Swiss asset manager Florian Siegfried: Look for value opportunities and put your capital to work selectively in this market
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 (see chart above).
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 benefitting. 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: The last time we talked, you also anticipated that mergers and acquisitions (M&A) would be a major theme for this year, and that definitely seems to have played out. Let's talk about some of the deals that have happened recently in the resource sector. What can investors learn from that?
FS: There were a few interesting acquisitions/mergers in the last month. The transaction between OceanaGold Corp. (OGC:TSX; OGC:ASX) and Romarco Minerals Inc. (R:TSX) is interesting because OceanaGold is an Australian gold producer with assets in the Philippines and New Zealand. The company is buying, for almost CA$900 million (CA$900M) in an all-equity transaction, Romarco, which has the 4 million ounce (4 Moz) high-grade Haile deposit in South Carolina. I think the transaction shows that good quality deposits are very rare. Otherwise, an Australian company wouldn't enter new territory in the U.S. Also, I think this shows investors that good projects, despite dire market conditions, come at a premium. OceanaGold paid almost a 70% premium on the Romarco shares.
TGR: Are similar premiums being paid for rare high-quality silver projects?
FS: Yes. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) recently bought SilverCrest Mines Inc. (SVL:TSX; SVLC:NYSE.MKT). 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$25M. 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 $120M 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.
Temex Resources Corp. (TME:TSX.V; TQ1:FSE) recently received a superior proposal from Lake Shore Gold Corp. (LSG:TSX) following the initial takeover bid from Oban Mining Corp. (OBM:TSX). Lake Shore is paying 50% more than Oban offered on the Temex share price and the weighted average price is roughly a 100% premium, but it's a small transaction, $24M, compared to Lake Shore's $500M market cap. That transaction makes sense strategically because the Whitney project is so close to Lake Shore's Bell Creek mill in Ontario, Canada.
I would be cautious when transactions don't make sense operationally, for example, a company with a good asset base and poor balance sheet buying another company with a bad asset base but a good treasury. That might just be a transaction to fix the company financially without creating any long-term value or creating any benefit for the shareholders.
TGR: As you mentioned, 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. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Newmont Mining Corp. (NEM:NYSE) 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.
One of two companies I would suggest that are in this position would be Falco Resources Ltd. (FPC:TSX.V), which has a past-producing portfolio in Quebec called the Horne project. The strategy is pretty clear—drill this deposit out, prove up the preliminary economic assessment (PEA), prove up the metallurgy, move the project to bankable feasibility level and then sell it to a major. One way of getting exposure to M&A upside is through Falco Resources.
The other one in a similar position is TerraX Minerals Inc. (TXR:TSX.V), which has a huge district in the Northwest Territories, the Yellowknife City project, just north of the historic Con and Giant mines, which collectively produced about 10 Moz gold in the past. TerraX controls the whole district and is targeting a 5 Moz gold resource. Management knows what a high-grade deposit should look like to make it attractive as a takeover target. TerraX is never going to be a producer. I think it is heading for an exit strategy. Management holds 15% of the company. When the majors need to buy something, this project will be available with great recent work. But it needs time. This is not a stock you only need to hold for a couple months. You have to be patient. That requires a three- to five-year time horizon.
TGR: What are a couple of other companies that might be good acquisition targets?
FS: Torex Gold Resources Inc. (TXG:TSX) was an acquisition target over the last few years. With a market cap close to CA$1 billion and a new PEA for its second project called Media Luna in Mexico, which has an after tax net present value of almost US$500M, it might be too big when you consider that a potential buyer would have to pay a substantial premium. The company is building its first mine, El Limón, right now. It's permitted and financed and adjacent to the Media Luna deposit. Both deposits are world class. Torex is poised to build the mine and go into production on its own.
TGR: What makes Lake Shore an interesting company as a takeover prospect?
FS: I think it is in the right jurisdiction. It is benefitting from the weak Canadian dollar and has a decent operation, plenty of in-the-ground potential and is fixing its balance sheet over time. Gold in Canadian dollars is almost $1,500/oz right now, so it is protected. It's like a hedge.
TGR: What are the steps Lake Shore still needs to take to derisk it to the point that it would start turning heads?
FS: It was turned around two years ago. It has a relatively long mine life and generates cash flow. Although the valuation discount of the past has largely been removed over the last few quarters, I don't think the market has really factored in an M&A premium. This could change once the company demonstrates its ability to repay its CA$103.5M convertible debenture by operating cash flow in the next two years in order to reduce the balance sheet risk.
