Wheaton
Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$21.18) continues to
diversify away from silver with two new streams, a gold and palladium stream
on the Stillwater Mine (a long-life mine in the U.S.) and a cobalt stream on
Voisey's Bay nickel mine. Both streams are front-loaded; Wheaton will receive
4.5% of the palladium reducing on hurdles to 2.25% and 42% of the cobalt
(expected to commence in 2021 after a mine expansion) down to 21% over time.
The first has a 6.1% IRR, and second 11% (before tax), reasonably high in the
current streaming environment.
However, Wheaton, already with a less than sterling balance sheet, funded
both—$500 million and $390 million respectively—from its credit facility,
adding to its debt.
Wheaton is undervalued relative to the other large royalty and streaming
companies. The ongoing dispute with Canadian tax authorities is largely
priced in, though a completely unfavorable outcome would hurt the stock,
particularly given that the amount in dispute has not been reserved. We are
holding Wheaton.
Not achieving goals yet
Goldcorp
Inc. (G:TSX; GG:NYSE, US$12.34) saw a weak quarter, with lower gold
production and higher-than-estimated costs. The company has advised the third
quarter will also be soft, while forecasting a strong fourth quarter. The
company's grand 20/20/20 goal (for 20% higher production, higher reserves,
and lower costs) was restated, but the company does not appear to be making
great strides towards the goals. Execution is the key. Two major new mines
have been experiencing more difficult ramp-up periods than expected—that's
Cerro Negro and Éléonore—though both are improving, and these two mines give
the company potential to go some way towards their production and cost goals.
The balance sheet, with $2.4 billion of net debt, is not as strong as many
of its peers, though its valuation is below its peers. We are holding, but
not energetically buying more. However, the current price—down over two
dollars from mid-June—is overdone, and probably a good price for a trade
here.
Good quarters at Yamana and Osisko
Yamana
Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$3.10) had a good quarter, with
better-than-expected production and lower costs. A new mine, Cerro Moro, just
announced commercial production so will contribute in the second-half, which
should be another good period for Yamana.
Net debt is a reasonable $1.58 billion, with liquidity of almost $900
million (most of which is a credit facility, not cash). It is valued below
peers. We are holding for the time being, but given that Yamana has
disappointed us time and time again, we are not buying.
Stock slammed by mine delay
Osisko
Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$9.16) reported good results,
particularly a record production quarter at Canadian Malartic, its
cornerstone asset. The bad news was the announcement of a blockade at
Lydian's Amulsar project in Armenia, which pushes back production to the
middle of next year (at the earliest). This was to have been Osisko's next
major cash-flowing asset, and the news drove Osisko's share price down
sharply ahead of its own results.
The balance sheet remains strong. Though cash is down to $189 million,
after new investments of $108 million in the quarter (and two of which carry
future payment commitments), debt is also down after a $52 million repayment
to $450 million. Osisko also has a large portfolio of junior companies valued
around $450 million, and it is expected that Pretium will buy back its
royalty, giving Osisko US$119 million before year end, so the balance sheet
remains, and will remain, strong.
Osisko trades at a meaningful discount on several metrics to other large
royalty companies, only partly justified (smaller, and higher-risk in
exploration), also now at a discount to NAV. Take advantage of the sharp
price decline—from $9.68 at the end of July; Osisko is a strong buy here.
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."
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