In a junior mining market that doesn't value good news, M&A could be the golden ticket that pays investors a premium for their patience. In this interview with The Gold Report, AgaNola Asset Manager Florian Siegfried evaluates recent deals and points to the companies that could be the next takeovers. Plus, he makes a bold prediction for what the recent takeout activity and fallout from the Greek crisis could mean for the resource market as soon as October.
The Gold Report: When we talked in November, you warned that there would be downward pressure on gold this year. What are you anticipating for the balance of 2015 and into next year?
Florian Siegfried: We were being cautious in November when we published guidance that indicated gold could trade as low as $1,070 per ounce [$1,070/oz] as a support zone. And that is pretty close to where it is trading right now. But I think that we have to distinguish between the paper price of gold and the physical price, which trades at a premium. For example, the U.S. Mint currently sells gold at around $1,400/oz.
This suggests that there is some tendency toward increasing premiums in the market for physical metal. Where we go by the end of the year is a difficult question because it's always hard to catch the bottom of the market. But a look at the last three or four years gives us some clues. Hedge funds were maximum net long in gold at the peak of 2011, and now they're maximum net short, which could be a good contrarian indicator.
It looks as if $1,080/oz could be the bottom. It's not defined yet, but the sentiment is definitely at extremes.
The turn in gold will come from short covering, and the short covering will come when the bearishness really reaches a climax event. Probably we are there, but we will have to wait and see. It is difficult to make a call for year-end because there are so many factors influencing the gold price, and sentiment is extremely negative. The trigger for moving up could come from the bond market, which is in a difficult spot right now. Liquidity is down. Yields and credit spreads are rising. When something goes wrong there, where will the conservative money go to? I don't think it is going to go back into government funds. As investors lose confidence, that could be the trigger for gold. We are probably going to see this in the fall, by September or October. I think the bond market is about to turn around.
TGR: What are some of the other triggers you're watching? Are you monitoring the U.S. Federal Reserve and whether that rate hike happens in the fall?
FS: I think the Fed is testing the market because it knows we are in a massive bubble and is talking to see what happens. I have four simple reasons why I would not expect a rate hike in September:
- The Fed sits on a US$4 trillion balance sheet. Raising rates would mean bonds go down in value, and this could wipe out the Fed's capital. That's the last thing it wants.
- The impact to the carry trades, which the banks always need, would be drastic. The banks get free Fed money now that they can invest in treasuries and multiply it tenfold, making a profit basically at no risk. An increase in rates would put pressure on the banks, something the Fed doesn't want either.
- U.S. exports are already suffering with a strong dollar and a rate hike would make the dollar even stronger.
- This fragile economic situation is also something that the Fed doesn't want. That is why quantitative easing is somewhat like the Hotel California. You can check out, but you can never leave.
I would expect more market dislocations because I think the Fed is between a rock and a hard place. Generally, my advice is to play it safe and not to put all your capital at work at this time.
TGR: You're in Switzerland. Are you more worried about what's happening in Europe or what's happening in the U.S.? Do you think the Greek crisis is now behind us and we've solved that problem or will that continue to haunt us the rest of the year?
FS: I would be more concerned about Europe right now because Greece is not fixed. It's an exercise to save the banks because everybody knows that if Greece defaults, it will trigger a chain of events that becomes uncontrollable.
The market seems to like the short-term fix and the U.S. dollar is benefiting. If you are looking to park your money, probably the U.S. is the only place you want to go. I don't know how long it will last because the markets in the U.S. are shaky. I think we are lurking on a major top in the equity markets. But people still like the dollar, and it's probably the best currency right now.
TGR: Are premiums being paid for rare high-quality silver projects?
FS: Yes. First Majestic Silver Corp. (NYSE:AG) recently bought SilverCrest Mines Inc. (NYSEMKT:SVLC). Both are silver producers in Mexico. This was a friendly all-share deal for the Santa Elena high-grade mine. It is probably strategically important for a company like First Majestic to add to its footprint to realize the vision of becoming the leading silver producer in Mexico. The deal also adds net cash to its balance sheet on the order of CA$25 million. That means the company is improving its balance sheet and it has another high-grade deposit to add to its portfolio.
In this market, there aren't too many companies that can offer a $120 million transaction, so it's a buyer's market. In a rising silver price environment, investors will revalue the whole company and see the wisdom in the timing.
TGR: Will these deals set a precedent for pricing going forward?
FS: It really depends on quality.
TGR: A lot of these are paper deals. Do you think that's going to be the standard?
