Video ID:
8729
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6936
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Description:
Fund Manager, Ani Markova provides an update on the Smith & Williamson Global Gold & Resources Fund in this webcast.
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0|Global Gold and Resources Fund
100|Gold bullion performance
139|Gold: monetary stimulus
219|Positive on gold
321|Central bank net sales
341|China and Hong Kong
493|Cheapest valuation
849|Market cap breakdown
1178|Tahoe resources
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1997|Key risks
Duration:
00:33:29
Recorded Date:
13 December 2012
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Transcript:
Presenter: Good morning everybody and welcome to this Smith & Williamson Conference Call. This time we are focusing on our Global Gold & Resources Fund. My name is Nick Hodgson and I am asking the questions this morning, and I am absolutely delighted that Ani Markova, the co-fund manager for the Smith & Williamson Global Gold & Resources Fund, is here with me in London, joining us having just recently flown over from Toronto. Good morning, Ani.
Ani Markova: Good morning, everyone.
Presenter: Delighted that you can be here. 2012, I think we all know has been quite a challenging year for bullion and for investing in gold miners in particular. But let us try and be a little bit more positive and looking forward into the impending New Year, 2013. What sort of prospects do you see for bullion in 2013?
Ani Markova: I have to say that actually the bullion has really performed well this year; it is again the stocks that have struggled, leading to another year of very mixed signals in the market. But certainly looking into 2013, we continue to be extremely optimistic about the price of the bullion itself. If you look on page two, why are we so optimistic, because we have studied years going into the US elections and during those years generally speaking bullion and gold stocks go down, as you can see from the chart to the left, just so two sectors, the gold bullion and the equities, outperform in the year afterwards.
So we have just gone through the US election, we have also seen what the Fed, and heard what the Fed is going to do, if you see on slide three, this balance sheet will continue to grow. Yesterday Bernanke told us that he will print $85 billion a month just to keep on going until unemployment hits 6.5%. This is huge, this is enormous. We are talking about another close to 40% increase of the federal balance sheet, this is very bearish for the US dollar, and I do not think that the Fed is going to be the only one. I think the Bank of England will need to introduce more QE (Quantitative Easing); I think the ECB (European Central Bank) will have to print more money.
So we continue to be in this environment of global easing and we will keep on going until some solid traction appears on the global economy.
Presenter: Yes, and of course apologies to the Canadian contingent of course for taking your current central bank governor, and he will be coming around the corner just literally from here in his new role next year. Let us go back to bullion and talk about what has been happening in India, because there have been changes to the Indian import tax policy, and that has had an impact on the physical bullion market. Have we seen any offsetting factors such as central bank purchases this year to temper that?
Ani Markova: Yes. India, as everybody knows, is a very important player in the bullion market, and earlier this year there was an increase in tax of about 4% on the bullion imports, and certainly there was a buyer strike and that led to a very rough first half of the year: a third of the Indian imports dropped in the first half of the year.
Now that trend reversed a bit in the third quarter where we have seen about 9% increase in the jewellery demand in the country, and a bit of a restocking, and that on the margin helped within the September/October timeframe in terms of the physical demand of bullion. But overall year-to-date India is still down 24% and I really do not expect India to recover strong trends and outperform into the fourth quarter; however what has happened is we have seen a solid demand from central banks. As you can see here on our page four, this is roughly where the current central bankers keep their bullion in terms of percentage of their foreign reserves, and you can see China is still showing close to 2% of their foreign reserves being in bullion.
Now something very interesting has been going on, you can see on page 5, the central banks really have come back and continue to be a very active purchaser. We have seen a massive demand now of the central banks year to date as you can see; we are tracking to meet or even exceed last year’s central bank purchases; and I think that it is very possible that we are going to meet those numbers and probably have another 500 net purchases this year. But also what has happened is China has been importing a significant amount of bullion. In the past several months I mean China imported more than 500 tons, and compared to the Bank of England, who only keeps 310 tons.
Presenter: Yes, I am sorry about that. We had an old Chancellor who then became a Prime Minister who did something about our gold bullion.
Ani Markova: This is very massive, and I am speculating here that because we know the jewellery demand in China has been weak because of the slowdown in the economy, some of this imported bullion is perhaps going in central bank vaults, and we have not heard an updated number from the Chinese central bank; the number we have dates back to 2010. So I suspect some of this volume will probably show as an updated number for the Chinese central bank bullion purchases.
Presenter: So intuitively you would expect further buying by the Chinese as a huge sort of demand driver if you like for bullion?
