Despite an average gold price more than $350 below that in the first-quarter–silver down even more on a percentage basis–and oil considerably higher for much of the quarter, gold and resource companies reported mixed second-quarter results on the back of higher production and controlled costs, with the softer results mostly among the largest companies.
Virtually all continued to buy back shares (with Altius the notable exception); most used massive cash flows to pay down debt; some (including Altius and Triple Flag) increased their dividends; and all reiterated their full-year guidance.
Barrick Has Soft Quarter as It Caves to Newmont
Barrick Mining Corp. (ABX:TSX; B:NYSE) reported mixed results, with reasonable operating results but weaker financials. However, more important than the quarterly financials was the announcement of an agreement with Kingsmen Profits Jump, Despite Higher Costs.
- Barrick's Fourmile project will be put in the Nevada Gold Mines BarrickNewmont joint venture for a payment of $1.95 billion.
- Two small Newmont Corp. (NEM:NYSE; NEM:ASX) projects will also be put into the NGM jv.
- Newmont ends its objections to Barrick's proposed IPO of some of NGM.
The payment for Fourmile is considerably less than half what Barrick had indicated it was worth. Analysts had put a tag of up to $5 billion on Newmont's share today; the value would have increased if Barrick had waited until it was obligated to transfer it into the joint venture. The two projects Newmont is putting in the joint venture are more difficult to value as they have not been discussed much by Newmont for well over a decade. Though there could well be potential, their current value comes nowhere close to the gap.
Essentially, therefore, Barrick is paying Newmont to end the latter's objections to the proposed IPO. This suggests either that Barrick thought that perhaps, after all, Newmont's objections did have some validity, or they are just in too great a rush to meet their self-imposed year-end deadline.
Either way, whereas Barrick's former CEO Mark Bristow was clearly in the driver's seat when he pushed through the joint venture (with the threat of a takeover hanging over Newmont), now Newmont clearly has the upper hand over Barrick. Fourmile was to have been a key driver of Barrick's growth, but it has now been sold at a massive discount so that the controversial IPO can proceed. Newmont analysts are jumping over themselves about the "positive resolution".
North American IPO To Proceed as Pakistan Asset Downplayed
Barrick reiterated the year-end target for the North American IPO, with current Barrick CEO Mark Hill to be the CEO of the new company. Barrick named Sebastiaan Bock, who had previously run the Africa and Middle East portfolio, as CEO, Rest of World. He will report to CEO Mark Hill until the North America IPO, when he is expected to be named as CEO of Barrick.
Barrick also continued to downgrade Reko Diq, its massive copper project in Pakistan, saying it was continuing to review the project even as it reduced again its forecast spending (to a maximum of $500 million, down from a $600 million to $700 million range), citing increased security concerns. Barrick said there was the potential for "a significant increase" in both the capital estimates and timelines for the project. We would not be surprised to see Barrick exit the project, with perhaps Saudi Arabia buying its interest.
Hold.
Wheaton Saw Record Revenue, Despite Slip in Production
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) reported production slightly lower than expected, largely due to lower output from Salobo, currently its largest stream, offset by higher silver from Antamina.
But because of the timing of sales, financial results were better than anticipated, with record revenue of $929 million. A number of Wheaton's assets are expected to perform better in the second half, so the company should meet guidance for the year.
Following the purchase of the Antamina II stream for $4.3 billion during the quarter, debt increased, with net debt at $1.9 billion, though the company still has liquidity of $2.6 billion. We expect Wheaton to emphasize debt reduction in the next couple of quarters.
Hold.
Franco Sees Production Increasing After Earnings Miss
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) reported somewhat weaker financial results, despite production coming in as expected. It reiterated annual guidance, now tracking to the upper half of the range because of the additional contribution from the sale of Cobre Panama's stockpile, which had not been included in the original guidance, as well as better-than-anticipated energy revenues.
Quarter-end cash increased to just over $1 billion, with no debt, putting it in a very strong position for new acquisitions.
Franco is a core holding, with a low-risk business model, broad diversification in assets, operators, and geographies, with a rock-solid balance sheet and solid management.
Despite the recent run-up in the price, Franco's valuation metrics are still reasonable on a historical comparison. Its price-to-cash flow multiple, for example, is much closer to its low than to its high. And a restart of Cobre Panama is not fully reflected in the stock price.
Buy if you are new to the space and do not own any FNV. Otherwise, we would hold now and look for better opportunities to add to positions.
Pan American Had Soft Results, but Buys Back Shares Aggressively
Pan American Silver Corp. (PAAS:TSX; PAAS:NYSE) reported soft second-quarter results, with lower production and higher costs, partly due to higher-than-expected tax payments.
The company reiterated its full-year guidance but indicated gold production would be at the lower end of its range, while costs would be at the higher end of the range. The long consultation process over the restart of Escobal in Guatemala drags on. It ended the quarter with $1.56 billion in cash, after aggressive buybacks (spending $224 million on just over 6 million shares, up from $25 million to buy 800,000 shares in the first quarter).
The company's goal is to return up to $1 billion to shareholders in buybacks and dividends this year. The stock price declined sharply after the results by nearly 10%.
Use this opportunity to buy.
Second-Tier Royalties All Report in Line
Royal Gold Inc. (RGLD:NASDAQ) reported 2Q earnings broadly in line with expectations after previously providing an estimate of streaming revenues. The company reiterated its full-year guidance, though noting that copper and other metal royalties were trending above guidance. Several assets should see production growth in the second half of the year. Royal continues to reduce the debt taken on for large acquisitions last year, leaving now $325 million of debt, and over $1 billion available on its credit facility, putting it in a good financial position.
