Seeking Alpha

The Gold Report's  Instablog

The Gold Report
Send Message
The Gold Report features leading investment coverage of gold, silver, other precious metals, base metals and gems. A Streetwise Reports publication. www.TheAuReport.com
My company:
The Gold Report
My blog:
TheAuReport.com
My book:
The Gold Report Newsletter
View The Gold Report's Instablogs on:
  • Junior Mining Companies That Will Be Making Beautiful M&A Music: AgaNola's Florian Siegfried

    Florian Siegfried, head of precious metals and mining investments with Switzerland-based AgaNola Ltd., knows where the music is playing in the mining M&A space. In this interview with The Gold Report, Siegfried notes that well-financed juniors with low production and capital costs, or intermediate cash-flowing producers, will be hitting the M&A high notes, and suggests a sextet of companies capable of making beautiful music.

    The Gold Report: As of Aug. 1, 2014 the SPDR Gold Trust ETF (NYSEARCA:GLD) was up about 7% year-to-date, while the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) was up about 30% and the Market Vectors Gold Miners ETF (NYSEARCA:GDX) was up about 22%. These are generally considered proxies for gold and gold mining equities. Is the mining sector bear dead?

    Florian Siegfried: We have to distinguish between the short term and medium term and take an overall picture of where we stand. Gold has found a floor at the $1,280/ounce gold [$1,280/oz] level, which is encouraging for the short term. If we are in fact in the late stages of a good basing action in gold, that means the speculative money will go back not only to the metal, but also mining shares in anticipation of higher gold prices.

    If we move below $1,280/oz in the short term, the bears will remain in the driver's seat for at least a few weeks, perhaps months.

    TGR: And in the medium term?

    FS: If we see a continued rotation out of broad market equities and into precious metals then I would say, yes, the bear is dead. An encouraging sign that the bear is indeed dead is that gold is rising against the U.S. dollar and precious metals shares are largely outperforming the metal itself. This is encouraging but it doesn't yet confirm anything.

    TGR: If the gold price falls below $1,280/oz, how many months could the bear stick around?

    FS: Midcycle corrections in gold tend to last up to four years. It has been more than three years now, probably 3.5 for the miners. I wouldn't be surprised to see a sideways trend for the next six months, if we go by past cycles.

    TGR: Share prices seem to be getting ahead of metals prices. Do you expect that to even out or continue?

    FS: If we see continuing weakness in equities and bonds, this rotation into precious metals will continue. But if we see heavy liquidation in stocks and rising yields in the junk bond market as liquidity evaporates, precious metal shares will not outperform gold because the sage money will primarily go into gold itself. As long as we remain in this rotation, I would expect shares to outperform the metal in the medium term.

    TGR: Some of the companies that you follow are performing well year-to-date: Kirkland Lake Gold Inc. (OTCPK:KGILF) is up 60%, while Lake Shore Gold Corp. (NYSEMKT:LSG) is up about 170%. What do those companies have in common?

    FS: Lake Shore Gold and Kirkland Lake are turnaround situations. Lake Shore Gold was extremely oversold last year and the stock was trading at $0.16/share in June 2013. Basically, it refinanced its business in 2012 before the gold price collapsed by raising the necessary debt and convertible debentures to improve operations. It stabilized the grade and costs went down.

    Kirkland Lake is a similar case. The new management team has started to bear fruit. Kirkland is focused on fewer higher-grade stopes in order to reduce tonnage and dilution. Costs have gone down but it's an ongoing process. The expansion capital projects are basically completed, however, the balance sheet has little room for operational errors. Both stocks are performing better than the index year-to-date, but they also lost a lot in the downturn.

    TGR: Are turnaround stories the sweet spot for precious metals investors?

    FS: This is where you can have the best returns if the market continues to go up. It's about being selective and trying to find turnaround candidates. The problem is that many companies are cutting capital expenditures [capex] to reduce their all-in costs, which lifts profits temporarily but poses new problems in the longer run. Lots of stocks are 80-90% below their all-time highs and they're down for a reason. You have to find the ones that have stabilized their operations and that have sufficient cash to go through the restructuring period as they make operational progress. At $1,300/oz gold few producers make much money but they have leverage to the gold price. When the gold price shoots higher, these companies should become very profitable. You can still buy them at depressed valuations at this stage.

