Fund manager rides the precious-metals roller coaster
Maria Smirnova negotiates ups and downs while overseeing gold and minerals funds at Sprott Asset Management
By: DIANNE MALEY
Date: April 28, 2017
For Maria Smirnova, the dozen years she has worked at Sprott Asset Management have been eventful indeed. The price of gold soared and dipped, the financial system nearly collapsed, the global economy slumped, the firm changed and then changed again.
In 2005, when founder Eric Sprott hired her to cover base metals, Ms. Smirnova says she wasn’t quite sure what base metals were. But she knew she wanted to be a portfolio manager. Today, at age 39, she manages the Sprott Silver Equities Class mutual fund and is part of the team overseeing the firm’s gold and precious-minerals funds.
Ms. Smirnova was in her late 20s when she joined Sprott, having worked at Excel Funds Management and Fidelity Investments before returning to the University of Toronto to get an MBA. She earned her chartered financial analyst (CFA) designation in 2002.
It was an unusual job for a young woman, being a mining analyst at a big hedge fund, but today Ms. Smirnova seems comfortable visiting mine sites and chatting with miners.
“I love my job for the fact that I get to meet the CEOs of the companies,” she says. “That’s the great thing about mining – you meet interesting people who travel the world and bring back stories.”
Her early days at Sprott were exciting times. Gold bullion had begun its long climb back from its 2000 low only to be smacked down in the financial panic of late 2008. It climbed back again and by 2011 hit a record high of $1,900 (U.S.) an ounce on worries the United States might default on its debt. But it slumped again, and silver followed.
“What happened a few years ago in the bear market is we had a lot of positions we could not get out of,” mainly in smaller companies, Ms. Smirnova says.
Today, the group is more dynamic and nimble. They view the precious-metals portfolios as two parts, one tactical and one core. The core junior miners are longer-term holds. The tactical part is made up of larger, more liquid, senior companies that are easier to buy and sell. “That gives us the ability to ramp up and ramp down our exposure.”
By the end of last year, Sprott had an impressive $9.2-billion of assets under management. Earlier this month, parent Sprott Inc. announced it was going back to its roots as an investor in gold, silver and mining plays by selling its $3-billion mutual-fund arm to its executives for $46-million. Ms. Smirnova will stay with Sprott Inc. and continue as subadvisor to the Sprott Silver Equities fund.
At Sprott’s annual general meeting on May 10, Eric Sprott will step down as chairman of the firm he founded in 2000 after more than 40 years in the business. He is still a major shareholder.
“Eric is definitely committed to the gold trade, and that’s where I fit in,” Ms. Smirnova says. “That’s what I do. I spend 100 per cent of my time meeting management teams and analyzing companies.
“A fun activity for me is to look at drill results and try to figure out the potential of the ore body, how it can be mined – open pit or underground – and whether there are metallurgical issues. If you get low recoveries in the test work, it might render the project un-economic.” (The recovery rate is the number of grams or ounces of metal in a tonne of rock.) “Then the company has to figure out how to increase the recoveries.”
Ms. Smirnova takes a “show me” approach to analyzing junior gold companies. “One of my criteria is I won’t buy a stock before they have drill results,” she says, “way more than one. The drill machine is the truth machine.”
But do miners create value for their shareholders?
“There are many stories where miners destroyed shareholder value,” she acknowledges. “You have to be careful, and be cognizant of that. People are important. A good manager will steer the ship the right way. A bad manager will take a good project and find a way to screw it up. You have to know who you are dealing with.”
Despite all the ups and downs, Ms. Smirnova is not discouraged by her fund’s dependence on precious-metal price cycles. “No matter what part of the cycle you’re in, we need metals, and gold and silver,” she says. “We build things with metals. I think the industry can create a lot of value.”
“Our thesis on silver is that it is more scarce than gold,” Ms. Smirnova says. “Demand for silver is very strong, half from investment and half from industry – for solar panels, catalysts, electronics. Silver is also in strong demand because silver coins are viewed as the poor man’s gold.”
Meanwhile, the mines of major precious-metal companies are being depleted. “So we need discoveries. Combine that with mine supply dropping off and you get a bullish picture on silver.”
Looking ahead, precious-metal prices are being helped by inflation expectations. “Our thesis is inflation is on the rise. … Inflation is increasing faster than nominal interest rates. That’s what drives gold.”
In turn, bullion prices are the single largest force affecting share prices of precious-metal miners, which are notoriously volatile. Sprott Silver Equities Class units are up 8.08 per cent year-to-date but down 7.21 per cent since inception in 2012. For the 2016 year, the units were up more than 91 per cent, handily beating the benchmark, which was up 65 per cent.
Despite their volatility, precious metals serve as a portfolio diversifier, Ms. Smirnova says. Investors should limit their holdings to 5 to 10 per cent of their portfolio.
Corporate performance is important, too. In February, for example, the silver fund slipped partly because Coeur Mining Inc. missed its financial forecast and the stock price fell. Rather than selling, Ms. Smirnova bought more.
“I make shifts in the portfolio every month,” she says. “Coeur missed a shipment in the quarter, so the revenue should be coming in the next quarter,” she adds. “The story is still interesting. It’s increasing its cash flow, it’s an improving situation. I feel the stock was punished unfairly. In a situation like that, I actually increased the exposure.”
Spoken like a seasoned pro.
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