Hans Peter Schmidlin, Precious Capital Ltd: "Buy When the Cannon is Shooting"
Source: The Gold Report††(2/22/08)
The Gold Report recently spoke with Hans Peter Schmidlin, CEO of Precious Capital Ltd. in Zurich. The firm's Precious Capital Global Mining & Metals Fund invests mainly in the leading global mining companies as well as some junior companies in the mining sector. Schmidlin gives us names of some undervalued juniors exploration companies that he believes are well positioned for the long term.
TGR: Tell us a bit about Europeans and their experience in investing in mining companies.
HPS: Europeans don't know that much about mining companies. Traders like myself who are in their mid-40s or younger have never experienced a bull market in mining companies like we've had in gold. Although the Swiss have a huge tradition in gold and silver, there is a lack of knowledge about investing in mining companies, and they prefer to invest in ETFs and in the spot markets. So the demand for gold is increasing a lot over here, and there is a lot invested in spot markets in gold and silver. But with the general markets having problems, people are afraid of investing in small cap companies. It either has either to do with the fact they haven't performed very well over the last two years because of rising costs for the big caps or lots of dilution in the small caps. Or, it has also to do with what I mentioned earlier, lack of knowledge. It's a big point that we shouldnít underestimate in Europe.
Personally, I believe the gold is going to go up way moreÖ in the short term to over $1,000 and we may see it go over $1,200 this year. And that has to do with the financial system. You've seen what happened with UBS over here. UBS is a very big Swiss bank, and they just lost $20 billion, which is investors over here just can't understand ó the number is too large.
TGR: Are you seeing a rush to gold as an alternative currency?
HPS: As an alternative to US dollars? Absolutely.
TGR: Do you see the gold price rise to $1,000 to $1,200 as a phenomenon that will happen for 2008 and then adjust in 2009, or do you see it going for more than a year?
HPS: For more than a year. In the long term, I actually believe we have to go back to the gold standard currency, even though that sounds very strange at the moment. But I believe that we will lose trust in the fiat paper money currencies. The sub-prime crash is only the tip of the iceberg.
Many of the national banks have driven liquidity into the market and it canít continue like that ó it will drive us into inflation. I believe strongly that sooner or later inflation will come back.
TGR: How do you see this affecting mining companies?
HPS: The young exploration companies are at a very ridiculous level right now. Long-term investors will have to pick the right ones and have the courage and the nerves to stay with them for some time. At the moment, it is very difficult and will become more difficult for the exploration companies to raise money. Companies that have a big dilution donít have big success in finding new ore bodies. They will have trouble.
TGR: Do you see the large companies starting to take off the better-run exploration companies?
HPS: Absolutely. I mean it's still cheaper to buy a company than to explore by yourself. That is a very important additional point. There's a huge basket to choose from now; they just have to pick out the right ones. Companies will go to younger and younger companies to pick up new assets, new potential assets. The political point is also very important ó the exploration companies in politically stable countries will become more and more of a target. For the moment I believe that the risk-averse stand of most investors against exploration companies will continue, with some exceptions.
TGR: Can you tell us about a couple of companies you're following that you think are undervalued?
HPS: One company I like, Miranda Gold Corp. (MAD:TSX-V), has a market cap of $25 million and $12 million in cash, and has one of the best, if not the best, geological teams in Nevada, That's value you canít get, especially if you have a labor shortage. Miranda has a low cash burn because of their model, and the cash burn is not big enough for them to get into liquidity trouble. They have 12 to15 promising properties, which I visited last year. So, I believe that is one of the companies that is way too cheap at the moment.
I also follow another company, Sable Resources Ltd. (SAE.V). They have a mill built by DuPont in the late '80s for $100 million, which still has a replacement value of about $50 million. Their market value now is about $25 million, which makes no sense at all. They have completed initial underground development at the mine site and will be starting up the mill before the end of this month. They expect to generate cash flow of more than CAD 12 mil per year. TGR: Where are their properties?
HPS: Their properties are in British Colombia.
