Fund Adviser Björn Paffrath's Mantra: In The End, Performance Matters

by: The Gold Report


The fittest mining companies will survive, especially in the junior and exploration sector.

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.

This fall, we will see more mergers and acquisitions activity, especially in the mid tier sector.

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 mid tier sector. We already saw Rio Alto Mining Ltd. (NYSE:RIOM) make a friendly deal for Sulliden Gold Corp. (SDDDF)

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 (NYSE:RIO) or AREVA SA (OTCPK:ARVCF).

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

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

Also, some diamond stocks like Mountain Province Diamonds Inc. (MDM) or Kennady Diamonds Inc. (OTC:KDIAF) did very well. In fact, after a correction in the first half year, diamond stocks are 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. (NYSE:HBM), Teck Resources Ltd. (TCK). 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. (NYSEMKT:NSU). 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 also find 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), Pan American Silver Corp. (NASDAQ:PAAS), Fresnillo Plc (OTCPK:FNLPF), Hochschild Mining Plc (OTCPK:HCHDF) and Silver Standard Resources Inc. (NASDAQ:SSRI), which just bought the Marigold mine in Nevada from Barrick Gold Corp. (NYSE:ABX). 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. (NYSE:EXK) 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 co-founder and chief editor of the well-known, subscriber-based, financial and mining market letter, Cashkurs Gold.

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