Franco-Nevada
Corp. (FNV, NY, 64.89) had a strong quarter, with gold streams from two
large copper mines (Antapaccay and Candelaria) better than expected with
strong oil and gas revenues (which represent somewhat over 10% of revenues,
and growing). As always, some assets perform better than expected, while some
has softer quarters. There were no particular significant shortfalls in the
recent period. Franco said it was on track to meet its annual guidance. This
is a benefit from having nearly 40 minerals assets generating revenue, none
representing more than 15% of the total.
Its next large asset, Cobre Panama, is expected to start production in the
first quarter of next year, though sales (and Franco's revenue) may come a
little later. There is a somewhat complicated challenge to the way the mine
concession was granted, though owner First Quantum expects that to be
resolved in the near term, and it should not affect the mine start-up.
Meanwhile Franco has made its final contribution under its agreement.
The balance sheet remains strong, with $77 million in cash and no debt,
and a $1.1 billion undrawn credit facility. In the current environment, oil
and gas revenues are expected to increase in relative as well as absolute
terms, perhaps exceeding 20% next year, before Cobre Panama is producing at
full capacity.
Franco-Nevada is a core holding for us, with best-in-class management,
business model, assets and balance sheet. If you do not own, we would buy
here, but otherwise look for prices closer to the recent floor around $62.
Low production at key assets hurts revenue
Royal Gold
Inc. (RGLD, Nasdaq, 73.69) saw royalty and stream revenue down, largely
because of lower production at Mt. Milligan and lower grades at Peñasquito.
The former have been well advertised to the market. Milligan's operator,
Centerra, has faced a water supply issue all year, but it just hit the last
quarter's revenues. The company has applied for permits to gain access to
alternative water sources. It is currently operating on temporary permits,
and if not made permanent, mine will not move back up to full capacity until
the snow melt next spring. Royal also took losses on fair value on
investments, notably Rubicon, in the quarter. On the positive side, the
company saw lower G&A, while the balance sheet remains strong, though not
as strong as Franco, with net debt of $238 million, down from the previous
quarter, and an unused $1 billion credit facility.
Though its valuations are in line with other major royalty companies, it
needs Milligan to come back to full production, representing as it does, over
25% of its NAV and revenues. If this happens, Royal—down from over $90 in
July—could recover strongly.
A different approach to royalty generation
Osisko
Gold Royalties Ltd. (OR, NY, 7.39) reported royalty revenue in line with
estimates. Canadian Malartic Mine, on which Osisko holds its largest royalty,
is on track to achieve guidance, while Éléonore continues its long ramp up,
with sustained mining of around 400,000 ounces annually is expected by the
end of the year.
There has been some activity in the portfolio this past quarter. As
expected, Pretium exercised its right to repurchase the royalty on its
Brucejack mine; Osisko retains, for now, the offtake agreement on the same
mine. Osisko also renegotiated its stream with Stornoway Diamond, paying
$21.6 million to expand the stream to the entire production on slightly
different terms. It also acquired an attractive stream on Falco's Horne
project. Falco is one of Osisko's "incubator" companies. This novel
approach provides Osisko with opportunities to more early stage projects,
though makes it somewhat more risky than its larger peers.
Osisko has a good balance sheet with $137 million in cash, a portfolio of
investments valued at about $365 million, and $100 million drawn on its
credit facility (with another $350 million available). It is trading at a
discount to the other large royalty companies, particularly on a price-to-NAV
(under 1x compared to well over 2x for Royal and Franco). However, given that
its junior portfolio represents 16% of its NAV and that it is a smaller, less
diversified company, some of this discount is justified. However, the current
level is overdone; down from $9.50 in July and almost $12 at the beginning of
the year, Osisko is a buy at this level.
Creating your own royalties
Altius
Minerals Corp. (ALS, Toronto, 13.22) reported strong results, on the back
of higher iron ore and potash revenues offsetting lower base metals and
thermal coal. There were some peculiarities, mostly positive, in recent
results: the resumption of Labrador Iron Ore Royalty distributions after a
work stoppage; mine sequencing at Sheerness coal; the settlement of
litigation and resumption of royalty payments at Voisey's Bay; and Nutrien
closing one operation on which Altius does not hold a royalty and shifting to
Saskatchewen mines on which it does. All in all, Altius said it remains on
track for annual revenue of between $64 million and $69 million this year.