TGR: Whatís providing the million a month cash flow?
HPS: The ores they have from the late '80s and '90s. Unfortunately they are not "43-101"-compliant [National Instrument 43-101 is a law which sets conditions under which public exploration and mining companies are required to publish technical reports]; that may be the big thing affecting their stock price. I just had a talk with them in Vancouver a few weeks ago and said, "please spend $50,000 to complete the 43-101. Investors must know what you have, and if you want to be quoted at a fair price in the market, then you have to deliver information to the people making the market cap of your company." You have to deliver the information that they can see, that they can realize that youíre absolutely at a ridiculous level.
Another company I like is GoldQuest Mining Corporation (CDNX:GQC.V). Their properties are in the Dominican Republic, a politically stable island. One property, Piedra ImŠn, is right beside the Pueblo Viejo mine (18.1 million ounces of gold and 88 million ounces of silver), which Barrick and GoldCorp just bought for a billion bucks from Placer. GoldQuest is run by a young geologist, Alistair Waddell, a really great guy. It looks like they really just found a really interesting mineralization. Barrick and GoldCorp have great, big, huge open pits at Pueblo Viejo right beside GoldQuest, so that means itís just a matter of time until Barrick and GoldCorp say "letís take this property, too." Actually, Gold Fields owns under 10 percent of the GoldQuest due to a joint venture they are currently working on with them.
TGR: I would like to hear you talk a bit about other precious metals. Weíve talked a lot about gold and whatís happening and how itís going to affect the financial markets. Will we see a similar reaction in other precious metals or will they act independently of this crisis?
HPS: I am not a big specialist in these metals. I have to be honest that I missed the upturn in platinum because I was focusing on gold, silver, and base metals.
I think silver is very much underpriced because investors donít see all the potential silver has. A growing number of people think that it's an industrial metal, but I am not of this opinion. Lots of people think silver is not in big demand any more because itís going out of style for photography, since it isn't used in digital photography. But they donít see that silver is antiseptic; it has a huge potential in medicology or medicine.
In base metals, I am half-bullish, half-bearish. Everybody talks about China and India and how they have to build up a huge infrastructure. This is kind of true, but on the other hand, you have much less demand in America. And you also have China producing more goods, but many of those goods were produced before in Western countries, like Europe or North America. So, itís actually just a transfer of production. That doesnít mean they have more demand in China. But on the other hand, you have less demand in Europe, North and South America. So, you have to be careful about all this talk about China.
TGR: As far as your overall portfolio, what percent do you have in mining stocks, and gold itself?
HPS: The current breakdown is approximately 50 percent gold; 23 percent silver; and 5 percent uranium, which we going to increase. We have no soft commodities, and no oil and no gas. We own only metals. We also have about 8 percent in copper; thatís mainly through the big companies which have a certain part in copperólike Rio Tinto, BHP, or other companies, because copper is so often a by-product of kinds of gold.
TGR: So, if I add up these numbers, the rest I am assuming is in cash or the actual metals?
HPS: I just gave you a metallurgical breakdown; if I gave the breakdown by the size of companies, we have about 50 percent in large caps, because those are the ones that move at the moment, and mid caps are about 30 percent because those are the takeover candidates. We also look at companies that are newly producing. We donít like companies that are in the feasibility study stage, which costs a lot. When the companies are just going through feasibility studies, over maybe a year, then their stock isn't moving much. Then we have some small caps, which we reduced a lot because of what we discussed earlier. But I still have about 20 percent in small caps because I really like some pearls, like the three I told you, which are bargains, long bargains actually.
TGR: Thanks for giving us this overview. We appreciate your time. Any final thoughts?
HPS: Two things I can tell you that I always tell to my investors or to my potential investors: First of all, I like to eat bread, but I like to invest in the baker. I like gold but I like to invest in the producers. And the second one is a saying in German, my mother language. To translate it word by word: "Buy when the cannon shoots and sell when the angels are singing.Ē What we have now is pretty much cannon shooting.