Montag , 25 Mai 2020

“Mining sector is due for a huge re-rating”

The prices of Gold and Silver are under pressure – again. How you can still turn a profit by investing into producers and exploration companies, reveals Terence van der Hout of the Dutch based Commodity Discovery Fund in an interview with Das Investor Magazin.

Investor Magazin (IM): Terence, thank you for taking the time to discuss the current state of the exploration and resource market with us. Although Gold and Silver are up for the year, the TSX-Venture is trading close to an all-time low. Why haven’t we seen an overall market recovery yet? 

Terence van der Hout (TvdH): Thank you for the invitation.

The demise in the sector has coincided with unprecedented rounds of fresh money pumped into the economies. This money made its way towards the S&P, rather than into hard assets as one would have expected in an increasingly financially risky environment. As a consequence, the S&P has risen to record highs whilst the global economy has continued to suffer from the debt and currency crises.

Gold has been on a down-trend since 2011, a trend that appears to be levelling out, but there is as yet no apparent sustainable upwards movement. So investors have not had definitive proof of a break out, and perceive any upward movement with skepticism. Is this yet another false move?

You have to bear in mind that the current down trend in the PM stocks is the most severe in the last 10 years. Many, many funds have been forced to exit as investors have taken heavy losses. After causing heavy selling throughout the sector over the last few years, most have now moved off to technology investments, leaving fairly little investment interest in the sector. Confidence takes time to rebuild, and will only come if an uptrend has been established. Fortunately the HUI-index of the fifteen largest listed gold producers broke out of its down-trend since 2012.

IM: Have we seen or are we currently at the bottom of the resource cycle? 

TvdH: Both the HUI and the CDNX reached a low last December, at levels which were lower than the crash of 2008, when we were on the verge of a global economic meltdown. A patchwork solution has been found to this imminent catastrophe in the form of waves of financial liquidity. We are not in the same situation as we were then. Despite this, the two indices have not stood this low since 2002 and 1999 respectively, at a time when the precious metals markets were at the bottom of the previous cycle. We are now in the fifth year of a bear market, which is a long time, historically speaking. Even during the nineties there were some years when the miners were positive. Technically, we need to see gradually higher lows before we can safely say the bottom is in. We should expect a reversal to the mean, as this is what markets do, and this one is way overdue.

So does that mean we cannot go any lower? We have seen some very irrational moves in the price of gold, over the last few years, particularly since April 2013. The gold price is set by paper contracts on the Comex, a market which is now completely cut off from the physical demand curve, as almost no gold delivery takes place. It is mere speculation, and therefore prone to manipulation. We saw an unprecedented move in the gold price in April 2013, and have seen regular repetitions of huge rounds of contracts selling in thin markets. Not something investors seeking a return on their investment would do. Rational investors cashing in on their investments set price targets and sell at those levels. They don’t dump large volumes into illiquid markets at any price. These sellers are not investors, but extensions of policymakers with an interest in keeping public faith in ailing currencies. Any price rise in the precious metals would undermine this faith, therefore it is curbed by paper contract selling. This same controlled irrationality is still there, and can lead to lower valuations, if only temporarily.

On the fundamental side, we have seen unprecedented demand for physical gold bullion by China. Central banks have become net-buyers, and CB selling has dried up. We are seeing huge flows of bullion moving from London vaults through Swiss refineries, and onwards to China. 1,500 tons is being imported into China annually. Added to this India’s 1,000 ton demand, the total demand from just two countries is more than the current world mine production of a good 3,000 tons. This Chinese demand, experts say, is just retail. The PBOC itself does not report its gold purchases, though we suspect they are substantial, as China has repeatedly stated it seeks a stronger role for the Renminbi in international finance, one which has to be backed by a substantial gold reserve. So the demand for physical gold is extremely high.

Looking at the supply aspect, the recent drop in the oil price has taken down the cost of mining, but despite this, many companies are struggling to make money at these commodity prices. Some mines are closing already, and many are beginning to high-grade their deposits, which essentially destroys part of their reserves. Companies have been focusing on cutting costs for two years now, and funding for new exploration has virtually dried up. This is hampering current supply, and will cause a supply crunch further down the road.

This is an explosive set up, and one which could burst once real physical shortages arise, as we saw briefly in 2011, when silver moved up to $50. According to our data, silver has been in a mine supply-demand deficit since 1990, and inventories are now at rock bottom. Will silver shortages be the trigger for a sharp rise in precious metals? Will silver break the Comex’ back?

IM: Almost 80% of your portfolio is invested in to stocks in the Gold and Silver space.  How did your fund develop in recent weeks and months? Did you shift focus into other areas, did you increase your cash position?