Ani Markova: Absolutely, and I think this is very, very important for everyone to understand. They do have now a goal of diversifying their foreign reserves, and they do have a desire to have renminbi as a convertible currency. And if that is the case, if they decide to even match the US bullion holding, that would take about three years of global mine production to meet that expectation. I mean we know that China is the number one producer in the world and no gold leaves the country. So there is a pent up demand here for the bullion and to be honest I much rather be a buyer of bullion when China is buying, because they must think prices are really low right now compared to where we are headed over the next few years. So, stay tuned, I think there are some very big catalysts ahead of us and some of them will play out in 2013.
Presenter: And that is a fascinating backdrop against the prospects next year for gold mining shares, for gold equities. How do you see that? What do you feel is the outlook for gold miners in 2013?
Ani Markova: Miners in my opinion are in a confidence rebuild stage. Disappointments with costs and capex escalations, political uncertainty and operational challenges have led to compressed valuations. I mean stocks are now as cheap as they were 12 years ago, before the run up in the gold price, and they trade as regular stocks. I mean when I look at a company that has cash, a price to cashflow multiple of 8 to 10 times and P/E of 10 to 15 times, you can just forget about it is a mining stock; I mean it is a business and it is easier to evaluate it now on its own fundamentals and cashflow generation.
I think this year has illustrated also that all these mining stocks are in a build-up mode and a lot of capex has continued to be spent for new project development, and we have not seen a massive free cashflow generation out of the sector, and that has been the challenge. Now, looking forward, a lot of these projects will be completed either early next year or the year after, and with a slight move in the gold bullion price there is a very big delta here in the free cashflow generation which will bring back the interest in shareholders.
I am optimistic that management teams have learned from shareholders that we need to see better controls on cost, better decision making and project decision and management. We have seen changes in CEOs in the past twelve months; we have seen turnover in operational teams in various companies. So I continue to be optimistic about the sector, and again it will be very company specific selection that will add value here, because not every company will continue to manage their company as a business, and that is what I am looking for, well-run businesses with good cashflow generation and return on invested capital.
Presenter: And a sense that there is a slightly more mature attitude being taken by management to reflect investors’ demands, such as your own?
Ani Markova: Absolutely, I mean we continue to hear that some projects will be deferred because the returns are not there or the economic conditions or sociopolitical conditions are not favourable. We continue to hear increases in dividends; for example Agnico increased their dividend last night by 10%. We hear about other companies that they will distribute cashflow, but acquired through sale of assets as dividends and share buybacks. I mean those are the things that are really of interest to shareholders and the companies are paying attention. I think that with a very small change of gold price we are going to see a very big outperformance here in the equities, just because they have been so depressed. And let us not forget this is not a big sector. The market capitalisation of all the gold stocks is much less than the capitalisation of Apple, so small movements in the flow of funds here could lead to very big outperformance.
Presenter: Interesting bit of context there with that certain technology stock. Well, what about gold royalty stocks, they have had a pretty good year, what are your views on them?
Ani Markova: They have had a fantastic year, and I am proud to say that a company like Franco Nevada, which is one of our top ten stocks, has been up about 43% this year, compared to an overall equity index which has been down 18%. This is a massive outperformance and certainly the royalty model has attracted a lot of attention. Investors do not want to be concerned about managing companies with various political exposures, and certainly we've heard so many governments want to increase royalties or taxations, or even have operational issues with cost escalations. And this royalty model offers increases in revenues from mines that come on stream without the headaches of running companies.
However those stocks are certainly quite expensive. Their valuations are, I would say, at very elevated levels and I would be cautious putting new money into them at this stage. However they do pay dividends and some of them really represent great opportunities. Actually, we recently added on a very sharp pullback a new position in a smaller royalty company, Sandstorm, and they are focused on smaller companies and smaller projects, so much easier to grow, as growth will be a challenge for the larger companies. It is difficult to bring those big massive deals year in and year out.
So I think that those models will do well, especially in a volatile market where our investors are more risk averse, but I also see a lot of other opportunities on a valuation basis outside the royalty space.
Presenter: Great, now let us turn to the Fund, the Smith & Williamson Global Gold & Resources Fund, and you very much adopt now a barbell approach to portfolio construction. Why is this, why have you gone down this route?
Ani Markova: Well for more than 12 months now we have had this roughly barbell strategy, and on the next slide you can see roughly the split between large caps, mid caps and small caps. Now investors need to add about currently 6% of bullion holding to the large cap names just to understand in terms of liquidity how we manage the Fund, and it has been very, very crucial to maintain that because of what has happened on the macro scene and the volatility that we have experienced in the equity markets. And I think that has helped us preserve value and actually capture some of the upside in some stocks that we have emphasised.