    TGR: Let's go back to the fundamentals. Tocqueville Gold Fund's John Hathaway recently told The Gold Report that the bottom of the precious metals complex will be confirmed when gold trades above $1,400/oz. Your thoughts?

    FS: We should see a close around $1,330/oz in the short term. That would confirm a breakout for me in order to see $1,400/oz. Gold has been trading sideways between $1,280/oz and $1,330/oz for several months. A breakout above this level would confirm the next leg up.

    TGR: Mining is largely a sentiment driven market. What is the current sentiment among investors and money managers that you talk with?

    FS: The traditional gold equity funds have mostly stabilized after the drop last year, but they are basically not seeing big inflows from the traditional investor base. Those investors have largely sold out. Interestingly, there are many first-time buyers, including private equity, investing in the sector because it is ridiculously cheap at this point.

    In Asia, investors are more into the high-beta stocks or turnaround stories. Overall, the sentiment toward gold and precious metals in Europe is definitely much more supportive than in North America.

    TGR: How much of an impact are Asian investors having in the space versus what was happening three to five years ago?

    FS: A lot of Asian institutions sold out just as everyone else did because those funds received the same redemptions as everyone else. The mood probably remains quite depressed, but the difference is that they are trying to play the next upswing by picking up those fallen angels, the midtier producers that are priced at much lower valuations than the senior stocks like Newmont Mining Corp. (NEM:NYSE) or Barrick Gold Corp. (ABX:NYSE). Selective buying from Asia has given the market some support.

    TGR: What are European investors seeking when it comes to precious metals equities?

    FS: For European investors looking for gold mining companies, it's all about quality, management, profits and sustainable operations. Investors are increasingly selective. In the last run up in 2009-2011, an investor could virtually buy any company with gold in its name and it went up when gold went up. A rally has been in place since the beginning of the year but not every stock is joining in. It's now about stock picking.

    TGR: You're not a geologist but you have a background in finance and a fair amount of experience in this space. How do you vet these companies?

    FS: I make a short, diversified list of companies. There are hundreds of names but in the end I end up with probably 50-60 that I can really track. It's a risky business. I have to consider all the different factors-financials, management, jurisdictions. I eventually try to pare the list down to the best names.

    TGR: What are your investment strategies to get the most out of the next move in the cycle?

    FS: Investors have to have a core portfolio of low-cost, well-financed junior and intermediate producers because that is where the music is playing if mergers and acquisitions [M&A] activity continues. Increase positions where you see momentum gaining strength because this is a market driven by momentum and sentiment.

    For turnaround situations, I prefer 100,000-200,000/oz [100-200 Koz] gold producers that are bottoming, demonstrating quarterly operational progress and have cash in the bank. But only selectively build positions on the down days because those equities remain volatile in this market.

    For M&A, the developers that are fully financed or fully permitted will take center stage in the next M&A wave. I would definitely have some exposure there.

    If we see higher gold prices in the next few quarters, I also like cheap advanced-stage exploration stocks trading between, say, $0.10-$0.30/share. These stocks are basically an option on gold.

    TGR: So you are saying the music is playing the junior and intermediate producers space for M&A?

    FS: Let's look at B2Gold Corp. (BTG:NYSE) takeovers of Volta Resources Inc. and Papillon Resources Inc. Those were junior names. If you buy a company for valuation purposes, there are definitely plenty of opportunities in this sector and that will attract suitors. You said that Market Vectors Junior Gold Miners ETF is up 30% versus the Market Vectors Gold Miners ETF, which is up only 22%. That, for a good part, reflects growing M&A speculation.

    TGR: So will the biggest M&A players be the midtier and one-mine producers that are looking to build production by 50% or more?

