Ares Capital Corp. (ARCC:NASDAQ, 16.31) saw net income catch up with the dividend following the higher share count after the American Capital acquisition at the beginning of last year. For the fourth consecutive quarter, earnings improved, running at 39 cents per share in the last quarter, up from 32 cents a year ago, and now greater than the dividend payout. (See our discussion and expectations Bulletin #683 and prior.) If not immediately, we can now look ahead to dividend hikes.
American Capital acquisition pays off
Ares acquired a $2.5 billion American Capital portfolio. It has now received more than $1.5 billion from exits and repayments, with a remaining portfolio of $1.6 billion, including about $1 billion of lower yielding assets (average yield 6.8%).
Included in the recent tax act that passed Congress were several provisions related to Business Development Companies, including, most notably, allowing leverage to increase from 1:1 debt to equity to 2:1. Ares is under-leveraged now. It wants to maintain its investment grade rating and will be cautious in increasing leverage.
Although the stock price jumped following the quarterly financial release showing earnings had now climbed above the dividend, it remains inexpensive, trading under book and yielding 9.3%. For such a conservative BDC, this is a low valuation. For those who do not own, it can be bought, and we are holding for a justified and anticipated re-rating.
Strong growth, solid balance and good valuation add up to "buy"
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$10.08) reported a strong quarter, with "gold equivalent ounces" continuing to increase. This year, GOEs are expected to be 39% over last year, with another 12% growth next year. In all, they are expected to double over the next five years, simply from organic growth. At the same time, costs are coming down, from over $600 per ounce in 2016 to an estimated $200 per ounce in 2020 (partly the result of costs being spread over more ounces).
Osisko continues to have a strong balance sheet, ending the quarter with $333 million in cash, an equity portfolio of $350 million, and $300 million available on its credit line, giving it almost $1 billion of fire power. ($99 million was spent on a new royalty transaction after quarter end.)
Osisko continues to trade at a lower multiple than the larger royalty companies, trading at 1.1 times Net Asset Value compared with 1.5 x to 1.9 x for the big three. Not surprisingly, Osisko has been buying back its own shares.
Although the stock price has recovered from lows in March and April, it remains a good buy. It traded at $12 earlier in the year (and much higher last year.)
Exploration spin off moves ahead
Almadex Minerals Ltd. (AMZ:TSX.V, 1.34) has announced that the special shareholder meeting to vote on the proposed spin out of exploration assets will take place this coming week. The company will essentially split in two, with the more advanced El Cobre project remaining in Almadex, in which the Australian major miner Newcrest will hold 19.9%, while the "spinco" will hold exploration projects; a 1.75% royalty on El Cobre; a 2% royalty on Tuligtic (held by Almaden); royalties on various exploration projects; 4 million shares in Almadex; and approximately $6 million in cash, 1,596 ounces of gold bullion, and various other shares in exploration companies. So, the spin-off will be in an excellent position to advance exploration on its projects, while El Cobre will receive the focused attention it needs to move forward.
A successful decade completed
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$73.62) , one of our core holdings, recently celebrated the 10th anniversary of its IPO after de-merging from Newmont. In its earlier incarnation, Franco originally went public in 1983 and has been one of the most successful gold companies.
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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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Ares Capital, Franco-Nevada and Osisko Gold Royalties. 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: Ares Capital, Almadex Minerals, Franco-Nevada and Osisko Gold Royalties. I determined which companies would be included in this article based on my research and understanding of the sector.
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5) From time to time, Streetwise Reports and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article, until one week after the publication of the interview or article. As of the date of this article, officers and/or employees of Streetwise Reports (including members of their household) own securities of Osisko Gold Royalties, Franco-Nevada and Almadex Minerals, companies mentioned in this article.