This is also something which perhaps gives us a better solid positioning, and now within that barbell strategy we can emphasise within the small cap range, smaller producers, and look for the names that will move upwards here in the mid-caps range, companies that are going to be delivering projects next year or through acquisition there will be an increase in capitalisation going forward. So we are comfortable with that split. We may see a little bit of change, but it would not be dramatic over the next little while. And we recently, I think in the past couple of months, opportunistically, we have been adding more on the small cap space.
Presenter: Right, but have you actually reduced the number of stocks in the portfolio during the course of the year?
Ani Markova: Yes, we have. We have taken a very close look at all of the names and certainly there will be challenges faced, the junior space in terms of financing their growth and their existence, and financing right now is very challenging for them. But in that environment we have seen acquisitions. I mean companies that generate cashflows and look for growth are looking down at that junior space and really are focused on projects, and if a junior has a good project, that junior gets acquired. And we have seen several of those acquisitions this year.
Presenter: Yeah, I was going to say, there has been a certain amount of M&A going on already, do you expect that to continue into 2013?
Ani Markova: Absolutely. I mean this year within our portfolio we have seen companies disappear such as Avalon, Primero, Hannah Mining, Quinceton and PMI. I think that into 2013 we will continue to see acquisitions, and again those are going to be very much project related. So companies with good assets will be desirable, not only for investors but for corporates as well. We may also see some other transactions such as the recent PMI Keegan merger of Equals announcement. I think that is also a potential outcome for all these juniors that do not have enough resources on their own but perhaps they can leverage each other’s trends to go forward and build their projects one at a time. I would not certainly exclude any large company acquisitions, but I do not believe it will be a merger amongst the seniors; it is going to probably be perhaps senior or mid tiers acquiring more downstream assets.
Presenter: So there is an element of almost a sort of special situation exposure within the portfolio at the moment to reflect that view?
Ani Markova: Absolutely, yes.
Presenter: Okay. Well the conversation so far has been entirely about gold, can we talk about the silver market? What is your view, how do you see silver progressing in 2013?
Ani Markova: I am optimistic about the metal, despite expected weakness on the industrial offtake. As most of you know, about 50% of the demand for the metal is industrial, and depending on where the global economy nets out, certainly it will be positive, negative or flat driver for the demand of silver. However, silver has been moving recently in line with gold, and it does tend to outperform gold in strong markets. So, as a precious metal investment, I certainly believe silver will outperform in the short term the gold bullion, and I am watching it very carefully because as I mentioned it is quite volatile. So we have to be prepared to lock in gains the moment we see again gold to silver ratios getting stretched the way we did see it a few years ago. But we have increased our exposure to silver; we effectively have about 19% exposure now to silver; and silver companies, which actually have a little bit better fundamentals than the gold stocks, just because they now have a higher margin and cashflow margin; and certainly there are some exciting stories there as well.
Presenter: And one of those exciting stories is Tahoe Resources, which is certainly in the top ten of the holdings in the Fund, and one I know that you are very keen on for next year.
Ani Markova: Absolutely. Well this is an example of a stock that illustrates our investment style. We are generally long term investors and take part in the value creation of companies from early stages to production, and an example of that is Tahoe where we invested at IPO level and we have been patiently awaiting the production which is expected mid next year. So after they start producing with an asset in Guatemala, this will be one of the highest grade silver mines in the world. I mean that speaks to the quality of the asset as well, but we have confidence behind the management team: this is the Goldcorp management team.
These are the guys who build Marlin in the same country; these are the guys who have built mines many, many times before; and they are awaiting their last operational permit any day now. And certainly delivering this project on time, on budget and be able to generate phenomenal cashflow from it with upside from exploration, this is the sweet spot. This is our core holding; we have been a patient investor in the stock. I mean we have already had a threefold return on our investment, and again I cannot be happier with an asset like that where I am happy to hold it over the long term.
Presenter: No stock tipping there, but certainly you expect it to perform well in 2013.
Ani Markova: Absolutely.
Presenter: In terms of the top ten holdings in the Fund, as you can see Tahoe is the eighth largest holding, but any other comments you want to make about the main holdings that we have got in the Fund at the moment?
Ani Markova: I am really excited about all of these stories. We see major catalysts. For example B2 Gold is a story we have held again for many, many years, and it is one of the fastest growing small caps that is about to graduate to go into the mid cap category. The management team has again long term experience building and running mines and making new discoveries, and they recently made an acquisition in the Philippines which again will have higher yield for them, but this is not the end of the story.
