Why Peter Vermeulen of the Netherlands' Plethora fund focuses on mid-tier Gold Mining stocks...
MANAGING PARTNER at Plethora Precious Metals Fund Management in the Netherlands, Peter Vermeulen focuses on emerging Gold Mining and silver producers.
Prior to founding the fund in August 2012, Vermeulen was the editor of The Gold Capitalist, a successful newsletter on gold and silver companies. From 2009 to 2012, Vermeulen was also an analyst with a private closed-end investment company where he was responsible for investments in natural resources companies.
Here Peter Vermeulen offers his rationale and strategy for investing in junior and mid-tier Gold Mining and other precious metal stocks to The Gold Report...
The Gold Report: Peter, your firm decided to launch the fund in August. Why precious metals? Why now?
Peter Vermeulen: The decision starts and ends with gold. Gold should be an essential part of every investment portfolio. Gold is insurance against the unthinkable, especially today, when the global economy is unstable and vulnerable, and when the unthinkable can happen.
Gold doesn't have counterparty risk. It cannot go bankrupt. It cannot be printed. Gold is being bought by central banks, unlike in years past.
But, while the fundamentals behind gold are strong, the prices for precious metals equities – the companies that actually get gold out of the ground – are at historic lows. Today, gold in the ground can be bought at giveaway prices, yet companies get no valuation for their projects. The disconnect between rising Gold Prices and low valuations of gold companies made us launch this fund.
We are now seeing mergers and acquisitions activity heating up. We frankly could not have imagined a better moment to launch our fund.
TGR: Although you are based in the Netherlands and not open to American investors, the Plethora Precious Metals Fund is available to Europeans and Canadians. What's the appetite among European investors for a fund with a lot of exposure to the high-risk junior Gold Mining sector?
Peter Vermeulen: There's an important distinction between the high-risk juniors and the mining companies that are already producing cash flow or have already defined a mining resource and have projects with demonstrated economic viability. Yes, high-risk companies can generate "homeruns" but these occupy only a small part of our portfolio. The majority of our portfolio is spread among the small to mid-tier emerging producers, companies that already have a defined resource.
Here in the Netherlands and in Europe, because people are increasingly Buying Gold and silver, there is a strong appetite for gold companies and for funds doing active selection. And those investors who have come to realize where gold actually comes from see opportunities with the companies getting gold out of the ground.
In addition, investors have been disappointed recently by mining equities. The larger names have had difficulty replenishing gold supply and keeping production going. There have been crazy takeovers and diversification away from gold. Investors realize that, in this sector, active selection and active management are needed to get a good return. That's why the appetite for our fund is very good.
TGR: Your fund requires a minimum investment of €100,000. Could you briefly summarize why investing in your fund is better than investing directly in the companies in your fund.
Peter Vermeulen: The active management that we offer is important. There are so many companies and distinguishing appropriate ones for investment requires both skill and experience. Furthermore, our funds can participate in discounted financings that would otherwise be very hard for the general investor to access. These financings sometimes come with warrants providing extra leverage for the funds if the deal goes well because then we can buy more shares at a set price.
In this market, a scattershot approach doesn't work. There are too few sufficiently interesting projects spread among too many companies. Unlike some other funds, we are focused. We know the companies that we invest in.
TGR: As of October 8th, your fund had about 25 holdings in the precious metals sector, with around 32% in feasibility-stage projects, 22% in producing companies, 18% in closed-end funds, 11% in emerging producers, 8% in junior exploration plays, 6% in cash and 3% in royalty companies. What is your rationale for this asset mix?
Peter Vermeulen: Currently, we see the best opportunities with companies that have both defined resources and have already done studies to show that these resources can be mined economically. They have the best chance to be bought out because there is a gap between what the big Gold Mining companies yearly produce and new discoveries.
This gap gives us an opportunity. Companies with defined ounces that can be economically mined are poised to fill the gap between production and new ounces needed to come to the market. That's why our largest weighting is in feasibility-stage project companies. Producing companies will always be a cornerstone of our portfolio, and we see more opportunity in the small and midtier producing companies than in big caps or the majors. Smaller, midtier producers trade at a discount. And, unlike the majors, the small and mid-tier producers actually show growth and know how to keep costs at bay. That's also where opportunity lies.
TGR: You have 11% in emerging producers and another 8% in junior exploration plays. There is definitely a line between those two, but for the most part, that's another 20% in the junior sector. Why are you so heavily invested there?
Peter Vermeulen: It's 8% in juniors. With these junior companies, there are actually a few investments that are trading below cash. There is a junior that has a net asset value that is much higher than the current price. So even though 8% is in juniors, if you look at the breakdown, it's actually less risky than you might think.
TGR: You were once a newsletter writer. How did that experience shape some of your choices?
Peter Vermeulen: The newsletter monitored a model portfolio that we created of gold and silver companies. How we selected companies for the portfolio doesn't differ much from how companies have selected for the fund. We've run this model portfolio for three and a half years, and the return has been +396%, even though we started in September of 2008 and the market took a nosedive in the months that followed.
TGR: What parting thoughts do you have for us?
Peter Vermeulen: How I see this sector is as, no pun intended, a minefield, yet you want to find mines within this minefield. If you have a large basket of stocks, the odds are that a lot of them will never make it to a mine, or will run into trouble or will dilute like crazy, so you won't ever see anything back from your investment. It's something that you have to realize when you are going to invest in this sector. It takes a lot of homework, experience and a learning curve before the mines can be distinguished from within the minefield.
TGR: Thank you for those words of wisdom for our readers.