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. (RIO:TSX.V; RIO:BVL) make a friendly deal for Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL) or Mandalay Resources Corp. (MND:TSX) buying Elgin Mining, just to name two.
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; RIO:ASX; RIO:LSE; RTPPF:OTCPK) or AREVA SA (AREVA:EPA).
Of course, you want to own Cameco Corp. (CCO:TSX; CCJ:NYSE). We also like Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT); it's still small, but is one of the lowest-cost producers.
On the exploration side Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) is always worth a look and for sure you want to watch Fission Uranium Corp. (FCU:TSX.V). The boom last year was mostly driven by its huge exploration success in the Athabasca Basin. Fission hit and hit and seems to have built quite a big resource now. The final number has yet to be confirmed in an NI 43-101 resource report, but could be well north of 80 million pounds. If you remember that Rio Tinto took out Hathor Exploration for around US$10 per pound in the ground, you can make up a valuation for Fission in a potential takeover game.
Also, some diamond stocks like Mountain Province Diamonds Inc. (MPV:TSX) or Kennady Diamonds Inc. (KDI:TSX.V) 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. (LUN:TSX), HudBay Minerals Inc. (HBM:TSX; HBM:NYSE), Teck Resources Ltd. (TCK:TSX; TCK:NYSE) or the smaller Trevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL), which had a nice run since mid-2013. Trevali is maybe the most leveraged junior to a rising zinc price, as around 58% of its revenues come from zinc. Also, 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. (CS:TSX) and Nevsun Resources Ltd. (NSU:TSX; 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 (Stabilitas Silber+Weissmetalle; Bloomberg symbol: STABSWI:LX). 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:TSX; SLW:NYSE), Tahoe Resources Inc. (THO:TSX; TAHO:NYSE), Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), Fresnillo Plc (FRES:LSE), Hochschild Mining Plc (HOC:LSE) and Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ), which just bought the Marigold mine in Nevada from Barrick Gold Corp. (ABX:TSX; ABX:NYSE). If you are looking for a pure silver play, there is Keith Neumeyer's First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). 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. (EDR:TSX; EXK:NYSE; EJD:FSE) 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. Cooke is attempting that again with another company, Canarc Resource Corp. (CCM:TSX; CRCUF:OTC), where he is chairman now. It just helped Santa Fe Gold Corp. restructure its debt, while supplying the capital to redevelop the Summit gold-silver mine in New Mexico. It's pretty ambitious. Summit has been closed since 2013 but I think Cooke can make that asset work again. 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.
SilverCrest Mines Inc. (SVL:TSX; SVLC:NYSE.MKT) is one we like, too. Low costs and high grade always help in the actual difficult environment for precious metals. Financial and operational results for Q1/14 have been solid and came in lower than expected for Q2/14 given the transition from an open-pit, heap-leach operation to an underground mine and milling circuit. The commissioning of the new 3,000-ton-per-day mill and facilities at the Santa Elena mine has been successfully completed. In addition the company sits on a healthy cash position, which should increase from future free cash flow.
TMR: Tell us about some recent success stories.
BP: Lately, we have had success with Maya Gold & Silver Inc. (MYA:TSX.V). It is in Morocco. We know CEO Guy Goulet very well, but perhaps the biggest asset of the company is COO Noureddine Mokaddem. He has managed several state-owned companies and brought some mines into production. That gave us some confidence. Recently, Maya announced the commissioning phase for the Zgounder silver mine. It took a while but the stock held up nicely in the correction and then almost doubled.
TMR: Why haven't we seen any mining companies in Morocco before?
BP: There are lots of private companies and a couple of listed ones, but in general, it's not a TSX country. That's why the Moroccan government was somewhat reluctant when Guy sat down with government officials and said, "We want to raise money for a silver mine." In general, Morocco is a stable African country. Mining has been going on there for 50 years, but with Maya having some success, others might follow. This is an example of something we like to find—smaller—opportunities that have positive impact on our funds and are overlooked by most of the investors. In the end, only performance matters.
TMR: You're on a roll with silver equities. Please keep going.
BP: We talked recently with Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) President and CEO Brendan Cahill in Zurich. We took a deeper look and started to build a position. We still want to see the results from its latest drill program. It could be a nice investment.
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) recently had some great drill results at San Jose. Also, the latest numbers showed a solid quarter with reduced all-in costs and free cash flow that helps to build up the treasury. Fortuna is definitely a company we follow closely.
MAG Silver Corp. (MAG:TSX; MVG:NYSE) is another one we like, as the company shows a long history for discovering promising silver assets. Also, MAG Silver is well on track to move the Juanicipio joint venture (56% Fresnillo) forward.
With the recent success the team had with Augusta Resource Corp. (AZC:TSX; AZC:NYSE.MKT) being taken out by HudBay, we're certainly following Wildcat Silver Corp. (WS:TSX.V) at the moment.
TMR: What are some junior mining and exploration companies outside the precious metals space?
BP: Obviously, we focus on gold and silver, but as mentioned above we had a great run with Fission Uranium and some fantastic performance with some of the diamond stocks last year. Both segments are ready for another take off. Also, especially in Europe, rare earth elements and other strategic metals are gaining traction again.
There are not many development-stage tungsten assets out there but we recently turned to Blackheath Resources Inc. (BHR:TSX.V), which is developing tungsten assets in Portugal. We got to know CEO Jim Robertson and President Alex Langer very well during a recent site visit. In 2007 Robertson sold another tungsten company based in Portugal, Primary Metals, to Japanese conglomerate Sojitz Tungsten Resources Inc. (2768:JSX). Hopefully, he will do it again. Blackheath just published an excellent drill result at its Borralha project, the largest past-producing tungsten mine in Portugal, and Blackheath recently announced a third drilling program at Covas, quite possibly the highest-grade open-pit tungsten project in the world. It's a European story. If it continues to get good drill results and build resources, then I'm 100% sure Blackheath will find the right partner for an offtake agreement to bring it into production.
TMR: Does Blackheath have the cash it needs to advance these projects?
BP: Yes, Blackheath has enough capital to fund its two current drilling programs and to deliver two separate resource reports, one at Borralha and one at Covas. In my opinion the company will need another $4–5M to finish a feasibility study and to do the required engineering work to advance one of its projects. With having two flagship projects, I suspect Blackheath will pick either Borralha or Covas to advance to the next stage, but it will most likely wait until after the current programs are complete to make that decision. In all likelihood Borralha and Covas could both be mines.
As for raising further capital, Blackheath recently announced two large multibillion-dollar partners, both out of Asia. I really don't think financing will be a concern moving forward. From there Blackheath will need an offtake partner to help finance the building of the mine. But the share structure will allow it to raise the near-term capital without too much dilution. It's a small, tightly held company. We're looking at it and building up our positions.
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.
Cashkurs*Gold.
