[Editor’s note: To read part I of this interview, please click here]
As SilverStrategies.com editor Sean Rakhimov tells us in this exclusive interview with The Gold Report, the economic crisis may go on for a generation but the market is a separate animal that will stir back to life sooner. He expects physical gold and silver to lead the parade, with base metals lagging 12-18 months behind, followed by share price recovery for the majors and on down the line. When picking stocks to buy now, he says investors have to decide for themselves whether a company will survive the washout; it may be tough going from here to there, but sticking with survivors should prove beneficial in the long run.
TGR: If people are looking at rolling money back into investments once the craziness stops, you say a logical sequence is to put some in bullion first and wait a little bit, buy some majors and wait a little bit, and then look at the juniors?
SR: That’s always been the theory. My views have not changed. If you asked me a year ago, I would have told you the exact same thing, so this is not trying to adjust my position based on current developments in the market. But in my opinion, that progression is how the market is going to move forward.
TGR: Doug Casey’s current philosophy is one-third cash, one-third bullion, one-third stocks. Would you agree, or are you saying to get it all in bullion for right now? Let’s say you have a high tolerance for speculation, risk taking. Where would you be?
SR: If you can get bullion at anything close to spot prices, you should buy as much as you plan to buy. I don’t endorse investors paying 50% premium, but I do believe in percentage terms the premiums will shrink at some point.
TGR: So would you buy Central Fund of Canada (AMEX:CEF, Stock Forum)? Maybe half physical and half stock?
SR: Yes, I would, absolutely. And as far as stocks are concerned, it goes back to asking yourself that one question: “Is this company going to be around on the other side of this financial crisis?” If it is, by all means, buy some. I would recommend—as always, this is nothing new for me—dollar cost averaging. Whether you want to buy 1,000 shares or 10,000 shares, split it into five or six segments and buy one part every month or so.
The other thing is to reexamine your outlook or your investment horizon. You have to be prepared to not make any money for maybe about three years at least. I’m not saying that’s what’s going to happen, but you have to be prepared for that. Going in, you have to believe in this. I often use marriage as an example. You marry for the rest of your life, even if you end up getting divorced next year.
TGR: Things can change.
SR: Things can change. You can learn things you didn’t know. You may have other factors to deal with that don’t have to do with your position. But ultimately you have to believe in the company or the investment you’re making, and you have to give yourself at least three years to sit on it and maybe take some severe losses.
TGR: Speaking of severe losses, seeing billions evaporate this year has been a humbling experience.
SR: It is and it isn’t.
TGR: Tell us about the “isn’t.” We know about the “is.”
SR: The “isn’t” part is we all knew big problems would be coming down the line. And we knew why. Some of us discussed doomsday scenarios. I think where we went wrong is we did not prepare accordingly. A couple of months ago I wrote an article to that effect. It was called The Trouble with Forecasting. Basically the argument I was making is we knew that things would get bad, really bad. We should have believed our own predictions. There would have been no downside if we had been more conservative, more careful.
TGR: Can you give us any names based on various categories—senior producers, junior producers, exploration?
SR: I can flip that and tell you which companies I own. I own a good position in Pan American Silver Corp. (TSX:T.PAA, Stock Forum). I own a position in Silver Wheaton Corp. (NYSE: SLW, Stock Forum), Hecla Mining (NYSE: HL, Stock Forum). Those three I am comfortable will survive this crisis. One step down in terms of size and presence in the market, I own shares of First Majestic (TSX: T.FR, Stock Forum), IMPACT Silver (TSX: V.IPT, Stock Forum) and Minera Andes (TSX: T.MAI, Stock Forum). Then if you go one step down below from that, companies with no production, I own shares of Esperanza (TSX: V. EPZ, Stock Forum) and Silvercrest (TSX: V.SVL, Stock Forum). I’ll leave it at that. Obviously, I own a lot of other different stocks, but I am trying to protect potential investors so I’m trying to be conservative here.
TGR: Tell us first about the one you mentioned last. What do you like about Silvercrest Mines Inc.?