TvdH: We were up 16% in January, a similar performance to the best of our peers. This pretty much sums up how well we do in general. We keep track of 140 of our competitor funds, and are in the top ten best performing precious metals funds since our inception in 2008. So we are doing something right. During the golden years of 2009 and 2010, we were heavily invested in the junior exploration companies, a strategy that got us >85% annual performances because of the leverage these companies have to the underlying gold price. After things cooled down in 2011, we shifted our focus to the producers, royalty companies and ETFs, companies with assets that will never go to zero. This has shielded us more against the effects of the downturn.

We have been fortunate enough to have received a steady cash inflow from existing and new investors, who are all high net worth retail investors. Of the last 78 months, we have had net cash inflows during 67 of them. We have put this money to very good use in what we believe is an excellent market for acquiring quality assets at low prices. And this is what we have been focusing on for the last year. Culling the producers that underperform, and the hordes of underfinanced explorers that are on care and maintenance. We are now left with an all-star portfolio that we expect will excel as the sector returns to the mean in the next part of the cycle. Thus, our cash position has gone down, and we are ready for the jump. As said we also started building a sizeable position in oil.

IM: You mentioned specialty minerals, like lithium, cobalt and graphite. What do you expect from this space in the future? And in your opinion, is this market about to take off and why?

TvdH: Our strategy is to invest in the markets we believe will provide the greatest returns. We believe systemic risk due to the unsustainable global debt crisis and the policies of governments as a reaction to it, are the greatest current risk. A risk we believe can only be alleviated by a reset that involves a significant re-appreciation of the value of precious metals in the financial system.

But we see other trends too. Emerging market urbanization, particularly in China, will continue to support demand for copper, zinc and the PGMs way out into the future. Particularly the latter two metal groups are supply-constrained, giving room for large potential gains for the companies that possess them.

We also profited handsomely from the rare earth boom a few years ago, a market that has by no means lost its potential, in spite of the apparent lack of demand. Technology leaders have been taking down their stocks as a consequence of the price explosion in 2010 and 2011, but they are now running low. For a selection of the rare earths, shortages will lead to much higher prices in the mid-term, as they are irreplaceable in goods for which demand will continue to increase strongly. Again, selecting the very few companies that will produce them by that time should be profitable.

The latest trend is in energy storage, a trend that will have a much greater impact than the rare earths in terms of market value. Analysts believe that this market will become as big as the pharmaceutical industry. Two forms of renewable energy, wind and solar, will ‘disrupt’ the energy sector when aided by energy storage devices. The whole concept of centralized carbon-based energy distribution will become obsolete once people become capable of managing their own energy harvesting and distribution. This innovation has started with battery packs for electric vehicles, and will be accelerated by larger scale storage systems for individual houses, neighborhoods, and grid power. Tesla has been a great proponent of the recent surge, seeking to deliver the full service idea of harvesting (from solar panels), storage (household packs) and distribution (to your Tesla car, or to the grid). The whole concept is disruptive because solar technology innovation follows Moore’s Law, and gets ever cheaper and more efficient, whilst carbon-based centralized distribution becomes ever more expensive because of scarcity and inefficiency.

We are not quite there yet, as sales of EVs have yet to reach critical mass, and grid-scale storage is still in the testing phase. Things could go fast in the next decade, however, as solar energy will quickly become adopted because of its plummeting costs. And scarcity does play a role here too, in the sense that energy storage technology appears to be favoring the lithium ion battery, one which needs lithium, graphite and cobalt to function properly. Demand for these natural resources will increase enormously, again favoring the companies exploiting them.

IM: Coming back to the exploration space. You recently were able to celebrate the takeover of Probe Mines by Goldcorp. Your investment gained over 110% in little over a year. Tell us about your investment strategy and philosophy.

TvdH: The biggest potential gains are when a company turns its nondescript patch of land into a valuable asset by making a discovery. This is the zone where many Canadian investors are active. We avoid it. The risks are massively against investors here. The chances of making money in a downturn is virtually nil. We get in once various drill results confirm the potential for a large deposit. By then we will have missed a fair bit of the price appreciation, but our philosophy is not to have a tiny chance at attaining a ten-bagger, but rather to get a good shot at a double.

A second area of excellent returns are companies that are bringing their project into production. Usually, permitting and financing worries have dragged the value down over the years, and once commercial production is achieved, cash starts to flow and the company is re-rated.

