Junior Mining Companies That Will Make Beautiful M&A Music: AgaNola's Florian Siegfried

Florian Siegfried, head of precious metals and mining investments with Switzerland-based AgaNola Ltd., knows where the music is playing in the mining M&A space. In this interview with The Gold Report, Siegfried notes that well-financed juniors with low production and capital costs, or intermediate cash-flowing producers, will be hitting the M&A high notes, and suggests a sextet of companies capable of making beautiful music.

The Gold Report: As of Aug. 1, 2014 the SPDR Gold Trust ETF (GLD) was up about 7% year-to-date, while the Market Vectors Junior Gold Miners ETF (GDXJ) was up about 30% and the Market Vectors Gold Miners ETF (GDX) was up about 22%. These are generally considered proxies for gold and gold mining equities. Is the mining sector bear dead?

Florian Siegfried: We have to distinguish between the short term and medium term and take an overall picture of where we stand. Gold has found a floor at the $1,280/ounce gold ($1,280/oz) level, which is encouraging for the short term. If we are in fact in the late stages of a good basing action in gold, that means the speculative money will go back not only to the metal, but also mining shares in anticipation of higher gold prices.

If we move below $1,280/oz in the short term, the bears will remain in the driver's seat for at least a few weeks, perhaps months.

TGR: And in the medium term?

"Asanko Gold Inc.'s world-class deposit is on the radar screen of many companies."

FS: If we see a continued rotation out of broad market equities and into precious metals then I would say, yes, the bear is dead. An encouraging sign that the bear is indeed dead is that gold is rising against the U.S. dollar and precious metals shares are largely outperforming the metal itself. This is encouraging but it doesn't yet confirm anything.

TGR: If the gold price falls below $1,280/oz, how many months could the bear stick around?

FS: Midcycle corrections in gold tend to last up to four years. It has been more than three years now, probably 3.5 for the miners. I wouldn't be surprised to see a sideways trend for the next six months, if we go by past cycles.

TGR: Share prices seem to be getting ahead of metals prices. Do you expect that to even out or continue?

FS: If we see continuing weakness in equities and bonds, this rotation into precious metals will continue. But if we see heavy liquidation in stocks and rising yields in the junk bond market as liquidity evaporates, precious metal shares will not outperform gold because the sage money will primarily go into gold itself. As long as we remain in this rotation, I would expect shares to outperform the metal in the medium term.

"Victoria Gold Corp. continues to drill and make higher-grade discoveries in its Olive zone."

TGR: Some of the companies that you follow are performing well year-to-date: Kirkland Lake Gold Inc. (KGI:TSX) is up 60%, while Lake Shore Gold Corp. (LSG:TSX) is up about 170%. What do those companies have in common?

FS: Lake Shore Gold and Kirkland Lake are turnaround situations. Lake Shore Gold was extremely oversold last year and the stock was trading at $0.16/share in June 2013. Basically, it refinanced its business in 2012 before the gold price collapsed by raising the necessary debt and convertible debentures to improve operations. It stabilized the grade and costs went down.

Kirkland Lake is a similar case. The new management team has started to bear fruit. Kirkland is focused on fewer higher-grade stopes in order to reduce tonnage and dilution. Costs have gone down but it's an ongoing process. The expansion capital projects are basically completed, however, the balance sheet has little room for operational errors. Both stocks are performing better than the index year-to-date, but they also lost a lot in the downturn.

TGR: Are turnaround stories the sweet spot for precious metals investors?

FS: This is where you can have the best returns if the market continues to go up. It's about being selective and trying to find turnaround candidates. The problem is that many companies are cutting capital expenditures (capex) to reduce their all-in costs, which lifts profits temporarily but poses new problems in the longer run. Lots of stocks are 80–90% below their all-time highs and they're down for a reason. You have to find the ones that have stabilized their operations and that have sufficient cash to go through the restructuring period as they make operational progress. At $1,300/oz gold few producers make much money but they have leverage to the gold price. When the gold price shoots higher, these companies should become very profitable. You can still buy them at depressed valuations at this stage.

TGR: Let's go back to the fundamentals. Tocqueville Gold Fund's John Hathaway recently told The Gold Report that the bottom of the precious metals complex will be confirmed when gold trades above $1,400/oz. Your thoughts?

FS: We should see a close around $1,330/oz in the short term. That would confirm a breakout for me in order to see $1,400/oz. Gold has been trading sideways between $1,280/oz and $1,330/oz for several months. A breakout above this level would confirm the next leg up.

TGR: Mining is largely a sentiment driven market. What is the current sentiment among investors and money managers that you talk with?

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 Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining ...

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