SR: The best thing about Silvercrest is management. And they do have a sizeable deposit, something on the order of 100 million ounces in Mexico. They have advanced studies, including, I believe, a feasibility study. They do need to build a mine. I don’t think it’s going to be an overly expensive mine and they don’t need too much lead time. They probably can be in production sometime in 2010, or maybe even sooner. But management is the key. I did buy that stock at well over $1. It’s probably half that today, maybe lower. But this is the type of company I believe will survive this crisis, come out on the other side and be one of the beneficiaries of whatever turnaround we see.
TGR: Esperanza Silver Corp.?
SR: Esperanza is a similar story. I like the management, very conservative. This is a pure exploration company. They do not plan to be in production, not that I know of. They have discovered two deposits: one in Peru and one in Mexico. I think the deposit in Mexico is about a million ounces of gold. In Peru, which should be roughly three quarters of a million ounces of gold, they have a JV with Silver Standard (TSX: T.SSO, Stock Forum). That one is a higher grade. This is a grassroots exploration company, they like finding deposits. They found two in the recent past, so I expect more good things from them.
TGR: Minera Andes Inc.?
SR: Minera Andes is one of the companies that doesn’t have a high profile, but one of my favorites. It’s been my favorite for about five years now. Again, very good management, very low key. They focus on getting things done and not talking big, not too promotional. They have a mine in production that’s joint-ventured with Hochschild Mining (which is a large silver producer) in Argentina. They have another project that they recently put out a resource calculation for—a copper project, which is a joint venture with Xstrata. Xstrata is a very large company, so this is another team that knows how to come up with good assets. I think they’ll also survive this crisis and will benefit from whatever upside in the future.
TGR: What about Minera Andes makes it one of your favorites?
SR: The management. Again, the management is very conservative, very low key, very non-promotional, very down to business. You just get a feeling for people; you see them so many times, talk to them, see how they go about their business and how they deliver. If they get where they plan to get and what they do to get there, it gives you a level of comfort. Minera Andes is one of those that has been through thick and thin and I think they’re definitely out of the woods in terms of whether they’re going to survive.
TGR: IMPACT Silver. What’s the story there?
SR: I should mention that I am somewhat biased, in that I am a consultant to the company. But on the flip side, I like them for reasons other than that. It’s one of my largest silver holdings. They’re in production in Mexico, very conservative management. They have a good cash position, one of the lowest costs of production. It’s a small producer, at this time. They produce about a million ounces of silver equivalent. But management is seasoned, been around for quite some time and they know how to operate a mine. Their motto is: "a business has to make money, otherwise it’s a hobby". They bought an old mine in Mexico, and been profitable from day one. They’re still profitable, even in this environment, and I also believe they are going to be one of the ones that will come through this.
TGR: I’ve been hearing a lot about First Majestic.
SR: First Majestic, I think, is one that has the highest chances of surviving this crash or this downturn, however you want to call it. I also think this is one that will get bigger, either through acquisitions or organic growth. I know the gentleman who started this company, Keith Neumeyer, very well, known him for years. Very ambitious and aggressive in executing his business plan. This company should produce on the order of about five million ounces of silver equivalent this year, maybe just under that. This has been accomplished in about four years. It’s no small task to get from zero to five million ounces in about four years. I also like First Majestic’s other principal, Ramon Davila, who is the most dynamic mining executive I’ve seen by far. He is the one who oversees the operations in Mexico, and is the one who built up Mexican operations for Pan American Silver in the past.
TGR: He’s got experience.
SR: Experience, knowledge and contacts; a very, very successful mining executive. First Majestic is going to be around for quite some time unless, of course, it’s going to be taken over by a major, which would be a compliment to get to a point where you are an attractive target to a major. For juniors that’s often of the ultimate goal. I’m not saying that’s the goal for First Majestic, but it’s like Rick Rule says, you build a company to keep and somebody else will want it. So I think First Majestic is going places.
TGR: And they’ve got the capital to weather the storm.
SR: I believe they have about $26 million in the bank. It’s a well established company in terms of production and operations. They have about 300 million ounces in resources. They’ve done their drilling, they’ve got four mines in production right now. They’re undertaking a major expansion at one of the projects in Northern Mexico. They’re basically going about their business according to plan. Maybe they’re making some minor adjustments to cut costs here and there, but ultimately this company is going to grow.