Our exit strategy, as you hinted in the question, is when the company receives a takeover bid. This is always done at a premium to the market price, and we pride ourselves in picking those stocks that are good enough to eventually get taken over. Newstrike Capital’s recent takeover bid by Timmins was the 30th takeover in our portfolio since our inception, which averages out at more than 1 takeover every quarter. Because we like to accumulate shares at low prices, we have averaged just over 75% returns on these 30 takeovers. In fact, three of these positions have been taken over during the last month alone, which shows M&A activity is getting a resurgence. Majors and intermediates are finally refocusing on adding to their depleted reserves.

IM: If you had to pick five companies to invest in today, which ones are they and why?

TvdH:  Companies that have solid projects that are astounding new discoveries or make economic sense, and which have a proven management.

In terms of business model, we cannot leave Silver Wheaton out of our portfolio. It holds countless silver streams guaranteeing an extremely steady cash flow, with a huge upside in the form of new exploration and new streams.

Randgold is the gold-plated producer. It has an exploration model that virtually guarantees profits, as it has made a profit every quarter since 2008. There is no other gold producer in the world that has matched this. It is also debt-free.

Oceana Gold started producing gold and copper in the Philippines two years ago, and are making loads of money even at these gold prices, because of the copper kicker. Their focus will gradually shift to producing more copper relative to gold, as they get deeper into the deposit.

Balmoral Resources comes to mind as a company that has a decent gold discovery, a wonderful nickel discovery, and is managed by Darin Wagner, who is a top-notch geologist and has done it all before.

Falco Resources has digitized a deposit straddling Noranda’s historic Horne Mine. The ground is so prospective, that Sean Roosen is using his large share in the company to bring in quality people, including his mine manager at Canadian Malartic, to advance the project.

Platinum Group Metals will start producing platinum in South Africa by the end of the year. Even more interestingly, they made a second platinum discovery some years back, which will become one of the biggest sources of future platinum and palladium in the world, and because of the potential for mechanized underground bulk mining, will change the face of platinum mining.

For the sake of disclosure, the Commodity Discovery Fund owns shares in all these companies.


IM: If you had a crystal ball, which events will have the most impact on the market in 2015 and where do you expect the Gold and Silver prices to be at the end of 2015?

TvdH:  Well let me see. A few years ago, we had this Greece issue dragging down the Euro, and therefore the price of gold. Now we have this Greece thing again, which is cranking up the price of gold because of fear for the financial system. Where was this fear a few years ago? We have tapering, Ukraine, turmoil in the Middle East, inflation/deflation risks, Gaza, tumbling oil prices, global warming, global debt, Grexit, Chinese slowdown. There is an unprecedented amount of fear in our political and economic system, and yet gold is languishing near multi-year lows. This is an irrationality of such monumental scale, that it is difficult to predict which individual event will be the trigger for a substantial price move, or when it will come. There is simply too much distortion.

So my prediction is that nothing significant will happen until either physical shortages in gold or silver occur – this could be a short-term development – or until the PBOC has published how much gold they have accumulated for the Renminbi to take its designated role in the next phase of the financial system – this could take a while longer. I don’t believe there will be a global economic collapse because of the mountains of debt spiral out of control. We envision a more or less orderly process leading of debt restructurings around 2020. This, combines with growing shortages, will lead to sharply higher prices for (precious) metals

We do believe the whole mining sector is due for a huge re-rating, as their undervaluation has reached absurd levels.


Thank you for the interview.

About Terence and the Commodity Discovery Fund:

Terence van der Hout is the senior researcher for the Commodity Discovery Fund. The Commodity Discovery Fund is a Netherlands-based investment fund primarily focused on natural resource discoveries. Gold, silver, uranium, nickel, copper, zinc, the PGMs and rare earth element discoveries add value in the order of millions of dollars annually. We have called this form of investing ‘Discovery Investing’.


All information contained in this interview is provided by Commodity Discovery Management Ltd, the Manager of the

Commodity Discovery Fund, based on information believed to be current and reliable. This information is not intended as advice, but is for information purposes only. Despite the fact that the greatest care has been taken by the compiler, Commodity Discovery Management BV accepts no responsibility for decisions made based on this information. The information contained in this interview should therefore be regarded as indicative. If you are considering participating in the Commodity Discovery Fund based on the information provided here, we urge you to take proper note of the Offering Memorandum, the Essential Investor Information and other documents and information which are all available on the website of the Commodity Discovery Fund, The documents referred to on the website can be sent upon request. The Commodity Discovery Fund is an investment company (mutual fund – fonds voor gemene rekening) under Dutch law. Commodity Discovery Management BV, the Fund Manager, is licensed by the Netherlands Authority for the Financial Markets (AFM) and is included in the register of the AFM. Past performance does not guarantee future results.

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