By September 25, 2012 0 Comments

Q&A with Grant Williams, Portfolio Manager, Vulpes Investment Management

Mines and Money spoke with Grant Williams from Vulpes Investment Management ahead of his presentation at Mines and Money Australia 2012.

Grant Williams is a Portfolio and Strategy Advisor for Vulpes Investment Management in Singapore, a hedge fund running $200 million worth of largely partners’ capital across multiple strategies.

Grant has 26 years of experience in finance on the Asian, Australian, European and U.S. markets, and has held senior positions at several international investment houses. Grant also writes the popular investment blog, Things That Make You Go Hmm.

Want to listen to this interview as a Podcast? Click here

M&M: Grant, we’ve seen some commodity prices fall in recent times but in the current environment are there any stocks that have been unfairly effected by the wider market and if so can you explain why and how this has happened?

GW: I think commodity stocks are a strange beast and they tend to overreact to the downside and the upside whenever we get moves in the underlying commodity, particularly in the precious metals side of things. We often see precious metal and mining stocks under-perform, gold and silver particularly, on a regular basis. It’s a source of frustration for a lot of people that invest in that space.

I think we’ve seen a little bit of a decupping – I hate to use that word because it’s used far too frequently – but we’ve seen a sense of that in terms of base metals and precious metals. We’ve seen a lot of fears about Australia and China starting to gain some traction with some very poor data out of China. It’s still not baked in the cake that they’re going to have a hard landing yet, but there’s certainly enough poor data for people to sell off cooper, iron, or coal, the real driving sources of this Chinese industrial engine.

At the same time you’ve got the Central Banks of the world really starting to look like finally they’re going to blink and realise that they’re going to have to print money, which is what a lot of us have realized a long, long time ago and this was always going to be the end game. It remains to be seen whether they actually will. But whenever you get these moves in the metals themselves and the commodities themselves, people tend to be a little bit frightened of jumping straight into the stock.

So we’ve seen a lot of prices of stocks, look at BHP and Rio in Australia, for example. They’re starting to turn back up again now, and these are the bellwethers of the market down there. Rio Tinto was where it was back in 2009 earlier last week, which is extraordinary when you think what’s happened in the broader market since then.

So, I think whenever you get big moves in commodities, we’ve seen stocks like BHP and Rio and some of the gold and silver plates sold far more aggressively than the underlying commodities. But I think when we get the bounce, if any kind of confidence comes back into these – moves up in the commodities themselves, and particularly precious metals are genuine – then I think you’re going to see some real fireworks to the upside in stocks on the out-performance side of things.

M&M: You mentioned a couple of things there already but what are the market factors that could see this trend begin to shift or reverse?

GW: It’s about confidence. If people think that the base metals – the industrial commodities – have bottomed and that perhaps whatever is going to happen in China has now been discounted, I think stocks like BHP and Rio particularly look incredibly attractive, particularly at these levels. Precious metals are different.

If you looked at the price of some of the gold mining stocks – I spoke about this a while ago – if you look at the price of those in ounces of gold, some of them have literally never been cheaper. So you’ve had this bizarre scenario where the gold prices have fallen from 1920, and a lot of people are calling it a collapse which frankly it’s absolutely nothing of the sort. It was a very healthy correction in a strong ongoing bull market.

But people get chased down on gold mining stocks very, very easily and a lot of that is experience. Mining stocks have performed pretty poorly, frankly. But we get to this stage where gold has turned around. On a technical basis the chart looked fantastic for the last few weeks and now it’s broken out on that chart and I think we’re going to see people play catch up with the gold stocks.

Once they start looking at the relative value of these gold stocks, I think you’re going to see some significant out-performance to the upside of the gold miners particularly.

M&M: How should investors position themselves to capitalise on this?

GW: Well, it’s difficult. People talk about investors almost like they’re all identical and they’re not. Gold mining stocks particularly are a very tricky thing to do. You have to have a strong stomach and you have to be very nimble, and you have to try and not get caught up in things, because they can be very, very frustrating things to trade.

I think right now where we are in this cycle with so much interference in markets from governments, and whether it’s direct interference or implicit interference – e.g we’re all sitting here today waiting to hear what Mario Draghi has to say – you can get shaken out of positions for all the wrong reasons at all the wrong times. That’s happened to a lot of people, particularly in gold mining stocks.

