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Diversification Pays off for Franco Once Again
Contributed Opinion

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Adrian Day Expert Adrian Day reviews quarterly financials from several resource companies. Most are doing well, though costs are rising. But given recent rallies in stock prices, Day suggests, for the most part, holding rather than buying more.

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) reported another record quarter, with revenue and adjusted net income, at all-time highs. Energy revenue offset declines in precious metals prices.

Gold royalty and stream sales were lower on a quarter-to-quarter basis largely due to Cobre Panama, its largest asset, which saw record production but a delay in sales.

The company said it expects to meet its full-year guidance at the higher end overall, though at the lower end for precious metals. Overall, Franco expects an operating cash flow of almost US$1 billion for the year, with just over 70% of that from precious metals.

Cobre Panama, at 15% of Net Asset Value, is the only asset over 10%. 

Lots of Growth Ahead

The company made three portfolio additions during the quarter, two royalties and one stream, and notes that several new mines and expansions on which it holds royalties or streams are currently under construction. These include significant new assets, including Equinox’s Greenstone, G Mining’s Tocantinzinho, and Fortuna’s Séguéla, as well as the new royalty on Argonaut’s Marino project in Ontario, while major expansions are underway at Cobre Panama, Detour Lake, and Tasiast.

Franco noted that it has a history of building a deep pipeline that continues to pay dividends as developers are, and are expected to continue, coming online.

At the same time, the company sees opportunities for new acquisitions. The weaker precious metals equity markets, as well as the recent hike in interest rates, makes streams relatively more attractive than debt or equity, though the sector remains very competitive.

Right now, Franco is seeing the most value in medium-size deals, in the US$100 million to US$300 million range, with the most opportunities for project financing. Franco is focusing on gold, where it sees plenty of opportunities.

With available capital of almost US$2 billion, Franco is in a strong position. Hold.

Osisko Heading for Record Year

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) reported record operating cash flows and cash margins in the quarter, coming in above expectations. It had already pre-released royalty sales, which were slightly down on analyst estimates, though up more than 7% on the previous quarter.

The major news is that Osisko has now de-consolidated its 44% stake in Osisko Development which makes its financials clearer.

Going forward, this will be reported as an equity investment, along with holdings in two other companies from the same stable, Osisko Mining and Osisko Metals, for a total market value of US$378 million. 

One New Royalty, and a Strong Growth Pipeline

Earlier this month, Osisko acquired for US$50 million a 0.6% royalty on SolGold’s copper-gold project in Ecuador, with an estimated 8% IRR, considered quite high in today’s competitive royalty space. The royalty has a minimum guaranteed payment of CA$4 million a year for the period 2020 to 2039; it is accretive to Osisko.

This is a long-life asset backed by large players, with Newcrest and BHP both equity owns, and Franco holding another royalty.

CEO Sandeep Singh noted that Osisko’s assets were “big and getting bigger . . . long life (and) getting longer.”

Several assets on which it holds royalties are in the development phase. He noted that the company was disciplined, while its organic growth allowed it to be selective. It did little in the way of purchases in 2020 and 2021 and much of this year.

The consolidation of Malartic under Agnico’s ownership following the acquisition from Yamana is expected to be a plus for Osisko. With CA$301 million in cash plus investments of CA$388 million against debt of CA$300 million, Osisko has a solid balance sheet.

With another CA$550 million in available liquidity, it is well-funded for future opportunities. Again, given the rally we are holding. 

Altius Looks for Organic Growth

Altius Minerals Corp. (ALS:TSX.V) reported earnings slightly below expectations; attributable royalty income had been pre-released, up 26% in the same quarter last year. Altius Renewable Royalties continues a successful ramp-up, achieving positive cash flow during the quarter.

There was no significant change in the outlook, with the company indicating it expected to meet revenue guidance to a new record this year.

The company said that in the current environment, it would continue to favor organic growth, although it continued to look at M&A opportunities. Altius said the current negative market sentiment might result in a slower pace of development of projects, while prospect generation companies face reduced access to exploration capital even as the demand for new projects continues to be strong.

Earlier, the company had provided an update on its coal litigation, where it is seeking US$190 million in compensation from Alberta and Canada for the effective confiscation of its royalty interests.

Last month’s decision of the Supreme Court of Canada in an unrelated “constructive taking” case holds “materially relevant and positive implications” for Altius, it said. 

Company May Emphasize Debt Reduction

The company ended the quarter with US$23 million in cash (excluding CA$75 million in cash held within ARR), US$123 million in debt, and a portfolio of junior exploration companies with a current value of US$43.5 million.

It has US$93 million available under its revolving credit facility. Some US$42 million of its debt has a fixed rate of 4.3% until 2025, with the remainder at floating rates. The company said it might emphasize debt reduction in the coming periods.