    FS: Yes. Being a single-mine operation is just risky; these companies are vulnerable and volatile. Most of them want to be more diversified and attract institutional investors by having greater liquidity. Many of these junior producers are thinking, "How can we attract the fresh money coming to the sector?" The generalist investors coming into the space do not have a lot of experience in the resource world. They typically want to see a good diversified portfolio of operations so that if anything goes wrong the stock doesn't lose 50% in one day.

    TGR: What other companies are on your takeout list?

    FS: Another company on the radar screen is Torex Gold Resources Inc. (OTCPK:TORXF), which has the El Limon-Gaujes project in the Guerrero Gold Belt, about 180 kilometers [180km] southwest of Mexico City. It's a world-class deposit, with 4.8 Moz gold Measured and Indicated and the grade is phenomenally high at 2.79 g/t. It's fully permitted. The capex is higher at around $700M but the project is fully financed. It should produce about 360 Koz annually once it reaches commercial production, which is expected in 2015. Cash costs should come in around $500/oz. On top of that Torex has another deposit, Media Luna, with an Inferred resource of 5.8 Moz gold equivalent, and it's basically open in all directions.

    TGR: What are your thoughts on Mexico in general?

    FS: The 7.5% mining tax that was enacted in 2013 basically hurt the whole industry, especially as it was introduced when gold lost 30% in value, which caused massive write-downs and losses for the miners. Goldcorp's decision to go after Osisko was in part to seek more growth outside Mexico. Goldcorp is one of the biggest foreign direct investors for the country. At the same time, I think it's difficult to say that companies operating gold mines in Mexico are underperforming since the tax was introduced.

    TGR: What makes the Timmins Camp prolific?

    FS: It's one of the world's richest gold mining districts and a historical belt that has produced more than 170 Moz gold since 1901 from more than 100 mines. The two biggest camps are Timmins and Kirkland Lake where companies are still making good discoveries. It's a mining-friendly jurisdiction with infrastructure and I think that is the reason we see M&A activity taking place. It has a mining culture.

    TGR: Earlier you mentioned Kirkland Lake as a turnaround story. The mining plan there is focused on less ore at higher grades. Obviously, that's working now, but is that sustainable?

    FS: That's always the question. It's difficult for me to have a clear opinion because I'm not a geologist. During the last two quarters the mined material was 0.4-0.42 oz/ton compared with 0.3 oz/ton previously. Importantly, in the last quarter the mined grade was above the reserve grade for the first time. I think that's the result of a more sophisticated mine plan in order to make this operation more profitable because the company needs the grade, not the tonnage. The challenge for Kirkland Lake now is to get enough high-grade feed to increase its throughput, which currently stands at 1,050 tons per day, and I expect this to gradually increase over the coming quarters.

    TGR: Do you have some parting advice for investors?

    FS: This market is driven by sentiment and momentum. Get the timing right. If you think the timing is right, buy the shares before they look as if they could breakout.

    Don't buy too many juniors; buy fewer names with the right ingredients and try to time the market. If something goes wrong, don't hesitate to sell because that was a big mistake and it's still a big mistake. Then go to the next name. Always do your own homework.

    TGR: Thank you for talking with us today, Florian.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Florian Siegfried is head of precious metals and mining investments at AgaNola Ltd., an asset management boutique based in Switzerland. Previously Siegfried was the CEO of Precious Capital AG, a Zürich-based fund specializing in global mining investments. Prior to this Siegfried was CEO of shaPE Capital, a SIX Swiss Exchange-listed private equity company that was founded by Bank Julius Baer & Co. Siegfried holds a masters degree in finance and economics from the University of Zürich.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Florian Siegfried: I own, or my family owns, 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: None. 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. AgaNola Ltd. does not assume any liability with respect to incorrect or incomplete information [whether received from public sources or whether prepared by itself or not]. This material does not constitute a prospectus, a request/offer, nor a recommendation of any kind, e.g., to buy/subscribe or sell/redeem investment instruments or to perform other transactions.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Aug 20 3:14 PM | Link | Comment!
  • Fund Adviser Björn Paffrath's Mantra: In The End, Performance Matters

    Björn Paffrath, Switzerland-based fund adviser and newsletter writer, says there is certainly an elevated risk of a correction in the broad market but the upside in the mining sector is worth looking at as the market turns. Paffrath expects more M&A activity in the fall and says he's always looking for opportunities that really impact the performance of the funds. In this interview with The Mining Report, Paffrath shares some silver, base metals and tungsten positions.