So if you’re going to trade them, you have to have a clear understanding of what you think fair value is. Trade them against fair value. Right now they seem particularly cheap and they have done for a little while now. But we were looking to switch our gold bullion holdings into miners six weeks ago and we started doing that. But we had four weeks of head scratching under-performance. It just didn’t make any sense to us. Suddenly, here we are, gold up 1.5% on Friday and the miners were all up 5%.

They’re starting to get this belief now that this gold turnaround is real. As soon as you get belief that the gold price is going to go higher, then these mining stocks are severely undervalued. But anyone buying them has to be prepared for enormous volatility and for them to do the wrong thing at the wrong time at pretty much every turn.

So try and look past the immediate noise and if you genuinely believe that the right price for gold is $1,800, $1,900, then these mining stocks are terrific value at these levels.

M&M: What steps can investors begin to take now, in the short-term, while things are looking volatile? What strategies can best position investors to create long-term viability?

GW: Historically, it’s made a lot of sense when you trade sectors like this to run closed stocks. So you establish your position and you set a stock loss a little bit below where you’re happy to sell them if things turn around and go against you. But what we’ve seen in the last couple of years is the movements that we see that cause a lot of these stocks to get triggered are generally set in motion by extraneous events.

By that, I mean the likes of Senor Draghi or Mr. Bernake or other politicians coming out and saying something that moves the markets. If you run a close stock you can get kicked out of your position for reasons that have nothing to do with the stock itself, the underlying commodity. It’s a very difficult thing to do.

So prudence would dictate that you run stocks pretty close but to do that right now I think that you have to take a little bit more risk on your plate and you have to perhaps open up a little bit more downside in order to not get chased out of positions. But there’s never been a better time in the last ten years, I don’t think, in the gold markets to take a longer term view. If you can actually try and look past the intermediate noise and try and establish what you think the end game is going to be, personally I think it’s significant of money printing by Central Banks.

I don’t really see how they can get out of this corner they’ve backed themselves into. If you’re aligned with that point of view then you can buy these stocks now at terrific valuations but you have to be prepared to sit though some volatility.

M&M: Finally, given the current climate, what can miners do to better position themselves and their projects to attract funding from investors?

GW: That’s a great question, Ross, and funnily enough it’s a question that some of the miners have actually clearly set out to answer. There was a presentation, I believe in Melbourne a few weeks ago by Nick Holland, the CEO of Gold Fields that caught a lot of people’s attention. It was something we’re referring to as his Jerry Maguire moment. It was almost a mission statement criticising the gold mining industry.

He addressed a lot of the concerns that investors have. We’re habitually disappointed by over-promising, under-delivering, extravagant CapEx on vanity projects and the lack of returns of profits to investors through dividends as such. Now Newmont Mining pegged their dividends to go with the price of gold about a year ago, which was received extremely well.

What Nick Holland has said is that they are going to rein in CapEx and try to spend their money more wisely. They’re going to try and return more money to shareholders through dividends, and that’s really what we need to see. I think anyone that invests in mining stocks as part of a core strategy understands that the operational risks in something like running a mine are enormous.

There are always going to be shocks. There are always going to be collapses in mines and having to shut projects down. We understand that they are part and parcel and they do generate volatility. But it’s the carelessness that, I think, has caused a lot of people to give up on these stocks. So if we do see some more discipline, if we do see returns being given back to investors distributed and we do see money not being spent willy-nilly on crazy projects in hard to reach places, then I think that goes a long way to attracting the kind of long-term investors that we really need to see.

The more average dividend yields on index stocks, on broader stocks fall and the higher dividend yields return from gold miners becomes, I think that makes them extremely attractive. Once we start to see institutional pension fund money and the like, starting to take a serious look at gold mining stocks that are yielding 2.5%, 3% against an S&P that’s yielding just over 2%, then you’re going to start to see some big money move into these stocks.

That’s really what they need. They need solid, stable money to try and mitigate some of the hot money that flows in and out and what causes big price volatility.

M&M: Grant, thanks very much for speaking with us today.

GW: Absolute pleasure.

M&M: Grant Williams is presenting at Mines and Money Australia on October 15 to 17, 2012 in Sydney. He’ll be expanding on the topics that we’ve discussed today.


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