Investing in Precious Metals Miners
Equinox Partners is a team of ten professionals based in Connecticut with a 25 year track record, a pedigree that extends to the very inception of value investing, and a specialization in precious metals mining. Today, the firm manages $500m in gold and silver mining equities on behalf of institutional and high-net-worth families.
The firm’s gold thesis is straight forward, while their execution via the miners is nuanced. Physical gold has unique financial characteristics: it is both very liquid and inversely correlated to other financial assets. Accordingly, gold can mitigate risk, especially in times of extreme market volatility as we have today. The firm believes that in a market characterized by financial fragility, too much debt, and overactive central banks, physical gold and silver are both prudent risk mitigators and attractive long-term investments.
While the gold price is making new highs, gold and silver miners are just coming out of a severe, long-term bear market. The result is undervalued mining companies and few active managers willing or able to invest in them. Given these low valuations and the leverage inherent in the miners, the firm believes that gold and silver miners should provide significant upside to the gold and silver price, as indeed they have over several market cycles historically. On a look-through basis, the firm estimates that its producing mining companies have seen 100% year of year cash flow growth, with only a 30% increase in the gold price.
“We own long-only portfolios of roughly 25 silver and gold mining companies. While technical and fundamental proficiency is necessary to analyze the miners, these skills alone are not sufficient to outperform. Mining companies are as much about the people as they are about the assets. We spend an enormous amount of time identifying top quartile teams and avoiding bad actors,” said Chief Investment Officer, Sean Fieler.
Given the enormous variation in the sector, investors are leaving a lot of money on the table when using passive or index-like funds. As a case in point, the gold mining index has a vast dispersion in any given year amongst the best and worst performing stocks. While some of that dispersion can be attributed to the surprises inherent in a risky mining venture, Equinox believes a good amount of the market’s inefficiency simply comes from its complexity and lack of managers left doing the work. An ETF is not able to make such nuanced judgments in a sector that demands it.
Finally, it is worth emphasizing that being a responsible investor in the mining sector is a must. Without the correct alignment of environmental safeguards, social license to operate, and especially a management team and board aligned to minority shareholders, mining projects can quickly become unfeasibly or unprofitable.
For information, Daniel Schreck, Partner at Equinox Partners, at [email protected] or 646 833 2783.