    The Mining Report: What's the biggest risk to a mining investor in a broad market correction?

    Björn Paffrath: Probably a worldwide economic slowdown, especially in China. If demand is fading, metal prices will fall. If the Chinese people need money to pay debt, they will likely sell some gold too. That also counts for other investors in general. Also, if the broad market will enter a longer correction phase, then the mining stocks will get hit too. In the end, if we like it or not, mining stocks are correlated to the general market. That's the risk. That's my biggest fear. Some goldbugs believe gold prices will rise dramatically if there's a crisis but, in general, we have to be very careful with such assumptions, as we could see from the year 2008.

    TMR: Some banks remain quite bearish on gold with the S&P near record highs. What's your view?

    BP: Yes, outfits like Goldman Sachs are saying gold is going down to $1,050/ounce [$1,050/oz], but their guesses are as good as mine or yours. You always have to ask yourself, who has something to gain by saying these things? The banks and speculators. They knock gold down and then run it up again by playing the paper gold market on the Comex. In the short term gold can be influenced a lot by traders but in the long run the fundamentals, like super low interest rates or excessive money printing, matter.

    TMR: As a fund adviser, do you operate differently when the broad market looks frothy?

    BP: Fund managers or money managers have to be careful. We always tend to think the party goes on or in case of a correction that it will be short and the market has to come back. We have to watch and manage the downside risk and the short side a lot more. That means investors have to take winners off the table, build up more cash or hedge the portfolio at the right time.

    TMR: How should retail investors protect themselves?

    BP: Retail investors have to be sure they have stop losses in place, especially if they are not in the market every day. Also, they can buy put options to hedge their portfolios. If you do that, you can be more relaxed when there is greater volatility. Also, take your time and be patient before you reinvest. Identify trends and try to find the bottom or turning point; that's when you put in your money again.

    TMR: What did you learn from the global economic collapse in 2008?

    BP: Gold and silver were rising in light of the crisis and mining equities were down sharply. But even if you're in a sector with undervalued stocks and believe that the underlying metals prices are going to go up, mining stocks will go nowhere if people don't put money in the market. The same situation could happen now.

    You also have to forget about what we saw between 2002 and 2007 or 2009 and 2010. I don't believe the mining sector will come back like that again. We have more fundamentals-driven investors now. People lost a lot of money in the sector because they lost track of their research as everything was going up. Many of those people are coming back into the mining sector but they are much more careful, which is good.

    TMR: What are your thoughts on the current mining equities market?

    BP: The fittest will survive, especially in the junior and exploration sector. It needed a cleanout. From 2002-2007, so many explorers and developers wasted shareholder money on big projects with excessive capital costs. They forgot about investors; they burned the money, then came back and asked for more. That's why we are here now. The companies that will survive are those with access to capital, that have great projects and that have focused on bringing the all-in costs down and running their operations more efficiently. A great and proven management can always deal with obstacles.

    Surprisingly, in the last few years a lot of the bigger miners turned to dividends, but they are often adding debt to pay them. I prefer companies that have no debt or use their growth potential before they pay dividends.

    TMR: What should investors expect this fall?

    BP: We will see more mergers and acquisitions activity, especially in the midtier sector. We already saw Rio Alto Mining Ltd. (NYSE:RIOM) make a friendly deal for Sulliden Gold Corp. (SDDDF:OTCQX)

    There are always special segments that get investors' attention. Last year we had a nice run in uranium and diamond stocks. Uranium is a no-brainer. People don't like it in Germany but reactors are planned even in Saudi Arabia and the Middle East. Yet there are not many uranium producers, maybe three or four good ones if you don't want to buy the big integrated companies like Rio Tinto Plc (RIO:NYSE) or AREVA SA (OTCPK:ARVCF).