FS: The companies buying now can dictate the terms. No one wants to pay a premium in cash because cash is rare, and companies need the cash for their mines, as we probably won't come out of the downturn any time soon. So they use their share price as currencies, and that's exactly the right thing to do. But it's going to change when the market gets more buoyant, companies make cash and accumulate a treasury, and banks prove more willing to lend. It's all cyclical.
TGR: Based on those deals, what are some companies that look attractive today, either as M&A targets or as projects that could be well positioned once the gold price does turn?
FS: The big mining companies, AngloGold Ashanti Ltd. (NYSE:AU), Barrick Gold Corp. (NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM) are currently disposing of nonstrategic assets. They have to shrink their portfolios and fix their balance sheets. Sooner or later, these companies have to refill their production pipeline, and they will have to do this by acquiring.
When you are betting on M&A, one way is to evaluate smaller exploration companies that are in a good position financially because they're backed by major shareholders who can fund their exploration programs through the downturn. Even better are companies with solid brownfield assets, which make it rather easy to prove up a substantial gold resource.
TGR: What are a couple of companies that might be good acquisition targets?
TGR: What position is Detour in?
FS: In terms of mine life and annual gold production, Detour is the only major Canadian deposit that is still in the hands of a single asset producer now that Osisko Mining Corp. is gone. Detour is highly leveraged to the gold price, but it has been volatile. Sometimes it makes money, sometimes it doesn't, based on mining and milling rates. I think there is still some financing risk in a persisting low gold price environment, as Detour currently has some CA$500 million in outstanding convertible debt. What Detour really needs is an elevated, high gold price environment. Then it would make sense for an acquirer to buy. Right now, I don't see that. It's just a name circling around.
TGR: Pretium is busy moving the Brucejack deposit ahead in British Columbia. It recently announced new permitting and infill drilling in Valley of the Kings. Are there any key catalysts we should be looking for there?
FS: The great thing about Pretium is the sheer size of the deposit, as well as the grade. It's one of those mines that brings a long mine life and high grade in a safe jurisdiction. Pretium is probably clicking the box there as well, but it's also hard to say if an M&A premium is factored in. It recently received an Environmental Assessment Decision Statement from the Federal Minister of the Environment that also includes agreement with the Nisga'a Nation treaty. CA$80 million in new Chinese money has been invested in the company. Pretium is the third name that I hear regularly in M&A discussions.
TGR: What is a company worth watching?
FS: When you look for value, where do you turn? Companies that suffered dramatically in the current downturn, but generate cash flow at current metal prices, have cash in the bank and no debt. I think one of them is Gold Resource Corp. (NYSEMKT:GORO). It just put out Q2/15 financials. Despite an illegal mine protest and work stoppage in May, the company earned US$9.4 million in operating cash flow and is paying around a 4% dividend yield, which should be sustainable given the strong balance sheet. It has cash in the bank. It's debt free. It has a nice, high-grade silver-gold project in Mexico and plenty of exploration potential; nevertheless, the stock is down to US$2.50/share after the company announced a decrease in metal production for the second quarter. I think the selling is overdone. I remember in 2009 it moved from $1 or so to close to US$30/share in 2011 and it wasn't even in commercial production. Now, Gold Resource is in production and the market cap is down to $120 million, and it is still paying a dividend. The good news is it didn't dilute all the way down. I think the sentiment there is very negative and consider the stock undervalued.
TGR: You also follow Australian companies. What will the precious metals mining landscape look like there once the dust settles on the OceanaGold (OTCPK:OCANF) deal?
FS: I think the Australian producers with West African operations get virtually no attention in this market regardless of the quality of the assets. The Australian dollar is so weak that gold there is at a two- to three-year high. That makes the local producers with mines in Australia look attractive.
TGR: Do you have any final words of wisdom for readers looking to survive 2015?
FS: Every bear market eventually turns into a bull market again. Things are cyclical. So don't get depressed. You can never pick the bottom, but you can prepare for the next upturn. Be patient. Don't get frustrated. The cycle will turn. I think it's probably coming in late 2015 or early 2016. When we see the best teams in the mining industry buying assets, that gives you some confidence that the bottom can't be far away.
TGR: Thank you for taking the time to talk with us, Florian.
This interview was conducted by JT Long of The Gold Report.
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.
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her 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: Great Panther Silver Ltd., Timmins Gold Corp., St Andrew Goldfields Ltd., Pretium Resources Inc., Romarco Minerals Inc. and TerraX Minerals Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. 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: Timmins Gold Corp. (TGD). 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 determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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