Money manager Adrian Day reviews recent developments at gold and resource companies, noting that “by happenstance, this review includes most of my very favorite long-term resource holdings, all ‘buys’ at current prices.”
The royalty and streaming sector had a good 2020, with the business itself quite strong, despite Covid restrictions restraining due diligence on many transactions. Overall, despite this, there were both large and small deals for the highest total value of the last 10 years.
In addition, last year saw several new entrants to the space. These included private companies going public (such as Elemental Royalties Corp. [ELE:TSX.V; ELEMF:OTCMKTS] and Nova Royalty Corp. [NOVR:TSX.V]), as well as new companies (such as Nomad Royalty Company Ltd. [NSR:TSX; NSRXF:OTCQX]), and existing companies making a transition to a royalty model (Orogen Royalties Inc. [OGN:TSX.V]).
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Royalty Stocks Perform In Line with Market
Despite a weak performance towards the end of the yearóalong with the gold sector in generalóthe royalty companies generally kept pace with the major miners for the entire year, some outperforming. Stocks that are more widely owned by generalistsósuch as Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) among the royalty companies and Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) among the minersótended to fall further as non-specialists exited the market at a more rapid rate.
The larger royalty and streaming companies continue to sport higher valuations, which makes sense since they have a lower cost of capital and the diversification helps limit the risk from any single asset. The smaller companies, however, have the advantage of speed, and the ability for multiple expansion as they get larger.
Franco Builds Cash Pile on Record Revenues
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE; US$109.47) is the largest of them all. It reported record revenues and cash flow in the latest quarter, though sales were short of the last quarter of 2019 record. As all mines come back to full operations after the COVID shutdowns, we should see record sales again. Franco expects to be at the top end of its 2020 guidance for the full year when it reports this coming week. Its oil and gas revenues, representing nearly 15% of the company’s total, were up as well.
Franco has continued to add assets, though small ones, mostly buying higher optionality exploration royalties, as the difficulties with onsite due diligence last year prevented them doing huge transactions. With the lack of major purchases, the cash is building back up. It recently paid off the debt it took on for payments on the large Cobre Panama stream, and now has working capital of $449 million (mostly cash). The company also has a $1.1 billion facility, giving it the firepower to complete a large transaction.
What comes next?
Right now is not the most favorable environment for royalty companies to complete large transactions. Most of the royalties inside the larger mining companies have been sold (Pan American, Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE), Barrick, Coeur Mining Inc. (CDE:NYSE) spring to mind); better equity markets (notwithstanding the slide in prices in recent weeks) mean companies can raise funds without a royalty; and the base metals miners are in strong financial shape, unlike five or six years ago when they undertook large streaming deals to repair balance sheets.
There is still the opportunity to be part of a multifaceted financing package for a large development or merger-and-acquisition (M&A) transaction. I suspect some of these have been in the works, with completion delayed due to travel restrictions postponing onsite due diligence.
Franco (and other large royalty companies) have traditionally traded at higher multiples than miners, and for sound reasons. The business model mitigates risk and provides visibility on future revenues. Last summer, Franco was trading at the high end of its historical valuations, but the stock has come off from those highs, and now represents a good buy for long-term, conservative investors wanting exposure to the gold market. It provides broad exposure to multiple gold and other mines, with multiple counter- partners, has strong management and a rock-solid balance sheet. Franco is a buy. We may have additional comments after the earnings call this coming week.
Positive Developments Are Not Fully Recognized by the Market
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE; US$10.73) saw record royalty revenues, but earnings missed due to higher-than-expected cost of sales, as well as several unusual items, including higher G&A (general and administrative expenses), business development expenses, and taxes. In particular, the consolidation in the financials of Osisko Development (OD), spun off in October (see Bulletin 766), caused “noise.” OR currently holds 75% of OD, down from 88%. The goal is to reduce the level of ownership opportunistically both by potential salesóno shares have been sold yetóand by not participating in future equity raises by OD.
Silver contributed 24% of the company’s revenues, as high a percentage as many companies with “silver” in their names! It has a good balance sheet, with cash just over CA$300 million, and availability of $385 million on its credit facility. It has recently renegotiated its debt, saving 1.5 percentage points in interest. It also holds various equities values at CA$286 million at year end.
Osisko has the assets for future growth
The company has a strong pipeline of assets in Osisko Development (as well as Osisko Mining, Metals and O3), in which it holds royalty interests as well as equity. This pipeline is important when competition for royalty assets is so strong and prices so high. On a recent call, CEO Sandeep Singh emphasized the significance of the accelerator model, which had been “wildly successful” both financially and in developing the pipeline. He said he continues to like what he described as “the pure accelerator model,” but said there are fewer good assets available after last year’s market rally.
The company provided guidance for this coming year of between 78,000 to 82,000 GEOs (gold equivalent ounces), which was self-described as fairly conservative and deliberately so after several disappointments in recent years. In particular, Eleonore appears to have stabilized and now has upside, as does the diamond mine Renard, though it is not in the guidance.
It has the lowest valuation among the larger companies, justifiably so perhaps, though too wide a gap in my view. It is the highest yielding at 1.5%. Osisko is not receiving credit for the progress it has made, including turning around diamond mine Renard, as well as its no-cost inbuilt pipeline. Osisko is a buy.