    Of course, you want to own Cameco Corp. (CCJ:NYSE). We also like Ur-Energy Inc. (URG:NYSE.MKT); it's still small, but is one of the lowest-cost producers.

    On the exploration side Denison Mines Corp. (DNN:NYSE.MKT) is always worth a look.

    Also, some diamond stocks like Mountain Province Diamonds Inc. (NYSEMKT:MDM) or Kennady Diamonds Inc. (OTC:KDIAF) did very well. In fact, after a correction in the first half year, diamond stocks starting to take off again, especially Mountain Province after securing its share of capital for the Gahcho Kué mine construction with De Beers.

    This year many nickel and zinc stocks have already done well. As we don't have too many pure zinc producers that we want to invest in, therefore we look at companies that do copper-zinc, like Lundin Mining Corp. (OTCPK:LUNMF), HudBay Minerals Inc. (HBM:NYSE), Teck Resources Ltd. (TCK:NYSE). HudBay should be producing a lot more zinc once the Constancia copper-porphyry project in Peru reaches commercial production in 2015.

    Base metals prices are sensitive to macroeconomic trends, but with copper at around $3-3.20/pound and zinc further uptrending, that's positive for a lot of these companies.

    TMR: Are there base metals juniors that you like?

    BP: In addition to the above-mentioned companies, I like Capstone Mining Corp. (OTCPK:CSFFF) and Nevsun Resources Ltd. (NSU:NYSE.MKT). I know it's a single-asset company operating in Eritrea but I don't know how much country risk you can put into this stock anymore. It went from gold to the copper phase without big problems. It has delivered. Nevsun should get rerated if it puts its cash to work and buys another asset for diversification. This stock is definitely a good buy in our view.

    TMR: Let's get to the silver miners. What do you like there?

    BP: We like silver equities a lot, although the space is much smaller than gold. We have a silver mining fund with some platinum and palladium stocks in it, but over 95% of the positions are silver miners. Obviously, you need to have the large-cap names, but we like to find also smaller opportunities that have either come into production or have a near-term production goal.

    Among the bigger names, we like Silver Wheaton Corp. (SLW:NYSE), Pan American Silver Corp. (PAAS:NASDAQ), Fresnillo Plc (OTCPK:FNLPF), Hochschild Mining Plc (OTCPK:HCHDF) and Silver Standard Resources Inc. (SSRI:NASDAQ), which just bought the Marigold mine in Nevada from Barrick Gold Corp. (ABX:NYSE). If you are looking for a pure silver play, there is Keith Neumeyer's First Majestic Silver Corp. (AG:NYSE). It just sold forward a part of its lead production for US$30 million [US$30M] till 2017. That comes on top of the US$50M forward sale for part of the lead and zinc done in 2012 till 2016. First Majestic has great leverage to a raising silver price and is a well managed company.

    TMR: What about some smaller plays?

    BP: We really like Endeavour Silver Corp. (EXK:NYSE) and its CEO, Bradford Cooke. He and his team have shown once again with the El Cubo mine that they can turn around an asset. If you want to bet on Cooke, then Endeavour is always the first choice in the silver universe because he has never disappointed his investors. In general, Endeavour Silver has a high beta. The recent gain in the stock was huge but given its management and expertise, it is always a great buy on a set back.

    TMR: Do you have any parting thoughts on the silver and base metal spaces?

    BP: It is and will remain a difficult environment for these metals in the near future as economies worldwide weaken and look vulnerable again. In the short term silver looks more and more ready for a bounce back. Indicators are moving into an oversold picture and also the commercials are reducing their big short position on the Comex step by step. Unfortunately if gold will break below US$1.280/oz, we might see a painful set back, which will cause silver to fall as well. If the support around US$18.70/oz breaks we will have a problem. Also, copper is trending downwards again, and zinc and nickel have to prove that they can sustain their great performance from the last 10 months. In general, I would be careful with new investments right now and lock in some gains.

    TMR: Thanks for your insights, Björn.

    This interview was conducted by Brian Sylvester of The Mining Report and can be read in its entirety here.

