Has the Tide Turned for Precious Metal Stocks?
Many post-facto articles appear at the end of severe bear markets and bull markets. A recent Wall Street Journal article, for example, noted:
"One of the world's biggest gold bugs is getting crushed by the metal's steep fall.
"The flagship fund of prominent Canadian hedge-fund manager Eric Sprott SII.T -1.56% has dropped more than 50% this year in what will likely be the third consecutive year of double-digit percentage losses, according to documents sent to investors.
"Redemptions and weak performance have pushed down hedge-fund assets managed by Mr. Sprott to about $350 million from nearly $3 billion in 2008." (Article here.)
The latter probably is a 3Q number that has been driven even lower by endless taper-talk and Comex paper shorting rout in the 4Q. The historic liquidation has run its course and supply is drying up.
How much more selling is left in Sprott’s and similar funds, or for that matter in the GLD ETF? The latter has liquidated its gold, plus some that was added going back to Lehman Brothers. How much additional naked-paper shorting to producers and bullion bankers can slingers muster? Nominal would be my estimation [see "One for the Ages"].
Rick Rule of Sprott conducted an interview about this flow of funds situation and offers some color on what’s transpiring. I put his last comment first because it points to the timing of what’s potentially a real turn in sector money flows. I think he is hinting that the money flow worm has turned from a selling climax to a gearing for an up phase.
“[The] events that have transpired over the last month have made me much more bullish in terms of timing than I would have been six weeks ago,” Rule said. “First, has been with regard to our Sprott mutual funds. We are seeing net inflows, as opposed to redemptions, for the first time in a long time.
“We recently signed and funded a joint venture with the incredibly large Chinese state-owned mining company,” he said. “This will show that outbound investment by the Chinese government into the junior mining sector, which is what we’ve specifically been charged with, is alive and well.”
Note: The following is in regard to the Zijin deal that I wrote about several weeks ago [see "China's Precious Metal Mines Running Out Of Reserves"].
“We expect to be able to announce a similar joint venture with another name-brand Asian investor by the end of 2013. Once again, this is testimony to the fact that Asian strategic investors are back in the junior mining sector in earnest,” Rule said.
“Our Sprott institutional lending fund, where we aim to raise $350 million for our lending business, is very close to securing an extremely strong cornerstone lead-order from a name-brand North American institution.
“I did a couple of days of marketing around the city of London with our CEO. We were seeing some of the bigger accounts in the city of London. The bottom line is we received an awful lot of interest in what we were doing.”
One would think that value investors from outside the industry would be all over this vacuum. Adrian Day’s fund was able to buy 5% of Vista Gold for less than a million and half dollars.
Teranga’s very bullish $135 streaming royalty deal with Franco Nevada is also a bell ringer. It has all the hallmarks of a smart, private company builder transaction that is shareholder positive. Further, it refutes the notion that there is no activity in the space. Incidentally, FNV has $1.3 billion in capital for acquisitions.
Before the deal, this went completely undetected by the market. TGZ was trading in a dull, vacuum-like manner, much like the rest of the sector. The good news is that the stock actually responded with a 32% rally on the news. TGZ will soon become a large producer and has the full backing of the government of Senegal, which has a stake in the deal. In fact, I have it from good sources that Senegal helped pushed this deal through. Hats off to TGZ management for consolidating this high potential district without any shareholder dilution.
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