Positive Developments All ‘Round for Altius
Altius Minerals Corp. (ALS:TSX.V, 14.47) announced fourth-quarter revenues of almost $22 million, up 33% from the previous quarter. Receipts were boosted by a doubling of thermal coal revenue, due to the acquisition of an additional royalty in July; a large dividend from Labrador Iron Ore Royalty Corp. (LIF.UN:TSX), which had withheld distributions for most of 2020; and stronger commodity prices overall. Copper revenues account for about 35% of the total, followed by potash at 21%. Many of the assets as very long termóover 1,000 years in the case of potashówith some of the iron ore and copper assets over 50 years mine life.
The most important recent development was the IPO of Altius Renewable Royalties (ARR:Toronto; 10.55). Altius initiated and developed the business and recently brought in Apollo Capital as a partner to co-invest in new assets (see Bulletin 758). The taking public of this unit came far sooner than many thought it would, evidence of its rapid growth. Altius currently owns about 60% of ARRóvalued at approximately $60 million in the marketóas well as royalties on different assets. By spinning it off, the renewable company can raise its own capital, and we expect strong growth in the period ahead.
Lots of potential growth ahead
There was more positive news with the completion of the acquisition out of receivership of the Kami iron ore project by Champion Iron Ltd. (CIA:ASX). This is a high-grade and high-quality project, stymied by the collapse in iron ore prices several years ago. They have since recovered. Altius, which was a shareholder, lender, and royalty holder of the previous owner (having initially spun out the project into a new company), Altius now has shares in Champion (current value over CA$20 million), plus production-based payments.
The company also continues with its project generation business. Over $150 million was spent on these properties last year, none by Altius. In the last four years, Altius has successfully sold 61 properties for royalties and shares, and it continues to assemble new projects for which it is seeking partners.
As of year-end, it had cash and public equities valued at $136 million (just $30 million in cash), with debt of $141 million. The company sees continued strong cash generation, “but we don’t see lots of places to spend it.” Altius, having spent the lean years assembling properties, is now in the harvesting phase. A higher dividend in the years ahead is a possibility. Altius is a buy.
Midland Is Active in Partnerships and Solely-Owned Properties
Midland Exploration Inc. (MD:TSX.V, 0.75) continues to move ahead on many fronts. It announced positive results from some drilling last fall, including the identification of a new gold-bearing zone on its Maritime-Cadillac project joint-venture with Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). New drilling on several projects, both joint ventures and sole-owned properties, is underway, or will be before winter break-up. This includes drilling by partners Probe Metals Inc. (PRB:TSX.V) and Wallbridge Mining Co. Ltd. (WM:TSX), as well as on the wholly-owned Samson project, on which a new gold system was identified in last year’s drilling.
In addition, the results of the first field program in the regional alliance with BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) has been presented to a reportedly “very happy” partner. There is $1.4 million still to be spent on exploration, plus spending on “designated projects” under the agreement. We should have news on this shortly, with drilling to follow later this year.
Midland has also generated new targets on its large copper-gold Mythril project, with drilling planned for later this year after new geophysical work. It also continues to stake new strategic properties in different areas of Quebec, and has several properties seeking partners. This new land includes a large land position for nickel-copper in the Grenville, both by staking and acquisition, announced at the end of February.
A strong balance sheet, aggressive management, several joint ventures and a pipeline of projects with several ready for new partners, Midland has a good a shot at discovery success as any. At this price, it’s a buy.
Lara Is Generating Revenue from Multiple Sources
Lara Exploration Ltd. (LRA:TSX.V, 0.60) is moving ahead quietly, creating value and beginning to generate regular revenue streams. It has two properties now in production, with drilling on up to six projects this year, three each in Brazil and Peru. In Brazil, production is underway at its Celesta copper project, with royalty revenue received in the last few months. There is the potential to increase production significantly when a new mill arrives and a second mining front is opened up. Lara is also receiving penalty payments for the delays in the project.
At a second project in the country, Planalto, ground has been optioned to extend the strike potential. Partner Capstone Mining Corp. (CS:TSX) has a $1.8 million drill program planned, commencing next month. The project needs to be bigger for a company like Capstone, but the results so far indicate a project that could readily find another partner should Capstone drop it. Lastly, Lara will initiate a small drill program on its 100%-owned Itaituba vanadium project with the expectation of increasing the value of any future option earn-in.
In Peru, because of COVID, Lara’s personnel had difficulty moving around in country, but one project is moving ahead nicely. This is the Corina copper project, being drilled by partner Hochschild Mining Plc (HOC:LSE), which has a flagship mine nearby with depleting ore reserves. Corina has the potential to replace that ore, delivering feed to an existing mill. To stay in the partnership, Hochschild will make a payment to Lara of $1 million in July, with another $2.5 million due next July.
There are other active projects in both Peru and Brazil, plus the Biofax project in Colombia, which started producing at the end of last year; Lara holds a royalty.
The famously frugal Lara is well financed, with $1.7 million in cash and around $2.3 million coming in during the year. Assuming Hochschild stays in Corina, Lara is fully funded for this coming year. Lara is a buy.
TOP BUYS this week: In the gold space, everything is on sale and it’s a little like being a kid in a candy store. With everything down, we can afford to be highly selective. Best buys, in addition to those discussed aboveóand all five above are strong buysóinclude Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$36.21); Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$104.55); Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$6.68); and Barrick Gold Corp. (ABX:TSX; GOLD:NYSE, US$19.83). A company might not be on this list only because there are better buys or perhaps pending developments that could weigh on the stock in the near term.
Originally posted on March 6, 2021.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Lara Exploration, Orogen Royalties, Franco-Nevada, Midland Exploration, Altius Minerals, Royal Gold. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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