    As authorized principal and head of trading, Switzerland-based fund adviser and newsletter writer Björn Paffrath worked for a well-known assets manager in Germany and the United States from 2000 to 2005, where he was responsible for the precious metals and mining division. Since 2005 he has been involved with various precious metal and resource funds, which have received a number of awards. Together with his broad network, especially in Switzerland, he is financing projects and emerging producers. For several years he has been in the media as the gold and mining expert of sought-after business partners and stock commentators. In addition, he is cofounder and chief editor of the well-known, subscriber-based, financial and mining market letter, Cashkurs Gold.

    Want to read more Mining Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our The Mining Report page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Bjorn Paffrath: I own, or my family owns, 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: None. 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.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Mining Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Mining Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Aug 19 5:13 PM | Link | Comment!
  • Björn Paffrath: Mining Sector Bottom Is In And Opportunities Abound

    Björn Paffrath, Switzerland-based fund adviser and newsletter writer, is so convinced that we've seen the bottom in the mining sector that he's launching a new gold and silver fund in Europe. He says capital is trickling back into long-forgotten mining equities as the smart money seeks to rotate out of frothier sectors and into real assets. In this interview with The Gold Report, Paffrath also forecasts a broad market correction as he tells us about some promising equity positions.

    The Gold Report: Do you expect a broad market correction over the course of the next two years or so?

    Björn Paffrath: Since the crisis in 2008, most of the well-known indexes, such as the Dow Jones Industrial Average or the German DAX, have almost doubled, and many individual companies have performed even better. Of course it is all liquidity driven, but it's at a level where we have to ask: Is it still justified or are we already in the next bubble?

    On one side, indexes skyrocketed on the liquidity provided by the central banks. But interest rates and bond yields are so low that they are not keeping pace with inflation, so people put their excess cash in the stock market. And more money exited the underperforming mining sector as the general markets went up.

    At some point we will have a painful correction of 30% or more. Maybe it started already, but it's tough to say because there is still a lot of liquidity in the market. There is a good chance that after the correction the bull market could run quite a bit longer. But we all know that we only bought time in Europe and the United States. A lot of Western countries have excessive debt. The painful end will definitely come at some point.

    Outside events or black swans also could trigger it. Tension rises between Russia and the Ukraine almost daily now. In the Middle East there are uprisings in Turkey and Libya, Israel and Hamas are battling and there is a civil war in Syria. And Iraq is more and more lost to the IS-terrorists. Any of those events getting out of control could trigger further events on the market side.

    TGR: Where should investors look for the first signs of problems?

    BP: You have to first watch the U.S., then Europe and China. The U.S. made it out of the recession, but how sound is the foundation without the money that the U.S. Federal Reserve is pumping in? That money will probably stop this year, but my guess is that the Fed will find other opportunities to pump more money into the market. We have to watch the U.S. closely.

    Europe came late to the bond-buying game and the peripheral countries-Spain, Portugal, Greece-are not in great financial shape. The Portuguese recently used bailout cash to shore up Banco Espirito Santo, and Greece will likely require a third bailout. Europe put a curtain on the debt crisis. Everybody is happy with the stock market, but we didn't solve any problems.

    China, the future engine of the world, certainly of the mining industry, also has a problem. The central bank there recently warned about a real estate bubble. We never can really trust the economic numbers from China but if the Chinese volunteer information on some potential problems, we have to watch carefully. China could cause a lot of problems for the global economy.

    TGR: How should investors plan ahead?

    BP: Investors have to find a way to still participate in the buoyancy of the market, yet be hedged against trouble. How do you hedge yourself? If you made good money in stocks, you should buy a hedge like precious metals. It's insurance. You may lose a few percentage points a year but you sleep better knowing you have it. You have insurance for your house, your car. Why shouldn't you have insurance for your portfolio? Warren Buffett said: "Be greedy when others are fearful, and be fearful when others are greedy." We don't know where the Dow Jones or DAX will be in a year. At least take some of your big wins off the table and find a sector that is undervalued. In our case, that's mining.

    TGR: You're a fund adviser based in Switzerland. Tell us about yourself.

