Sprott Silver Equities Class Co-Manager Maria Smirnova understands the power of leverage. She has seen the big impact even a slight increase in the silver price can have on silver producers. Every cent is multiplied and goes right to the investor's bottom line, giving the equities more upside than possible in a coin. That is why Eric Sprott increased holdings of silver equities in certain Sprott funds. Smirnova discusses five of these companies in this interview with The Gold Report.
The Gold Report: Maria, in April Eric Sprott sold more than $45 million [$45M] worth of units in the Sprott Silver Physical Trust. A spokesperson told Canada'sGlobe and Mail that the sale was needed to cover charitable obligations and to buy shares in silver mining companies because Mr. Sprott believes silver equities will outperform the metal in the next rally. Can you fill in the details on that thesis?
Maria Smirnova: We believe in the equities-for any commodity-for several reasons. Equities represent a leverage play on the underlying commodity. To use a simple example: Assume Company X can earn $5 when the silver price is $25/ounce [$25/oz]. If the silver price increases 20% to $30, that extra $5 goes directly to the bottom line. This doubles the company's profits from $5 to $10. The silver price increases 20%; the profits rise nearly 100%-that is what I call leverage.
In addition, mining companies benefit from production growth through exploration or acquisition. We look for companies that can find millions of ounces of silver or gold.
TGR: Precious metals have certainly had their detractors of late. Why does Sprott Asset Management remain committed to precious metals?
MS: Governments are trying many maneuvers to fix the economic situation, printing money, for example. None of their actions are actually fixing the underlying economic issues. We remain committed to the precious metals because they are hard assets.
In addition, the financial market has become disconnected from the physical market. Especially since April's two-day selloff in silver and gold, purchases of the physical metals have surged.
For example, sales of the U.S. Mint's silver coins jumped 57% year-to-date compared to last year [as of April]. Sales increased 169% in April alone. We have heard stories of people lining up to buy silver in Canada and Australia. Demand is up in China as well. Chinese jewelry sales grew 72% in April compared to 2012.
If you look at the exchange-traded funds [ETFs], silver ETFs have not had a large selloff.
The buyers are there, the physical demand is there, but the price is just not reflecting that. It is a bit frustrating, but from my perspective, it is comforting to see the numbers show that people want to own silver and are buying more of it.
TGR: In a recent radio interview, Mr. Sprott said, "The beauty of silver is that there is not much inventory in the world." What other small-cap silver equities are slowly but surely adding to the global silver inventory?
MS: I co-manage the Sprott Silver Equities Class with Eric Sprott and Charles Oliver and have been investing in the smaller silver producers. [For more information about their picks, click here]
TGR: What silver price do you use in your models?
MS: I usually just use the spot price to evaluate all companies. For me, it is a relative-standing game. I do not project the silver price going forward. If today's price is $24/oz, I will use $24; that allows me to evaluate all companies on a fair ground.
TGR: You currently own First Majestic Silver Corp. (AG). As of late March, it was the largest equity holding in the Sprott Canadian Equity Fund. Why does the fund have such a significant position in that name?
MS: Our initial investment in First Majestic was at less than $4/share. Today, the stock is $10 or $11/share. The position has grown because of price appreciation, as well as subsequent purchases.
First Majestic is one of the best silver plays out there. The management team has definitely delivered on its promises. The company built five mines and is adding two more. It is one of the purest silver producers out there; 90% of the production is silver.
Management has done well keeping costs under control. The total cash costs are virtually unchanged since 2008 at about $9/oz. Production is still growing. We think the silver equivalent production could double from 2012 to 2014. The stock is trading at about eight times next year's projected cash flow. This is a very reasonable multiple using the current silver price.
TGR: Is First Majestic an example of Sprott's approach to the equities? Even though overall things may not be that great in the sector, some very good performers exist.
MS: Absolutely. To me the key is to find the companies that can survive a tough market, exceed expectations, deliver on their promises and generate free cash flow. That describes First Majestic.
TGR: Do you have a time frame for when the market might begin to favor precious metals again?
MS: That is hard to predict. A lot of what is taking place right now does not make sense. It is very difficult to predict when things will turn. We take a long-term view.
TGR: A number of companies have operations in Mexico. There has been some talk of increased royalties and some quiet forms of nationalization. Is that a concern at all?
MS: Nationalization is not a concern at all. Regarding royalties, the proposal appears to be for a net profits royalty tax of about 5%. That would equate to a 2% top-line net smelter royalty, lower than what people expected. This is not atypical and it is not a windfall tax. Therefore, in my mind, it will not have a huge impact on these companies.
The removal of the uncertainty about the tax is probably good for the mining industry in Mexico. We will move on and live our lives.
TGR: How do you view the silver space and what is your outlook for small-cap silver miners?
MS: I think you have to remain optimistic that the prices of the commodities, especially silver and gold, turn around. I do not even want to call them commodities, to be honest. I would call them currencies, especially gold. Silver is a hybrid because it also has industrial applications.
Once the turn happens, these stocks could explode in a good sense and completely revalue to the upside. Today, they are at depressed valuations.
TGR: Is there an across-the-board percentage recovery you would predict?
MS: Some stocks are down 50%-60%; they could double or triple. First Majestic used to be a $20/share stock; it will go back there and then some based on earnings alone.
TGR: To what do you attribute the two-day fall in mid-April? Was it manipulation?
MS: Yes, I would agree with that characterization. It is very difficult to believe that something could fall that much in just two days. A whopping 1.8 billion ounces of silver was traded on the COMEX on April 12 and 15-that's in a 1 billion ounce market!
TGR: And what are the reasons behind the more general mining equity slump?
MS: A lot of people believe we are fixing our economic problems and things are getting better. People are going to the U.S. dollar and to other assets and other sectors.
There have also been disappointments in the mining sector with companies not meeting their guidance and costs coming in higher. This too has put a damper on investor sentiment.
TGR: Can you leave us with a positive thought about the space in general?
MS: It is very comforting to see retail buyers choosing in droves to own the physical metal. We hope that leads to higher market prices for gold and silver, and in turn to a rally in the stocks.
TGR: Maria, thank you for your time and your insights.
This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.
Maria Smirnova joined Sprott Asset Management as a research associate in May 2005, and was appointed associate portfolio manager in February 2010. She currently co-manages the Sprott Silver Equities Class with Eric Sprott and Charles Oliver. She is also responsible for supporting the portfolio management team in the precious metals and mining space. Smirnova has over 12 years of experience in the financial services industry; she began her career at Excel Funds Management as operations manager, and subsequently worked in product development at Fidelity Investments. Smirnova graduated with distinction from the University of Toronto with a Bachelor of Commerce degree and obtained her CFA charter in 2002. She graduated as a Bregman Scholar from the University of Toronto's MBA program in 2005.
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Maria Smirnova: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Certain Sprott funds own shares of First Majestic Silver. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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