Again, this is a benefit of having exposure to different resources.
On an annual basis, copper accounts for about 44% of revenues, coal 24%,
and potash 13%, with iron ore and nickel accounting for most of the
remainder. Though total revenues would remain fairly stable (from existing
producers) for the next five years, by 2022 the potash revenues will have
more than doubled, while copper will have declined to around 33%, due to the
closing of one large mine, and the start of another (Gunnison, in Arizona,
which will start this year and still be a small contributor, around $1
million by 2022, though rising to $7 million by 2026).
Altius has made additional royalty investments, increasing its stake in
Labrador Iron Ore Royalty and the new Lithium Royalty company. It has also
spun out a new diamond company, currently private, with DeBeers Canada as a
leading investor. Following drilling this winter, the company plans to go
public. As is its game plan, Altius will retain a significant share ownership
as well as a royalty on any future revenues.
Equities and royalties in multiple juniors
The balance sheet is strong, with $84 million in net debt and $100 million
available on an unused credit facility. It also holds a portfolio of junior
equities valued at around $68 million. The appreciation in this portfolio was
due largely to a 15% interest in Evrim (which is also on our list of current
holdings). It has bought back some of its own shares this past quarter.
Alderon Iron Ore announced an updated feasibility study on its Kami project,
showing strong economics on the high-quality product; though Altius sold down
some of its share-holding, it remains a 3% royalty. Altius also exchanged a
50% interest in various exploration interests in the James Bay area for an
equity interest in Midland.
Altius is a core holding for us, though the share price tends to be
volatile. It has risen from lows under $12 in August and early September to
nearly $14 earlier this month, before the recent drop. We would wait to buy
for prices closer to the mid-$12 level, depending of course on whether you
already own or not.
New option generates cash and potential
Lara
Exploration Ltd. (LRA, Toronto, 0.55) signed an option agreement with
Capstone Mining on its Planalto Copper project in northern Brazil. The
project returned very high-grade drill results over the past 12 months. Under
the agreement, Capstone will make payments to Lara (US$150,000 immediately
and $200,000 following receipt of a drill permit) as well as exploration
commitments of $5 million over three years to earn 49%. At that point,
Capstone can earn another 2% (for majority ownership) upon payment of
$400,000 to Lara.
The agreement is a good one, seeing fairly aggressive exploration of a
high-potential project as well as providing ongoing revenue to Lara.
Lara has other key assets, including a high-potential zinc project,
Puitico in Peru; a 2% royalty on a new coper mine, Maravaia (formerly
Curionopolis); and an interest in a lawsuit on its Libertade project.
The company has about C$2 million in cash and marketable securities, and
has a history of making progress throughout the bear market at a low spend
rate. It has various payments coming in, including on Maravia, where its
partner must pay Lara $1 million if it is not in production this month (which
it won't be). Lara has already granted one extension.
It also has several other properties, mostly in Brazil and Peru, with
drilling under options and joint ventures. Lara has been very active in
recent years, has multiple properties being worked and two high-potential
assets, as well as Planalto. Management has proven itself most adept at doing
attractive deals even in a down market and without excessive dilution.
(Indeed, Lara is one of the juniors with minimal dilution over the past
decade.) At this level, it's a very strong buy. Indeed, we will add another
tranche of Lara to our list at C$0.55.
Waiting and wishing and hoping
Evrim
Resources Corp. (EVM, Toronto, 1.50) is currently drilling on its
100%-owned Cuale project in Mexico. Evrim has planned a minimum of 3,000
meters comprising 10 to 15 drill holes, with the first holes testing the
depth of the high-grade mineralization found in trenching at La Gloria.
Drilling is also planned for four step-out areas identified by geophysics.
Results will likely be released by the company in two batches, with the first
round of results expected potentially by month end.