They know how to run a business, and everything is approached as a business. The management is a very large shareholder here as well, and so our interests are aligned, and I am very optimistic about the future of that one. And, again, companies like Agnico-Eagle that continue to deliver, and assets are in the Americas and Finland, I mean this is a very stable producer with great prospects. Eldorado is building mines in Greece, and they have exposure to mines in China and Turkey and Brazil. Again, I visited the assets in October and I think that there is a bright future there. They just have to get through the regulatory environment in Greece and deliver on the mines they started building.
So again, very optimistic about the future, it is again execution, execution, execution on all of these stocks and we have comfort with the management teams and the capabilities inside the companies, it is so crucial that now mining companies illustrate that they can do the job on their own.
Presenter: And of course the largest holding continues to be the Central Fund of Canada, which is your mechanism for getting exposure to physical gold and silver.
Ani Markova: Yes, absolutely. I mean this perhaps will get diluted down as we continue to invest in more stocks as we believe at this point the stocks represent a better valuation, but there will always be room in this portfolio for the bullion itself.
Presenter: So how would you summarise prospects for 2013? How do you feel the market and the prospects of the Fund ought to be for next year?
Ani Markova: Stay tuned! I think that there are great opportunities, now is the time to consider any exposure to the sector. Again, with the backdrop of a very challenged macroeconomic environment, where governments around the world in the past 15 months have triggered more than 300 easing policies, where we still see challenges with the geopolitical uncertainty and we see more printing globally going on, I think bullion is going to be, and precious metals overall, it will be a category that could outperform, and stocks have a great opportunity here to show their leverage. And I am optimistic about the dividend distribution, I am very optimistic about the execution and the delivery of new projects, and I think all the bad news is behind us.
Presenter: Excellent, Ani. We have had five questions from listeners, so we will just crack through them if we may. Firstly, historically gold has been a poor hedge against inflation, will this be different in the future?
Ani Markova: It depends on the timeframe you are talking about. Actually, if you look at the ’70s, it has been a fantastic hedge of inflation, and I believe that bullion moves 12 to 18 months ahead of inflation, and that is why you have to be careful as to which periods you are talking about. But in terms of the debasement of currency that we continue to see, I mean this is the only asset that you cannot print, and certainly in terms of preserving wealth and preserving fair value, it is probably the only one tested asset class in the world that is a reserve asset, that I believe will continue to show those characteristics.
Presenter: Excellent. Here is another one: why are central banks buying bullion; is it to weaken their currencies?
Ani Markova: It has more to do with what currencies are they holding and what is their comfort with the long term outlook of those currencies. It is called reserve diversification. Some counties, especially the emerging countries that are buyers of bullion right now, they hold too much US dollars and euros, and obviously their belief is that those currencies are perhaps not the ones that will preserve value over time. And it is a prudent management to diversify your holdings. So this is what I think is going on, the realisation that major reserve currencies like the US dollar, the euro, the yen, they do not have good fundamentals, and they are turning to the bullion itself as a reserve currency, as a reserve management tool.
Presenter: The third question, what do you believe are the reasons for the current governor of the Bank of England suggesting a scenario to be cautious on gold purchases? Is this because of the possible compression of prices going forward?
Ani Markova: I am not quite certain what you mean by that question. I am optimistic..
Presenter: I think it is comments that we have had by the current Governor, Mervyn King, of being very cautious on gold purchasing.
Ani Markova: Well, certainly he did not do any gold purchasing, so he will be talking down, you know, or talking along the side of his strategy. I actually differ. I do not think this is going to be about the compression in the price of bullion. I mean down the road perhaps all these ETFs that investors have purchased, if everybody starts going for the exit, they may create a bit of a selling pressure, but I do not think this is an immediate threat and risk to the price of bullion. It is not in our investable horizon. Yes, it is a risk and it is a bigger risk when real interest rates start going higher. Right now we are in an environment where we continue to see negative real rates, and when for example you have to pay money for the Swiss banks to hold your money, I mean where else would you put your wealth to preserve it over the next few years, where we are going to see some very big stresses continuing in the system.
Presenter: Indeed. Here is another one, a question we certainly get asked from time to time. A year ago, Smith & Williamson was saying that gold stocks were cheap and good value compared to bullion, you are still saying that today and yet clients that have been in for the last year are nursing big paper losses: why is it different this time?
