Swiss Fund Manager Florian Siegfried Says Gold Bear Market Is Ending

Includes: ABX, ALO, AU, GG, NEM
by: Palisade Radio


Is this the start of a bull market in gold?

Money is moving out of financial assets.

How can smaller companies take advantage of renewed investor interest?

Companies with little debt and rich in assets are poised to shine.

As the equity markets deteriorate and the price of gold increases more and more mining companies are becoming financially viable and their share price is increasing substantially. Mining shares are outperforming bullion, which is a classic sign of a bull market.

Gold as a monetary metal defies the deflationary commodity and asset market. Money is moving out of financial assets so a portion of that will be moving into gold. Big names tend to get all the attention so smaller companies need to make acquisitions and investments along with long term strategies to gain positive attention.

When investing, look for companies in good financial condition without significant debt and with substantial long term assets. Florian provides us with a detailed analysis of Perseus Mining Ltd (OTCPK:PMNXF) and Timmins Gold Corp. (TGD).

Palisade Radio Host Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host Collin Kettell. On the line with us today is a new guest from Switzerland. His name is Florian Siegfried. He is the senior portfolio manager at AgaNola, which can be found at Florian, welcome on the show.

AgaNola Ltd. Senior Portfolio Manager Florian Siegfried: Thanks for having me, Collin. It is a pleasure.

CK: Yeah, there is a lot of excitement we are just talking about. This is Thursday, Feb 11th, we are recording. For the gold bugs out there you will remember that as you we post this probably on Sunday is the day when gold opened up about $40 an ounce against the global equities which are pulling back. It is a refreshing thing to see for the gold bugs who have been waiting for years now for things to turn around. This might finally be it. Florian, what do you think? Is this the bottom and how do the general equities play out in the coming months as well?

FS: Yeah, I think we are completing a long bear market which started in 2011, around September or August 2011. There has been probably like a cyclical bearing in the gold space and on the other side we have the cyclical bull market in the equities. I would say do not watch things isolated; look at the whole picture. My feeling is that clearly equity markets are rolling over. The market internals are clearly deteriorating. You have a widening credit spread so a mixture of news that makes the market very nervous and one hand.

On the other side, you see the safety bet which creates a good bid for the gold price. What makes me more positive now is that you see mining shares clearly outperforming, bulling, which is always a classical feature of how the bull market starts. We have seen the opposite on the other side, in the down side, over the mining shares have gradually underperformed the prices of bullion. Now, we have seen since a few weeks the opposite side. Yeah, I think we are completing the bear market here and I think we are probably heading into an exciting year, yeah.

CK: Florian, in terms of your fund and your investment philosophy, what can you tell our listeners about how you have been investing over the past couple of years? What your focus is, what size company, commodity focus, etc?

FS: I am clearly being in gold. I think it is the metal I like most because I still feel the overriding problem is deflationary rights, so you have a deflationary environment with deflating commodities and now deflating asset prices. Gold is basically a monetary metal so it really is not a commodity which is used by industrial use or sorts of things like that, so it serves as wealth preservation in the item and it replaces probably cash.

Given my long term fundamental view on gold and how it should behave during asset or currency deflation times as with gold shares, and my positioning has been to buy or to invest really the value space in the mid-tier segment. I would say everything which is probably producing, let us say, 100 to 300, 400 ounces of gold per year and gets the benefit from weak local currencies especially in Australia. There will be a trading about $1600 or Canada where we probably also trade more than CAD$1,600 per ounce.

I think these companies they get a very good gold price. I think under-regarded on this market because everybody is so focused on the US dollar price. But they had a good local price and their costs are coming down. Crude oil has been very depressed and the consumables were down. There is an excess pool of labor probably from base metals, drilling contract …ongoing squeezing costs. All the companies which are not too big and which have actually like the balance sheet which allows them to take those margins which they create from an operating site and reinvest that portion of the cash flow into the business. I think there have been good outperformers over the last two years and I would say they continue to do so, yeah.

My focus is not on the big caps and I see some fundamental issues, failing assets, fixing balance sheets, and I really want to be into more junior or mid-tier space where people can actually- will have the balance sheet to buy and make acquisitions at these low prices. I think that makes perfect sense. It is like buying low and selling high, right?