Although Royal has meaningful upside potential, we would hold for now.
OR Royalties (OR:TSX; OR:NYSE) reported financial results as expected, after previously providing operating results. OR ended the quarter with $76 million, down slightly, with debt of $215 million after making over $280 million in investments during the quarter. It maintained its full-year guidance, notwithstanding the suspension of mining at Agnico Eagle Mines Ltd.'s (AEM:TSX; AEM:NYSE) Barnat pit, on which OR has a royalty. OR repurchased $8 million shares during the second quarter, but in July, following the Barnat news, spent another $29 million, buying back just over 1 million shares, an aggressive pace of well-timed share buybacks.
Buy.
Triple Flag Precious Metals Corp. (TFPM:TSX; TFPM:NYSE) also reported financial results in line; it too had previously reported preliminary results. Upwardly revised guidance, which followed its agreement with Steppe Gold, was reiterated. Cash is down to $15 million (down from $144 million), and debt stood at $236 million, though the company has available liquidity of $1.1 billion.
Hold.
Fortuna Makes New Acquisition After Somewhat Soft Earnings
Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S0:FSE) saw weaker-than-expected earnings, mostly due to higher tax expenses. Costs for the quarter were a little better than expected, with "all-in sustaining costs" (AISC) of $2,157.
Remember, these costs are expected to decline throughout the year as temporary capital expenditures decline or end. The company is well-positioned to advance the recently approved Séguéla expansion and new Diamba Sud project.
Separately, Fortuna announced the acquisition of the Bambadji gold exploration project in Senegal from Barrick and IAMGOLD. The project is adjacent to its Diamba Sud project and should extend the mine life; construction is expected to begin this year. Fortuna paid $200 million, as well as a small royalty on initial production from Bambadji, an attractive transaction as an add-on to Diamba.
Fortuna is a multi-mine company with top, disciplined management, a rock-solid balance sheet, a strong operating history, and growth potential. It remains undervalued relative to peers.
Use any dip in the share price to buy.
Altius Has Multiple Growth Opportunities Ahead
Altius Minerals Corp. (ALS:TSX) reported financials in line with the back of previously reported record royalty revenue, and lower G&A expenses.
In addition to the increased ownership in the renewable business (see Bulletin #1017), Altius noted that AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE) is to advance the Arthur Gold Project to a full feasibility in the second half. Anglo has released a maiden reserve estimate (as opposed to resource) on the Arthur deposit of 4.9 million ounces; Altius retains a 0.5% royalty on the project.
We would expect royalty revenue to increase over the next two years (Altius does not provide guidance) on the back of higher revenues from both the renewable and lithium portfolios in particular, with the Voisey's Bay underground expansion ramping up through the rest of this year. Beyond that, there is growth potential from the Kami iron ore and Arthur gold projects.
The company ended the quarter with $143 million in cash and $86 million of debt, before an equity raise of $181 million to fund the purchase of its increased share in the renewable business. It remains, therefore, in a good position for additional acquisitions.
As we have stated many times, Altius is a core holding for us, offering exposure to a broad range of commodities, with top, thoughtful, and disciplined management, a solid balance sheet, and multiple growth opportunities.
We would, however, look for a pullback to add to positions.
Metalla Sees Strong Results as It Hits Inflection Point
Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American) reported strong results, above estimates, as the company hits its inflection point. The quarter saw the first revenue from its royalty on the Amalgamated Kirkland mine.
This quarter should see initial revenue from another royalty, on La Pirralla, while the next 12 months should see material progress at some of Metalla's largest assets, including the expansion study for an integrated Côté/Gosselin operation, which would bring forward Metalla's royalty revenue primarily on Gosselin; a production decision on Copper World; federal permits on Castle Mountain; and environment approval on Taca Taca.
These four assets, which represent over 50% of the company's net asset value, had (with the exception of Gosselin) received little value in the market, in my opinion, until very recently.
It ended the quarter with nearly $11 million in cash against $13 million drawn on its $40 million revolver, a dramatically changed balance sheet from just a year or 18 months ago.
Tether Continues Buying, Others Take a Look
This all coincides with Tether continuing to increase its stake in the company, 13.5% per the last filing (July 15th). The end result could be that Metalla is acquired by a third party, with cash-rich Franco, which also has royalties on the four assets mentioned above that represent over half of Metalla's NAV.
This is pure speculation on my part, and we would note that in the past, Franco has downplayed any possible corporate transactions, arguing that a corporate acquisition involves buying assets it does not particularly want as well as those it does, making the purchase of the desired assets expensive. However, the strong overlap and Metalla's low price-to-NAV mitigate that argument. Continue to buy, though preferably on the increasingly less frequent, shallower, and shorter pullbacks.
Kingsmen Profits Jump, Despite Higher Costs
Kingsmen Creatives Ltd. (5MZ:SGX) reported first-half results, showing revenue up nearly 4% on the year-ago period, while cost of sales increased nearly 6%. However, after-tax profits jumped 52% after accounting for higher contributions from associates and lower interest and other expenses. This was lower revenue growth than expected, but Kingsmen has several projects underway that should see that number increase. The stock fell to its lowest level since March, where it yields 5.6%.
Buy.
TOP BUYS this week, in addition to the above, include Midland Exploration Inc. (MD:TSX.V) and Lara Exploration Ltd. (LRA:TSX.V).
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