Ani Markova: Well because they continue to be cheap and going cheaper every day – it is probably not the answer you would like to hear. I have been through a lot of conversations with management teams about what has been done, and why we are seeing all these massive selloffs. The market is not very tolerant for processes that are related to mining: mining takes time. It takes time for the drilling to be completed, for the permits to be obtained, for the mine to be built, and for the cashflow to come. With certain missteps that we have seen operationally, there have been disappointments in terms of meeting guidances or cost escalations or capex escalations, and I think this year has been perhaps the worst of all that I have seen in this cycle. And we have seen changes in the leadership of a lot of those companies for that reason. So it will take a little bit of time to rebuild; as I said in my comments, this is a confidence rebuild time; and perhaps we have hit the bottom this year, again.
Presenter: And we already talked about a more mature attitude from management as well, that you discovered during the course of this year.
Ani Markova: Absolutely. It is all about the returns now; it is all about the cashflow; it is all about preserving capital and giving it back to shareholders.
Presenter: Last question, which is very relevant to certainly the UK market in the sense of utilisation of different vehicles in portfolio construction for clients: is the divergence between gold equities and bullion a structural change in demand due to the rise in popularity of gold ETFs?
Ani Markova: I think we have established that a couple of years ago, yes, I mean there has been a structural change. And I think that is why we will never see the gold stocks at three times their net asset values the way they used to trade before the ETFs. I think the ETFs have definitely taken away some of the cashflow that has typically gone into the sector in terms of the investment demand for that category. I think that there will be an opportunity here for both to move higher. Again what stocks are not reflecting is again the option value of the ounces they have in the ground and the dividend distribution that they can offer. This is something that really gets priced in where we see much more meaningful movements in the bullion, and bullion has been in this sideways consolidation pattern in the past two years.
Everybody needs to understand that gold is a very rare metal, and now we are mining grades that are at twice as low as they were in the ’90s. We have mined all the high grade gold in the world; now we are scraping a lot of dirt to make money producing gold, and it is challenging. It is very challenging, and that is why investors do need to recognise this option value that the stocks would give them, and that is the ounces they find and continue to replace, and give them the growth in their holdings vis a vis the bullion, the ETF, which would only reflect the current price of the commodity and nothing else in terms of the optionality.
So that is why I continue to think that the stocks will be a good investment vehicle, and we will manage that accordingly as we see opportunities, if they get expensive again, we will shift back into more bullion and other safer investments. But right now, where we stand, there is a great opportunity for the sector.
Presenter: Great, Ani, thank you very much indeed for answering the questions. And that brings to conclusion our conference call this morning, we have got the disclaimers coming up now, and of course investments as we know can go down as well as up, and the future cannot be guaranteed. But Ani, can I thank you very much indeed for joining us, thank you for spending the time with us here in London this morning, delighted that you are over. Can I thank everyone for their questions and for being able to join us on the conference call today, and finally can I wish everyone season’s greetings and a very pleasant break and a very prosperous 2013, thank you very much indeed.
Ani Markova: Thank you very much, and best of luck for everyone in 2013.
Key risks
• Investment does involve risk. The value of investments can go down as well as up and investors may not receive back the original amount invested.
• Equity (stocks & shares) investment is subject to specific risks relating to the performance of the individual companies held, the market’s perception of them and systematic risks such as general economic conditions, interest rates, foreign exchange rates and industry sector risks. In general terms, equities tend to be more volatile than bonds.
• The Fund invests substantially in mining stocks in Canada.
• The price of gold and natural resources in which the fund invests may be subject to sudden, unexpected and substantial fluctuations that may lead to significant declines in the values of the shares concerned and therefore the value of the Fund.
• The Fund has exposure to commodities through its investments in mining and mining-related companies. The risks associated with the commodities sector may be greater than other investment sectors.
• The Fund may from time to time invest in substantially only one country and will therefore have greater exposure to the market, political and economic risks of that country than if it was more diversified across a number of countries.
• Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems.
• When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.
• Investments in smaller companies may involve a higher degree of risk as markets are usually more sensitive to price movements.
• Investments in higher yielding bonds issued by borrowers with a lower credit rating may result in a greater risk of default and have an adverse effect on income and capital value.
• Investments in lower rated and unrated securities may be more volatile than higher rated securities and therefore represent a higher risk to capital.
• Past performance is not a guide to future performance.
• Investment is subject to documentation (Prospectus, Simplified Prospectus and Terms & Conditions), copies of which can be obtained free of charge in English online at www.sandwfunds.com
Smith & Williamson. Smith & Williamson and Asset.tv Ltd accept no liability for any loss arising from the use hereof nor make any representation as to their accuracy or completeness. Any underlying research or analysis has been procured by Smith & Williamson for its own purposes and may have been acted on by Smith & Williamson or an associate for its or their own purposes. Smith & Williamson Investment Management Limited is authorised and regulated by the Financial Services Authority.
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