CK: Yeah and I think investors are noticing quite a stark difference from the last time that gold started to move which was after the financial crisis in 2008. There are some similarities in that the stock market were at lofty levels then and is once again now starting to come down. But, of course, the difference being that gold was also in a strong position going into the financial crisis, whereas right now it has been negatively correlated to the stock market for the past few years. It is very refreshing to see as the stock market is pulling back to have gold and the gold stocks going up. Is that something that you expect to continue, that the negative correlation between gold and gold stocks and the equities will continue as it has been for the past couple of years?

FS: Yeah, I would say so. I would subscribe to that argument. I mean in the end I think it is really simple. We have the boom. We have party time in the markets for the last six, seven years, and, of course, it is always the public or the speculators who decide on what to invest in. Usually what you see to any kind of boom is that in financial assets they get to beat, so they are getting a higher price over time and not necessarily gold.

I think in the contraction phase you see the other side, so gold relative to financial asset is gaining in value. By the end of boom time it is the other side. I think these trades are basically reversed over the last few months. I think for gold that should play out to be the case and also for the gold shares, because they were not part of the equity value over the last few years because gold was really flat. It has no interest in it. I think that is the classical feature of a boom. Gold is not part of the boom time. Gold gets the beat and the contraction starts and I think this is where we are.

CK: So the major movers so far in the beginning of this rally have been the majors: Barrick (NYSE:ABX); Newmont (NYSE:NEM), not quite as much; Goldcorp (NYSE:GG). That is quite usual for the beginning of a gold rally. Money seems to go into the big names and then flow down to the mid-tiers and, of course, eventually the juniors and the explorers. Some of the issues that are plaguing these big companies, they, of course, made some overpriced acquisitions in 2010, 2011. Many of the balance sheets are far from ideal and these are things that you believe are going to hamper the performance of these companies over the next couple of years into the start of this bull market.

You touched on this a little bit a couple of minutes ago, but what would you say you are looking for in a company because there are several out there for investors to choose from? What are the different metrics that you are looking for? After that we can start talking about a couple examples that interest you at this time.

FS: Yeah, I think, of course, when you have good action into the market it is no surprise that the big names like Barrick, Newmont, AngloGold (NYSE:AU), they get all the attention. I think that the moves in the stock price are also reflecting that indeed these are companies which have quite a high leverage on the gold price because their balance sheet is somehow leveraged and has a higher gold price and the fixed cost structures they get a higher operational leverage.

I think you can explain the move, the rationale, from a rational standpoint. My question would just be looking to the longer term or mid-term growth of the production pipeline. Because there will a point and these guys have to somehow replace their existing production, they have to add some new mines, and if you are not a super bull on gold, let us assume each stage at a certain level, sooner or later they have to reinvest into their business. That means they have to buy something or they have to bring something into the production so… I think the market now has clearly a view which is more short-term oriented. But on the longer term I think those cash flows could be turning into a challenge when they face new investments into their mines. I think that is a little bit overlooked right now.

What I like here, as I said before in the introduction, it is more that the smaller names where you have pretty much a good deal of certainty over their production profile, let us say the next seven, eight years, projects which just cannot be mined without having massive sustainable Capex requirements coming down the road. Because then you as a shareholder can basically say, "Okay, if you are bullish on gold, then these companies should really be able to generate a lot of cash and that cash is not necessarily used to buy another company or to do a stupid aquisition at much higher prices. It is also not used to just pay down the debt holder.

I would say look for long term substantial mines which can create good deal of cash and look into the balance sheet because there are just too many companies which are in terrible financial shape which loaded up their balance sheet with debt where all the cash flow they generate will go to the debt holder's pocket in the next few years leaving nothing for the shareholders. Then they probably come to the time where they should reinvest into the business, there is just nothing there. I think the ingredients would be clean balance sheet, long life assets which give you clarity over the next, let us say, five, six, seven years.

CK: Yeah, and Florian, one company that I know is of interest to you, we wrote about it on Palisade Research a couple of months ago, is Perseus Mining. In fact, we spoke to the CEO just a couple weeks ago. There was some higher than expected prices at the mine for the past quarter, but those are issues that will likely be resolved; very strong company in terms of cash position and checks the boxes for you in terms of mine growth, mine life. What can you tell us about Perseus?

FS: Yeah, I think it is a name I would definitely watch out. First of all the valuation; it is trading more or less at cash. I think the market cap is around $100,000,000. They have AUD$100,000,000 in cash, no debt. The Q4 of 2015 was a challenge because they were basically mining stock piles, so the grade compared to the resource grade was really disappointing for the market. But that was probably also expected because the company has clearly indicated that it is going to be a softer quarter.