Being paid to take part in a scavenger hunt
Though Cuale is the focus of the company and the market at present, Evrim
is not standing still on other fronts. Last week, it announced a very
attractive exploration alliance in the western U.S. with Yamana. Under the
agreement, Evrim has free access to Yamana's extensive dataset (obtained from
work conducted over 30 years by Meridian and FMC). Yamana is funding the
exercise with an initial $1 million. Yamana has the right to enter into an
option agreement on any project unearthed by Evrim on predetermined terms
(including payments to Evrim, initially of $150,000 and subsequent three
years of $100,000 annually; and a royalty to Evrim). At the end of a
three-year alliance, both companies have equal access to the database and are
free to pursue any projects independently.
This is a superb opportunity for Evrim on very attractive terms which
provide it with cash and a royalty on properties that Yamana wants, and
opportunity for multiple projects it is free to deal to other companies if
Yamana declines.
Drilling is also underway on a very prospective property Cerro Cascaron,
optioned to a junior, Harvest Gold, and First Majestic is undertaking an
infill drilling program on Ermitaño (on which Evrim holds a royalty) to
upgrade the resource to indicated.
How good will the drill results be?
Results from Cuale could move the stock price significantly in either
direction. Certainly, disappointing results—which we do not expect—could see
the stock price fall back to levels before the initial trench results set the
market aflame. Results which confirm the grade and show it extending to depth
could see the stock price jump meaningfully. We are holding. Our next move
will depend on the results when released and the market's reaction.
The fat lady is preparing to sing
Nevsun
Resources Ltd. (NSU, NY, 4.48) continues to inch up as the acquisition by
Zijin draws closer. In Canada, at C$5.90, the shares are just 10 cents below
the tender price. Given we are not expecting another competing bid for the
company—nor, on the other hand, do we see much risk of the acquisition not
completing—this is a small discount for 50 days. Given the weakness in the
Canadian dollar over the past month and a half, the U.S. price has not moved
so much.
If taxes are an issue, you might wait and tender your shares, and
if the proceeds are received next year (and you are a cash-basis taxpayer),
potentially postpone your tax bill a year. (Note: we are not tax accountants;
ask your accountant.) Now that the Lundin offer has expired, there is also
the possibility that Nevsun and Zijin bring forward the closing date, which
would make the tax consideration moot. Zijin has already received two of the
three approvals from China (as well as the Canadian approval, which was fully
expected).
If taxes are not an issue, a Canadian might sell, while a U.S. holder
might wait in anticipation of a stronger Canadian dollar in coming weeks
offering a better opportunity to sell. But we are only talking about pennies
here. Much depends on whether you have alternative uses for the funds.
A potential new discovery is worth watching
Midland
Exploration Inc. (MD, Toronto, 0.94 x 1.05) released very promising
high-grade results from a new project in James Bay, with copper, gold,
molybdenum and silver showings. The property, called Mythrill, is a new
discovery in an underexplored area, though one with excellent infrastructure
(a road and electricity). The second set of results on the heels of the
initial release extended the strike length of mineralization to 2 km (from
700 meters); it remains open in all directions. The high-grade boulders
suggest strong mineralization.
This is very early, with the assays mostly from grab samples and some
channel samplings. It is not known yet if the mineralization is continuous.
Although the company plans to conduct an IP survey and fly an electromagnetic
survey, probably by Christmas, with snow falling, there will likely be little
work on the ground and no drilling until spring. The company aims to generate
drill targets from its work over the winter.
Midland is well funded, with $11 million cash and no debt. Moreover, in
Quebec, there is a rebate of 38 cents for every hard dollar spend on
exploration in the province.
The stock price jumped on the news, following both releases, from under 80
cents to over $1.20 before falling back. Given the likely lack of exciting
news over the winter, the short-lived gains was not a surprise and the stock
will likely further drift back in coming months, giving us an opportunity to
more up more shares.
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."
[NLINSERT]
Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares
of the following companies mentioned in this article: Evrim, Nevsun, Lara
Exploration, Franco-Nevada, Royal Gold, Midland Exploration, Osisko Gold
Royalties and Altius. 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: Evrim,
Nevsun, Lara Exploration, Franco-Nevada, Royal Gold, Midland Exploration,
Osisko Gold Royalties and Altius. I determined which companies would be
included in this article based on my research and understanding of the
sector.
2) The following companies mentioned in this article are billboard sponsors
of Streetwise Reports: Pretium Resources. Click here
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