TGR: What’s going on with Hecla Mining Company? Is it just silver and the industrial metal and, therefore, demand is off and prices are off?
SR: All of the above, but I think one of the reasons that is not well understood is that Hecla is one of the very few companies in this space that’s listed on the New York Stock Exchange. So it’s one of the more visible ones and I think they take it on the chin harder than the rest, particularly because of that listing. The way mainstream investors work is, “Everything is going down, so let’s short commodities. What do we have to play with?” And Hecla inevitably pops up on that list. I think that’s part of the reason it’s been beaten down so badly. Hecla is one of the best underground mine operators, so I think they will survive. The company’s been around for 100 years, so I’m sure they can weather this one—at least that’s the way I’m betting. If I’m wrong, then so be it.
This is why I am reluctant to discuss specific companies. If you’re investing in the mining sector, you have to be prepared to make mistakes and you will definitely make mistakes in many of them. The question is, of course, in the grand scheme of things, are you making progress or not, are you making money or not. So long as your portfolio is growing, you could do much, much worse than Hecla.
TGR: Wouldn’t you think the darling of the sector would hold up better?
SR: It works both ways. It would have been darling in good times and I think it will be again. At some point they will benefit from that New York Stock Exchange listing. But in bad times, they take it on the chin harder than the rest.
TGR: Another company that’s getting some conversation is Silver Recycling Company (TSX.V:TSR, Stock Forum), which is a different play than mining. What do you know about them?
SR: Silver Recycling has been another favorite of mine. The businesses they currently control are profitable and they’re still doing okay. This has been one of the attractions when we first looked at it. Unfortunately, they’ve been one of the victims of the current credit environment. While they do have self-sustaining operations, they need to raise capital to make acquisitions. If they are successful in that task, and I have to believe they will be, it’s going to be a very, very pleasant surprise. It’s beaten down with the rest of the sector right now, but the business plan is sound. I am still optimistic about this company. In fact, I’m trying to help them get through this. By the way, chances are you can buy some silver from them because they’ve responded to the market demand and produce 100-ounce silver bars and silver rounds, which they sell to investors.
TGR: Right. At a premium to spot, right?
SR: Yes, at a premium to spot, I bought some myself, so I don’t think the premiums are outrageous at all or out of line with the market.
For additional comments on Teck Cominco Ltd. (TSX: T.TCK.A) (TSX:T.TCK.B) (NYSE:TCK), Newmont Mining Corp. (NYSE:NEM), Barrick Gold Corp. (NYSE:ABX), Central Fund of Canada (AMEX:CEF), Pan American Silver Corp. (Nasdaq:PAAS) (TSX:T.PAA), Silver Wheaton Corp. (NYSE:SLW), Silvercrest Mines Inc. (TSX:V.SVL), Esperanza Silver Corp. (TSX:V.EPZ), Minera Andes Inc. (TSX:T.MAI) (OTCBB:MNEAF), Hochschild Mining (LSE:HOC), IMPACT Silver (TSX:V.IPT), First Majestic (TSX:T.FR) (PK SHEET:FRMSF), Hecla Mining Company (NYSE:HL), and Silver Recycling Company (TSX:V.TSR) from newsletter writers, money managers, and analysts, click on the respective links or visit The Gold Report.
Not all of Sean Rakhimov’s dot-com dabblings paid off, with at least one important exception. He traces his interested in financial markets to that era, when he joined a software development company in 1996. In the years that followed, he designed financial systems to support different areas of the investment banking business. He seized the opportunity to learn about options trading, securities lending, payments processing, clearing and settlement, fixed income securities and margin transactions. He’s not only been putting those learnings to work ever since, but also sharing them with others, with writings published on such internet portals as Le Metropole Café, 321Gold.com, SilverMiners.com and—of course—The Gold Report. Sean, who has been involved in a number of research projects for renowned silver guru and newsletter writer David Morgan, now publishes and edits his own website, SilverStrategies.com.