TGR: Is Detour in the same position?
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$500M 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$80M in new Chinese money has been invested in the company. Pretium is a third name that I hear regularly in M&A discussions.
TGR: What about companies that might just be good investments right now?
FS: St Andrew Goldfields Ltd. (SAS:TSX) is attractive for me because it is priced right. The company has growth potential and no debt. It's trading at around $0.28/share for a market cap of less than US$100M. The market has not taken note of St Andrew because of the tight shareholder structure. A single shareholder owns around 50% of the company so brokers have not really covered the stock, and it is not very liquid as a result. But when you look into the company a little bit deeper, it is currently producing around 100,000 ounces (100 Koz) of gold per year in the Timmins mining district on Ontario, Canada, but in Q4/15, it will bring the Taylor mine into production. That could add another 20–30 Koz of high-grade and low-cost production to its portfolio.
TGR: Do you think that is what investors are waiting for?
FS: In the last bulk sample, St Andrew put out a very good results from Taylor demonstrating the grades were 20% higher at almost 9 grams per ton (9 g/t) than its forecast. The stock price didn't really react on the news, but I think that's just a function of the market. There is no interest in the sector. This is an opportunity because if it can grow production by 25–30%, it doesn't need to dilute shareholders, and it has another high-grade mine, which is open at depth, gives free cash flow and has no major royalty. That is something investors will really have to pay attention to. Taylor is going to change the whole production profile and financial situation of the company.
TGR: What is another 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. (GORO:NYSE.MKT). It just put out Q2/15 financials. Despite an illegal mine protest and work stoppage in May, the company earned US$9.4M 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 $120M, 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.
The same is true for Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT), which just made two acquisitions in Mexico over the last eight months. I think the market is overly concerned over whether the company has the capability to bring the two gold projects into production in the foreseeable future. But Timmins, with its existing San Francisco mine in Mexico, financed and put this mine into production in the last down cycle in 2008 and 2009, so management has proven it knows how to execute. The company has US$40M in net working capital and can sequence the development of the two new projects to manage the capital requirements. It is producing around 120 Koz annually. It reduced guidance a little bit, but the underlying asset portfolio has the potential to become a 300 Koz producer. The market cap in U.S. dollars is down to $100M, which I think is ridiculously cheap. Timmins looks very undervalued, in my opinion.
TGR: You also follow Australian companies. What will the precious metals mining landscape look like there once the dust settles on the OceanaGold 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.
One to watch is Perseus Mining Ltd. (PRU:TSX; PRU:ASX). The market cap is around AU$150M, and it has AU$127M in cash and bullion with no debt. This is an opportunity to buy a producer almost at cash value. Its Edikan gold mine in Ghana is targeting 200 Koz of annual production. It has a 5.4 Moz gold resource. The company added AU$40M cash and bullion in Q2/15. What is really attractive to me is that the resource base is so big. The mine life is eight years. Management has now proven that it has effectively brought costs under control. In the June quarter the company's all-in site costs are below $700/ounce, so it has a good cash margin. It's a low-grade deposit, 1.2 g/t according to the mine plan and, typically for such deposits, any reduction in mining costs can improve the operating cash flows significantly. At Edikan, there are seven pits to mine over the mine's life, so it's not so easy to work these deposits, but if you're a value investor and you're thinking gold is going to turn around one day, here is a company that trades almost at cash and you get the gold virtually for free.
TGR: Is there one last story that you want to mention?
FS: Probably the last one that also touches on this whole M&A story would be Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT). The stock has suffered lately after some exchange-traded funds sold their positions. But it made two acquisitions over the last few months that are interesting. It bought an option on the Coricancha polymetallic gold-silver-zinc deposit in Peru from Nyrstar (NYR:BSE). If it wants to execute its option to buy the whole project, including the infrastructure, mill, everything on site, the price would be around US$18M. It has a 124 Moz silver equivalent Inferred resource and 22 Moz silver equivalent Measured and Indicated resource. So it's a big resource. Great Panther is reviewing the mine plan to see if it can find cost efficiencies. Then it will decide if it wants to execute on the option. I think that's smart. Great Panther is a stock to watch.
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.
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.
Source: JT Long of The Gold Report
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. 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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