    BP: I am an adviser to Stabilitas GmbH, a group of resource funds in Germany. Also I consult to various Swiss or German portfolio managers on the institutional side with regard to mining investments. Smart money with deep pockets thought it is the right time now for investments into the mining sector, so we launched a new gold and silver equity fund for them in Lichtenstein. We plan to cap it at around $100 million [$100M] with a soft closing because we still want to play the junior and midtier stocks.

    On top of that, we work with some wealthy private investors who look to invest not only in mining equities, but also in production streams. Therefore, we created a new loan fund to work with smaller companies to help them finance through to production. In most cases we have an 8-12% bond. Then we negotiate a royalty stream or financing fee for 10-15 years. Our money helps small companies with low share prices that can't raise sufficient funds in the equity market.

    I also write a subscriber-based newsletter called Cashkurs Gold, which mostly covers large-cap precious metals producers, $400-500M and up. Cashkurs roughly translates to "money direction." We educate mostly German and European retail investors on how the mining sector works and what constitutes a good investment. We also run a real portfolio there.

    TGR: In an interview prior to the 2014 Prospectors and Developers Association of Canada [PDAC] conference in Toronto, you said the junior mining market had bottomed. Where is it now?

    BP: In 2012, and especially in 2013, we saw one or two good breakout months. We all thought that maybe that could be the turnaround, but it wasn't. The biggest difference this time is that the volumes are picking up. Volumes on the Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.MKT) are increasing and we know that people are bringing fresh capital back to the sector. It's not a lot but there is inflow. It might be traders or generalists seeking value in gold and silver stocks but I think we have seen the worst in the junior sector.

    We focus on the small producers and near-term producers. Most of the exploration stocks still have liquidity problems. Last year, brokers and banks did a lot of bought deals. So money is still there and some people are taking advantage of undervalued assets.

    TGR: Is that where the smart money is headed?

    BP: It's still a small amount. The people who look for sector rotation see that the sector is beaten up. When we look at the long-term chart for the Philadelphia Gold/Silver Sector Index [XAU], there were buying opportunities in the early 2000s, and 2008, of course. We actually had a bottom-building phase here at similar levels. That means we really have a chance. Banks and other institutions, are investing into our new fund now in order to find the right investments. They want to get back into real assets; ultimately they know almost everything around us comes from mining. Before you own it, it's mined. So the smart money is starting to very carefully turn toward the mining sector. But if we combined the value of all the stocks in the Philadelphia Gold/Silver Sector Index and compared it to the market value of Apple Inc. (AAPL:NASDAQ), it's a tiny market. It doesn't need much capital to raise it 10-20%. Even this year we have seen nice gains already.

    TGR: One of the common complaints among investors is that junior mining equities have little to no liquidity. How important is that?

    BP: That is key. These companies need to have experienced management that earns the trust of investors and large institutions to fund their activities. Look at Detour Gold Corp. (OTCPK:DRGDF) [DGC:TSX]. It needed more and more money, but it is going to make it in the end. The latest quarter wasn't great, but that was expected.

    If no one will give you more money, especially in the junior sector, someone will take you out or you will go in default and someone else will take your assets. The gold will still be in the ground. Liquidity is almost as important as management, geology and jurisdiction.

    TGR: What's your pitch to investors?

    BP: In general we tell people that mining is an important part of their lives. It's a great investment if you know how to play it, and if you do so at the right time.

    We like gold and silver equities right now. That's why we launched a new gold and silver fund at what we believe is the bottom of the market. Even if the gold market drops a bit more, there are companies out there with all-in sustaining costs around or below $1,000 per ounce [$1,000/oz], which means they can still make good money and survive at $1,300/oz gold, and are well positioned if gold goes higher.

    TGR: What are some gold and silver equities you're following?

    BP: In the short run we like some large caps like Goldcorp Inc. (GG:NYSE), but we see the biggest potential in the junior market. We prefer the smaller producers that have been hammered down due to the market.

    We like Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL) and Lake Shore Gold Corp. (LSG:TSX), which are some of our bigger positions.