But then I think Jeff Quartermaine, over the last few months or over the last few quarters I think his board has gained a reputation for not overpromising on the delivering so I think that is the sort of deposit which still has in the rising gold price environment. It is a low grade deposit. It is probably one gram per ton. In a rising gold price environment I would say that that deposit has a huge leverage on gold because the costs are basically fixed. It is still the same… The mining contract is I think they have to renegotiate at a much more favorable price. They have no debt so any penny or every dollar to gold price rise should be a good addition for their cash flow, given Perseus' trading right now I think it is below $0.30 trading at cash.

Do not forget at the time it is still I think an 8 year mine life deposit just a few million ounces of gold. You really, at the current market price, you get this thing for free more or less. You are basically paying the cash the company has in the bank and their whole deposit is not priced into the current share price. I think if you are a patient and long term and value-oriented investor I would look into such metrics and then I think then you can really find tremendous value into space.

CK: Well, thank you for that. Another company that you mentioned before we started recording the interview is Timmins Gold. I would like to ask you what interests you about Timmins Gold? That is a bit of a turnaround story at this point. They have had some issues over the last couple of years. But I think that you see them finally coming over those problems and starting to head back up.

FS: Yeah. Timmins, I think, is a real turnaround story here. I think the more concern has really been I think they went into the penalty box based on the two acquisitions they did in 2015. They bought basically two mines, Caballo Blanco and Ana Paula from Newstrike, so two deals. The result was they drained on the treasury. The cash was burned. I think they were down to $10,000,000. They had … and Morgan Stanley loan in the order of $10,000,000, which has now been extended for a few months. But in the end what you have now is a company. You basically have Timmins Gold with one producing mine in Mexico which is San Francisco which continued to struggle at current gold prices and which is probably a result of the grade. But then on top of that you got a very nice project which is Ana Paula which came into the company as a Newstrike acquisition and Caballo Blanco.

Now I think the market is powerful because here we have a company which potentially has a 300,000 ounce production profile on paper which looks good which was the story which was told to the investors. But the market is struggling. How can you execute the plan? San Francisco is not making a big deal of money right now because the gold price is simply too low. Ana Paula needs to move the project from a PEA into a feasibility study or a bankable feasibility which in my opinion would be at least $10,000,000 or $15,000,000 capital layoff then you still have to build the whole thing.

But when you look at it from a value standpoint, just look at the NPV of Ana Paula and all the metrics or all the things Timmins actually did to lower the initial capital of that mine by buying, for example, fully functional facility and milling facility from Goldcorp. I think the NPV is probably going to remain as high as it is, but the capital requirement will be significantly lower if they can come up with more mine optimization going forward.

Then we look into Newstrike, I mean Newstrike, when Ana Paula was not on their books, it was an exploration asset. It was moved into some sort of a PEA and in the good times the market was paying probably $300,000,000 for Ana Paula without really a road to production. But this is how the market value … and the mood is good. And now Timmins Consolidated is probably worth less than $100,000,000, right? This is I think the metrics that you have to see. I still think the market simply pays no attention.

The market prices… They can never afford to execute under plan. But you see the reaction today where gold is up, let us say, 3%, Timmins is up 20%. Immediately, there is a reaction because this is a leveraged exit which you as a gold investor will want to see in those names because the rising gold price can change the whole business case fundamentally. All of a sudden the one mine starts to make cash flow. That cash can be used to move the other project into sort of a feasibility study. Then the market starts to realize, "Okay, what is the value of that company and what can it actually be in a good gold price environment?" I think this is where the action can change to be good.

CK: Well, that is some great analysis and good point on the leverage afforded by these gold stocks. That is why we are interested in the sector and why all of our listeners have a keen interest in the gold mining sector. I just want to mention that our friends over at Streetwise Reports did an interview with you, Florian, back in the middle of January. Since we do not have more time to discuss other companies the title of that was Five Companies Swiss Asset Manager Florian Siegfried is Watching; some more great information there for our listeners hungry to hear some more information from Florian.

Florian, I want to thank you very much for coming on the show. It is a great day to get you on with some excitement coming back into the sector. Hopefully 2016 continues to play out in our favor. It has been four difficult years, but the time maybe has finally come.

FS: Yeah, I really hope and I think we have reason to be positive here, Collin.

CK: Yup, absolutely! Well, Florian, thank you so much for coming on the show and looking forward to getting you back on later in the year.

FS: Anytime. It is a real pleasure, Collin. I hope to be on your show anytime soon in the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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