown to be valuable with an IP licensing agreement recently announced.

"TORONTO, CANADA – October 25, 2023 – Vox Royalty Corp. (TSX: VOXR) (NASDAQ: VOXR) (“Vox” or the “Company”), a returns focused mining royalty company, is pleased to announce that it has entered into an Intellectual Property (“IP”) Licensing Agreement (the “IP Licensing Agreement”) with private investment group, Perpetual Royalty IP Holdings LLC (“Perpetual RoyaltyCo”), to potentially unlock value from a non-core subset of royalties within Vox’s proprietary global royalty database. Under the IP Licensing Agreement, Vox grants Perpetual RoyaltyCo access to the coal royalties in Vox’s proprietary royalty database (but not any other commodities)."

" On the successful closing of relevant coal royalty transactions, Perpetual RoyaltyCo will pay Vox a cash transaction fee of up to 3.0% of the asset acquisition price, including any future earn out payments or contingent payments associated with any applicable coal royalty assets acquired. "

This provides an additional source of revenue and upside with no capital requirement. This database should allow Vox to cherry pick opportunities. I also expect Vox to grow relationships within the space and assist companies with structure/creation of royalty contracts for financing and be in a position to take action and efficiently allocate capital long term.

A look at the stages and locations of each royalty.

Vox Royalties (Company Presentation) - 2023 Guidance

I have initiated a position and like this business model. I believe mining royalty contracts offer an opportunity to capture upside in commodity prices with less risk than attempting to identify or pick a specific mining company. These contracts and the mining industry/commodity prices in general should benefit from the push towards electric vehicles in addition to inflation or economic expansion. Investing in Vox may also provide some recession protection with its exposure to gold prices. With the company currently paying a 2.65% dividend, I am happy to start building a position as new mines come online.

Fund Positions – In Order of Portfolio Weight

[[RICK ]] , [[ DSHK ]] , [[ VOXR ]] , [[ HZO]]

Thank you for reading. Please reach out for any reason.

Nicholas D’Agnillo

IMPORTANT DISCLOSURES

In General: This letter is for informational purposes only and is intended to provide an overview of the investment strategy and performance of Ace River Capital Partners, L.P. The contents of this letter should not be construed as investment, legal, tax, or other professional advice.

No Offer to Purchase or Sell Securities: This letter does not constitute an offer to sell or a solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of a confidential private offering memorandum.

No Tax, Legal, Accounting or Investment Advice: The contents of this letter are not intended to be, and should not be construed as, tax, legal, accounting or investment advice. Prospective investors should consult with their own advisors as to the tax, legal, accounting or investment consequences of an investment in any product described in this letter.

Performance Information: The performance information provided in this letter is based on internal calculations and is subject to revision. Performance results may vary depending on the timing of investments and disinvestments, as well as other market conditions.

Past Performance: Past performance is not a guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for an investor’s portfolio.

Risk of Loss: All investments involve risk and there can be no assurance that any investment strategy will be successful. The value of an investment may fluctuate, and an investor may not get back the amount invested. Changes in economic, political or other market conditions, as well as issuer-specific events, may have a material impact on the value of a security or a portfolio.

Portfolio Guidelines/Construction: The portfolio construction and investment guidelines for Ace River Capital Partners, L.P. are based on a proprietary investment process that seeks to identify undervalued securities and maximize returns while minimizing risk. The portfolio is actively managed and may be changed at any time without notice to reflect changes in market conditions or the manager’s assessment of individual security or market prospects.

Index Performance: The performance information provided in this letter may be compared to a benchmark index for purposes of illustration. The benchmark index is not intended to represent the performance of any investment product and does not reflect the expenses associated with the management of an actual portfolio.

Logos, Trade Names, Trademarks and Copyrights: All logos, trade names, trademarks, and copyrights referred to in this letter are the property of their respective owners.

Confidentiality/Distribution of the Letter: The information contained in this letter has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This letter and its contents are confidential and intended solely for the recipient. It may not be reproduced or redistributed without the prior consent of Ace River Capital Partners, L.P."

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