    TGR: You mentioned Lake Shore Gold. It's up 155% year-to-date. Is there any room left to climb?

    BP: Good question. Maybe it's a little pricey right now, but it has some great assets. Lake Shore turned things around on the cost side at its Timmins West complex and now has free cash flow even after paying back some debt. It's sustainable at that level. It is building bullion and cash. President and CEO Anthony Makuch has done a great job. Of course, we were shareholders much earlier. You have to believe in management. It stumbled, but stood up and changed its course.

    Lake Shore must eliminate its debt and it still has to prove in the next quarter and beyond that the expansions will continue to work. I would put it on a watch list and wait for a buying opportunity.

    TGR: You mentioned that Inca One was the latest investment with your loan fund. Tell us more about that story.

    BP: Years ago Dynacor Gold Mines Inc. (OTC:DNGDF) [DNG:TSX] started the toll milling business in Peru because it is a country with a lot of high-grade ore and small miners who need a processor for that. We own Dynacore and like it a lot. It's a good model, if you have the right people and connections. We were looking for the next play there and came across Inca One. We liked the management-CEO Ed Kelly, COO George Moen. They are not mining people, but they found the right partners in Peru. We have been to Peru a couple of times to check everything out. We liked what we saw so we made sure it does not have to worry about any financing in the near term so that it can build the plant.

    TGR: What are some other miners that you have positions in?

    BP: We like to find sweet spots in the gold space. About six months ago we took a position in Caledonia Mining Corp. (OTCQX:CALVF) [CAL:TSX], which owns 49% of the Blanket gold mine in Zimbabwe. I met the management in London and I was convinced that these people were doing a great job. The stock was about $0.70/share with a great dividend, and nice, steady small gold production. Now, it is above $1/share. At some point we probably have to think about a sell but right now there is lots of room to grow, so we're quite happy.

    TGR: There is incredible value across the junior gold and silver space. Why would you willingly take on exposure to Zimbabwe and Robert Mugabe's regime?

    BP: As we listen to the company and checked out the setting of the mine and how it fully indigenized, we got a very good and positive feeling for the investment. It's one of the opportunities most of the people miss. We always like to learn, right? Also the mine brings a lot of value to the locals and it treats the miners very well. This mine helps the local community. We watch the company closely, but so far it always has delivered and that builds trust in the management.

    TGR: What about some other smaller gold plays?

    BP: With the recent success Osisko Mining Corp. CEO Sean Roosen had with the takeout by Yamana Gold Inc. (AUY:NYSE) and Agnico-Eagle Mines Ltd. (AEM:NYSE), Quebec's Abitibi region started getting more traction.

    TGR: Parting thoughts?

    BP: For an investor who looks for a good opportunity, the mining sector is the place to be. You have to have patience so that you don't get shaken out on the pullbacks, but I would be quite surprised if you are not making a lot of money in this sector within the next two or three years.

    TGR: Thank you for your insights, Björn.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    As authorized principal and head of trading, Switzerland-based fund adviser and newsletter writer Björn Paffrath worked for a well-known assets manager in Germany and the United States from 2000 to 2005, where he was responsible for the precious metals and mining division. Since 2005 he has been involved with various precious metal and resource funds, which have received a number of awards. Together with his broad network, especially in Switzerland, he is financing projects and emerging producers. For several years he has been in the media as the gold and mining expert of sought-after business partners and stock commentators. In addition, he is cofounder and chief editor of the well-known, subscriber-based, financial and mining market letter, Cashkurs*Gold.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Bjorn Paffrath: I own, or my family owns, 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: None. 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.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Aug 18 3:31 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

  • "One thing we really like about $RPMGF is that it has cash flow coming from a quarterly royalty"-James Fraser. http://ow.ly/BzMKx
    about 14 hours ago
  • " $MLNGF was featured in our most recent Top 10 report"-Jeff Desjardins. Read More: http://ow.ly/BzMCx
    about 14 hours ago
  • " $CBGDF is partnered with a major producer, Nordgold, on the Paul Isnard project in French Guiana"-James Fraser. http://ow.ly/BzM2W
    about 14 hours ago
More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.