What to buy—gold or gold shares? While many argue that bullion is the better investment, Peter Zihlmann of P. Zihlmann Investment Management makes a compelling case for gold shares with a focus on junior miners. In this exclusive interview with The Gold Report, Peter explains how gold shares have actually outperformed the yellow metal at a ratio of 5-to-1 since the start of the bull market.
The Gold Report: In Sierra Madre Gold & Silver Fund's Q1'09 quarterly statement you state, "Junior gold and silver mining companies are at bargain levels." Can you talk about your outlook for gold, and why you think the juniors are bargains?
Peter Zihlmann: Gold and gold shares do not move in a parallel fashion. Sometimes gold is leading, and at other times the gold shares lead. Gold shares over the long term show a far better performance than the metal—in fact, since the start of the bull market, gold shares have outperformed gold at a ratio of 5-to-1. We not only believe the long-term up-trend for gold is positive, but also that technical indicators for equities are improving and indicate a heavily oversold market.
The HUI Gold Bugs Index, which represents a portfolio of 15 major gold mining companies, recently dropped to its 2002 level, when gold traded between $250 and $350, but has since regained almost 115%. Gold stocks are now outperforming gold; however, many companies are still trading for the value of their liquid assets.
We are not surprised that the gold shares are moving up strongly, outperforming gold, because they had fallen to an unrealistically low level based on their outlook for earnings, production or reserves. Gold and silver shares were sold indiscriminately when the financial crisis erupted. Sellers totally ignored the fundamental aspects in selling their shares; they just needed to raise cash.
The NAV of our Fund, The Timeless Precious Metal Fund, increased 1.0% in April 2009. The price of gold went down 3.2%, while the price of silver receded 4.2%, respectively. I think it is significant that the NAV of the Timeless Precious Metal Fund, which seeks out junior miners to add to the portfolio, went up in April while the majors represented by the three indices dropped by about 8%. This shows that the juniors have been catching up. However, many still remain at their 2002 level, even though the price of gold has increased by 250% and the price of silver by 175% during the same period.
TGR: Why do you focus on junior minors instead of major producers in your portfolio?
PZ: Juniors have more price appreciation potential compared to majors because it is easier for them to increase reserves or resources, while the majors struggle to replace what they produce. Majors are expensive, too, because the juniors are too small for big institutions to buy them, so the big money goes for the majors. As a junior grows into a mid-tier, more big money can invest in them.
TGR: There are several junior miners in your portfolio. What are your criteria for including companies in your funds? And what's the difference between your two funds?
PZ: Other funds often invest in physical gold or major companies. Since it is easy for an individual to buy physical gold, he does not need a fund to do it for him. It is also easy for anyone having an interest in this sector to buy a few major stocks. It is difficult, however, to put together a portfolio of juniors for many reasons, including lack of funds for proper diversification, lack of time to select and follow companies, no personal access to management, or no possibility to visit mine sites.
What are our criteria in selecting companies? We believe value is created through discovery of mineral deposits and bringing them into production. A large portion (80%) of our Portfolio is composed of producing companies, companies approaching near-term production and companies that have already drilled-up a significant resource (1 million ounces to start with). These latter companies have decided not to go into production, in spite of having substantial mineral reserves. Their aim is to prove up a substantial resource in the hope that one of the majors will take them over—at a substantial premium to the cost of exploration.
TGR: As a European, do you believe your investment strategy is different from most North American fund managers?
PZ: It may be that North American funds concentrate more on North America. On the other hand, one of our funds, The Sierra Madre Gold and Silver Venture Fund, concentrates on companies that only have properties in Mexico, one of the highest rated mining countries in the world.
TGR: I see you own companies with properties in various jurisdictions. Do you look for companies in specific countries, or is it more about management, or simply ounces in the ground?
PZ: Management is of upmost importance because good management can obviously manage all the risks associated with mining. For example, there are lots of ounces in the ground in Africa but we tend to stay away because of the political problems. One company, operating in Tanzania, was recently victim of an armed robbery.
TGR: Can you give us an overview of your favorite companies?
- Orko Silver Corp. (TSX.V:OK) - has been steadily increasing its silver deposit in Mexico and has drilled up a resource of more than 200 million ounces of silver and it keeps growing. Their recent agreement with Pan American takes away many of the funding risks that a company that is not in production has. And Coeur d’Alene Mines (NYSE:CDE) recently completed the purchase of Palmerejo for US$1.1 billion and paid $4.45 per ounce of silver (Ag-Eq oz). We believe a share price four times higher than the present will become reality one day.
- Romarco Minerals (TSX.V:R) - has purchased the historic Haile mine in South Carolina where they are on the road to a 5 million ounce gold deposit, which may grow much bigger.
- Great Panther Resources (TSX:GPR) - operates the great historic mine in Guanajuato, Mexico, where more than 1 billion ounces of silver has been mined. Great Panther believes that this deposit could contain another 500 million ounces. Nevertheless, it will take a higher silver price to explore aggressively.
- Minefinders Corporation (NYSE.A:MFN) (MFL.TO) - Minefinders has a bright future. They have a resource of more than 5 million ounces of gold and 250 million ounces of silver. In addition they have more than $20 million in cash and more than $20 million in working capital, plus positive cash flow.
- Gold Resource Corp. (OTCBB:GORO) (FSE:GIH) - has a high-grade gold deposit (10g/t) in the state of Oaxaca, Mexico. Starting production during the first half of this year, they will generate a significant profit, of which one-third is expected to be paid out in dividends. We believe that the market does not recognize the potential of this company.
- West Timmins Mining Inc. (TSX:WTM) - has great properties in Mexico and West Timmins where recent excellent drill results have been announced.
- Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK) - One of the premier silver producers in Mexico with an appetite to grow quickly into a mid-tier producer.
- Pediment Gold Corp. (TSX:PEZ) (OTCBB:PEZGF) (FSE:P5E) - already has a resource of 1.45 million ounces of gold and good exploration potential in one of the best gold belts. Mine construction is scheduled for 2010.
- SilverCrest Mines Inc. (TSX.V:SVL) - should be in production this year and set the ground for further rapid expansion in Sonora, Mexico.
- Rubicon Minerals Corp. (TSX:RMX) (NYSE.AMEX:RBY) - is uniquely positioned among junior explorers in the marketplace with an advanced 100%-controlled project (Phoenix Gold Project) and large camp land holdings under option to Agnico-Eagle Mines Ltd., Solitaire Minerals Corp. and Redstar Gold Corp. Armed with a significant treasury, Rubicon plans C$25 million of drill focused programs in Red Lake in 2009.
In 1994, after working for various banks, Peter Zihlmann founded the P. Zihlmann Investment Management Company in Zurich, Switzerland. One of his specialties is precious metals and mining shares. He manages numerous funds through his company Timeless Funds . The Sierra Madre Gold and Silver Venture Fund concentrates on precious metals companies mining in Mexico, and the Timeless Precious Metal Fund, which seeks out junior miners to add to the portfolio.
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