During the quarter, it invested over US$18 million in new investments (almost US$16 million in new shares of Labrador Iron Ore Royalty Corp.). It also paid of US$3.8 million in dividends (with an increase announced for the next quarter) and repurchased 158,000 shares for US$2.7 million.

Overall the balance sheet is strong, with access to cash if needed.

Altius remains a core holding for us, one of our very favorite long-term resource investments. Following a nearly 30% rise in the stock price since late September, however, we would wait for a pullback to add to positions. 

Fortuna Doing Well, with New Mine Nearly Ready

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) reported strong cash flows, with earnings inline with expectations as costs are near the top end of guidance. Production had been pre-released.

Construction at Séguéla was 83% complete as of the end of October, with 95% of the total capex already committed and adequately funded for completion. With a rapid ramp-up expected following the first gold pour scheduled for the middle of next year, this mine will be a key growth driver for 2023. The company also received positive news when a Mexican Court confirmed the company’s 12-year extension to operate the San Jose Mine.

Almost a year ago, the government agency that grants permits reversed the extension, giving only a two-year renewal. (See, inter alia, Bulleting 793 and 804.)

This should now be the end of that saga.

In the quarter, 68% of Fortuna’s revenues came from gold, 20% from silver, and the balance from zinc and lead. After funding US$20 million towards the Sequela construction, Fortuna ended the quarter with almost US$91 million in cash; and US$120 million in net debt.

Given the recent rally in the stock price, we are holding.

Barrick Reduces Long-Term Outlook

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), at its annual analyst day, reduced its five-year guidance by 1% on production and increased cost estimates over the period by 14%.

It also expects capital spending to increase by 35% over prior estimates. Full-year 2022 guidance, however, was reiterated, and the company said it also expects to replace reserves.

It continues to pay down debt, recently commencing an offer to buy its 5.25% notes due in 2042.

Barrick is a Buy if you do not already own it.

Acquisition May Put Pan Am Back on Track

Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) reported financial results moderately below estimates, mostly due to higher costs. Gold production was slightly higher quarter-on-quarter, though below expectations, while silver output declined 2% but was meaningfully below estimates. Costs for both gold and silver were higher than forecast.

The company lowered its full-year guidance for silver production (by 8%) while maintaining its gold production estimate. Arguably, the underwhelming results highlight the potential benefits for Pan American from its acquisition of Yamana, which improves the quality of its producing assets (though at the cost of adding more countries), adds new assets to offset production declines, and lowers its overall costs.

The acquisition is accretive on most metrics. Gold Fields, which had an earlier agreement with Yamana, said it would terminate its offer (and receive a US$300 million termination fee). The Pan American acquisition is expected to close sometime in the first quarter following shareholder votes in late January.

Separately, the Guatemalan government’s consultation process with communities surrounding Pan Am’s Escobal mine continues, with the government expected to report to the Supreme Court, which ordered the consultation, by February. But the company said it does not have a date for the potential restart of the mine.

At the end of the quarter, Pan Am had cash of US$187 million and total debt of US$69 million, with US$500 million available under its credit facility. It also holds US$91 million in shares of Maverix, which is being acquired (for shares and cash) by Triple Flag. Pan Am will likely want to take as much cash as it can for that investment.

The stock price is down from US$24 in June, a dramatic drop. As discussed previously, the 70% share dilution will likely weigh on the share price in the near term, so we are holding. 

Midland Continues to Explore, Do Deals

Midland Exploration Inc. (MD:TSX.V) continues to be busy with a new drill program and an option for a project. First, it announced a maiden drilling program on the
Tête Nord nickel-copper (“Ni-Cu”) property, owned by Midland but under option to Rio Tinto. Second, it has optioned two James Bay properties to Brunswick Exploration for lithium exploration; the properties are close to Patriot Battery’s Corvette Project, which has reported exciting results.

The agreements exclude copper, nickel, zinc, lead, gold, silver, platinum, and palladium. Midland has earlier said it was evaluating its lithium potential. Midland will receive US$500,000 as well as exploration commitments.

In all, Midland has 10 active j-vs, with drilling expected next year on six or seven. It was US$7 million cash and no debt. The stock is inexpensive here, trading at its lowest share price (other than a couple of brief dips in the last few months) since the end of 2008.

It has strong management and a solid balance sheet, with multiple opportunities for success in good jurisdictions.

It is a Buy but note that it may be subject to tax-loss selling over the next month.

TOP BUYS this week, in addition to those above, include Lara Exploration Ltd. (LRA:TSX.V); and Kingsmen Creatives Ltd. (KMEN:SI).

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Adrian Day Disclosures:

Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2022. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.


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