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Florian Siegfried: Seeking Less Risky Business in Mining M+A

 -- Published: Monday, 24 November 2014 | Print  | Disqus 

Florian Siegfried, head of precious metals and mining investments with Zurich-based AgaNola, says there are small signs—fewer equities participating in the recent rally, greater spreads in the high-yield market—that the sentiment toward gold is changing. But we will have to wait to see if a trend forms. In the meantime, Siegfried believes all-paper M&A will gain pace, with a focus on companies that are making money at current gold prices while still trading at multiyear lows. In this interview with The Gold Report, Siegfried suggests playing it safe with some small producers and tiny developers.

Florian Siegfried, head of precious metals and mining investments with Zurich-based AgaNola, says there are small signs—fewer equities participating in the recent rally, greater spreads in the high-yield market—that the sentiment toward gold is changing. But we will have to wait to see if a trend forms. In the meantime, Siegfried believes all-paper M&A will gain pace, with a focus on companies that are making money at current gold prices, while still trading at multiyear lows. In this interview with The Gold Report, Siegfried suggests playing it safe with some small producers and tiny developers.


The Gold Report: When we talked in the summer, gold had found a floor at around $1,280/ounce ($1,280/oz). Where is the new floor?


Florian Siegfried: With a floor of $1,280/oz in August, the question was will it hold or not. Obviously, it did not. There could be even more downward pressure. The support level could be around $1,070/oz, especially given that the U.S. dollar has more upside. It could take a couple of months before we clear out the weak hands here.


TGR: What's going to bring upward pressure to gold prices in 2015?


FS: We need to see a change in sentiment in the overall markets. In September, equities were going up and the high-yield market was running wild. That was followed by a mini-panic in both equities and the high-yield market in October. Then we had a springboard rally in the equities, which was really substantial, but the high-yield market stopped reaching new highs.


There is a divergence happening now. Not all equities are participating in the uptrend, and there are rising spreads in the yield market. Things are not as robust as they were, which could also support the gold price at these levels. It doesn't confirm a trend yet, but gold is basically an investment that you want to have when liquidity is seeking a safe harbor. There are some small signs in the market that the sentiment is changing.


TGR: In late October, U.S. Federal Reserve Chairman Janet Yellen announced the end of quantitative easing (QE). Did the gold price react the way you thought it would? Could it have been worse?


FS: The Fed officially announced the end of QE, but when we look into the Treasury International Capital (TIC) report, there is a large sovereign entity in Belgium that has become the third-largest holder of U.S. Treasury securities after China and Japan. We don't know who the buyer is, but obviously Russia is dumping Treasury bonds, and with current oil prices the Organization of the Petroleum Exporting Countries (OPEC) has much less capital to recycle into U.S. Treasuries.


It's puzzling to know how ending QE is going to work. Officially, it worked: the dollar went up and gold tanked. The problem is that the Fed is tapering into economic weakness. As a result, my suspicion is that the zero interest rate policy is going to stay, and we will see yet another round of QE. One of these days gold will react to this central-planning recklessness. So far, the market has perceived the Fed's move as a rising-dollar scenario, probably a rising interest rate scenario, too, but I don't see interest rates rising any time soon.


TGR: What's a realistic trading range for gold in 2015?


FS: In a really bearish scenario gold could hit $970/oz. I would say that's the floor. We could see some more downward pressure before the end of the year, but it's difficult to make predictions because basically every market is somehow manipulated and managed. I wouldn't be surprised to see gold at $1,400–1,500/oz in 2015 but if central banks step in and keep pushing equities higher, as they did this year, then $970/oz is more likely. But when this price-fixing scheme comes to an end, there will be some kind of a reversion to the mean for all asset prices.


TGR: In August, you talked about the continued rotation out of broad market equities into precious metals. Would you suggest that the process has stalled?


FS: We had a severe break in equities in October but the rebound has been impressive. That rebound has pushed money back into equity markets and has taken some air out of precious metals. Gold is down in U.S. dollars, but in most other currencies, it's up. In Swiss francs, euros and yen, gold is up year-to-date. Should deflationary pressure mount, I think we could see a continued rotation out of the equity and high yield markets into liquidity, namely short-term government bonds and gold. I think this process has not stalled.


TGR: Do you expect mergers and acquisitions (M&A) to be a major theme in the gold space in 2015?


FS: Yes, definitely. I think two types of deals will dominate M&A over the next while. First, midtier producers will buy cheaply valued advanced exploration or development companies at roughly a 50% premium in all-share deals. These deals will not be material to the larger companies—they are essentially buying optionality for their project portfolio, which is smart. This is the time to do so.


The other kind of transaction will be mergers among equals, mostly as acts of desperation. How else will these companies get to the critical mass that excites more shareholders? I doubt most of these deals will create value over time because there will be little operational synergies among these companies.


TGR: Are these all-paper deals the blueprint for future deals?


FS: Yes. Every company that has a decent share price can use shares as a currency without spending valuable cash. Every CEO who is prudent will not use cash for M&A at these prices. As for the target companies, those CEOs are executing a takeover bid from a solid producer, so they get something. They would probably prefer quality shares to cash. That way there is a chance to benefit from the upside once the cycle turns.


TGR: Are companies with polymetallic assets more likely to be targets?


FS: Probably not in the current environment because base metals and iron prices are all down. The trend is down and that is likely to continue. If you are positive on base metals, the dance would be different. But selling those kinds of assets in this market is rather tricky.


TGR: What words of wisdom do you have for investors in the gold space?


FS: I would still play it safe here. Look for producers that make money at these prices to protect your downside risk—as long as those companies have little chance of issuing new shares. Also, have a look at selective exploration and development stocks that have done well this year. A few stocks are up 20–60% YTD based on progress on fundamentals.


I would be reluctant to buy into any company that is high grading at these prices to survive. If companies mine their best deposit at current gold prices at small margins, those firms are basically giving away their upside when the cycle starts to turn upward. I would rather see those companies shut down and wait for better prices.


TGR: Thank you for your insights, Florian.


Florian Siegfried is head of precious metals and mining investments at AgaNola Ltd., an asset management boutique based in Switzerland. Previously Siegfried was the CEO of Precious Capital AG, a Zurich-based fund specializing in global mining investments. Prior to this Siegfried was CEO of shaPE Capital, a SIX Swiss Exchange-listed private equity company that was founded by Bank Julius Baer & Co. Siegfried holds a masters degree in finance and economics from the University of Zurich.


The Gold Report


1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor.
2) Streetwise Reports does not accept stock in exchange for its services.
3) Florian Siegfried: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
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