Strong Holdings to Buy on Pullbacks
Nestle SA (NESN:VX; NSRGY:OTC, 83.70) continues to see small improvements toward its somewhat modest goals. In particular, there has been an improvement in the margins, the result of efficiency programs. Margins are all important to a company such as Nestle, particularly given the current pricing pressures. There has also been increased growth, particularly in China, though the company is not expecting further acceleration of growth in that market.
Nestle remains a global blue chip, with strong management and a solid balance sheet, with diversified assets and sales, and innovative programs, though in the short term, it can be difficult to move the needle.
The problem is the valuation. Though not out of line industry peers, it is trading at a high price-to-cash flow; a high P/E; and importantly, the lowest yield since the beginning of 2008 (and we know what followed that). So we are cautious. For now, it is a hold.
Undervalued Awaiting Tax Decision
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$20.59) continues to perform in-line with guidance and expectations. This past quarter, though silver sales were weak, gold made up for that; lower operating and corporate expenses also helped. Some of the silver lag was the result of under-sale relative to production, which will be made up in the next quarter. In accordance with its policy to distribute 30% of cash flow, the dividend of $0.09 was announced, down a penny from last quarter, but up $0.02 from the quarter before.
The balance sheet, with $70 million of cash against $784 million of net debt, is the weakest of the big four, though overall valuations compare favorably with peers. The trigger for higher stock prices will be a recovery in silver or a favorable resolution of the dispute with the Canadian tax authorities, which is dragging on the stock. We are holding.
News from Almadex
Almadex Minerals Ltd. (AMX:TSX.V, 1.31) has reported a series of strong assays from recent drilling on its El Cobre deposit, primarily at the main Norte zone. Results include 481 meters grading 0.67 g/t gold and 0.27% copper. Due to a backlog at local labs, there are more results to come, including from a new zone, Raya Tembrillo, which has very strong surface expressions and for which many analysts are eagerly awaiting.
Significant deposit, attractive to suitors
This is a district play, with a cluster of deposits, and Almadex has now reached technical certainty it has a feasible deposit. Metallurgy is clean and straightforward. Additional drilling will now be in-fill on the main zone and expansion of the main zone (open to depth and along strike) as well as other zones around the property.
Given the stage at which Ixtaca now stands, and the funding needed for a good drill program ahead, consideration is being given to spinout El Cobre, with a producer as a lead shareholder (or similar arrangement), leaving Almadex with numerous other properties, mostly in Mexico, as well as royalty interests (on Ixtaca and Almaden's Ixtaca and other projects sold over the years). The balance sheet of approximately $7 million (divided more or less equally between cash, gold and securities) would likely stay with Almadex, as more money would be raised for El Cobre. This is just under consideration and no plan has been announced.
Almadex is one of our favorite exploration companies, well funded with strong management and multiple projects at various stages. A price pop over the last month from under $1.10 cause us to wait for better buying opportunities.
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."
