OR Royalties (OR:TSX; OR:NYSE) announced preliminary third-quarter operating results broadly in line with expectations, and tracking in line with the company's full-year guidance of between 80,000 and 90,000 gold-equivalent ounces (GEOs).
The company is expected to grow to 120,000 plus GEOs by 2020. It ended the quarter with almost US$77 million in cash, after a US$15 million royalty purchase and US$29 million spent on share repurchases.
OR has tended to be disciplined and cautious in new royalty acquisitions.
We like the company, its management, discipline, and internal growth profile, but would hold for now.
Triple Flag Precious Metals Corp. (TFPM:TSX; TFPM:NYSE) reported in-line third-quarter operating results, although revenue was down 17% over the prior quarter, mostly due to lower metals prices; it reiterated its full-year guidance of 100,000 to 120,000 GEOs.
In the third quarter, silver and copper revenues were up, offset by lower gold revenues.
The quarter also saw the first revenues from the new Ravenswood mine in Australia.
Hold.
Fortuna's Production Down, but Stock Oversold
Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; F4S:FSE) reported lower production, due to issues at its flagship Séguéla mine. These were a blockade by local artisanal workers, now ended, and contractor equipment availability, also resolved.
Management reiterated full-year guidance. The stock sold off sharply on the miss, but quickly recovered most of it in the last two days.
We like Fortuna for its solid, disciplined management, solid balance sheet, and growth profile.
Buy.
Orogen Continues Its Streak of Transactions
Orogen Royalties Inc. (OGN:TSXV; OGNNF:OTCQX) sold its Cibola copper-gold porphyry property in British Columbia to Northern Discovery.
Orogen will receive CA$130,000 cash and shares currently valued at around CA$600,000 in addition to keeping a 2% royalty (subject to a 0.5% buy back).
Orogen consolidated the Cibola property through staking and some third-party agreements.
Orogen is a top exploration company, with a solid balance sheet and recurring revenue; four alliances (three where partners pay all the exploration), and multiple early-stage projects on which it holds royalties.
Buy on any weakness.
MARKET INSIGHTS In the minutes of the Federal Reserve's last meeting, released mid-week, all 19 members — not only the voting members of the Open Market Committee — unanimously agreed with the quarter-point interest rate hike, with most believing another hike before year's end would "likely be appropriate".
However, members were divided on whether the impact of the higher oil price was more important than emerging demand-driven inflation.
Fewer than 20% of traders see another hike this month, but 80% see one at the December meeting.
Normally, rising yields prove a strong headwind for gold, particularly when yields are moving up around the world; strength in the dollar and a strong oil price (arguing for further hikes in rates) aggravate the impact.
This trifecta would normally see the gold price sinking, but gold is holding up quite well, and is actually up over the last three months when yields started backing up.
Why is this?
Gold and Bonds See the Jig Is Up
Gold, and the bond market (yields are moving faster than the Fed), are signaling fiscal risk and a higher sovereign credit risk. In other words, the Treasury market, if not broken, is severely fractured.
The U.S. is having difficulty selling longer-maturity bonds at today's yields. Erstwhile top buyers include China, but also Japan.
This is very bullish for gold. China has been steadily increasing its gold purchases each month this year, 21 tonnes in September, the largest monthly purchase in three years.
Meanwhile, Tether resumed aggressive buying in the second quarter, after a decline in the first, 14 tonnes up from just 6 in Q1; September's buying has not yet been reported.
There was also aggressive buying of gold ETFs, almost US$4 billion in North American funds, and US$10 billion for global funds.
Though less than in September, the global buying is higher than in prior months, while the quarter's net buying is a record, boosted by a jump in buying from Europe.
Continued Selling of Gold Stocks Provides Opportunity
Buying of physical is in contrast to the ongoing selling of gold shares: GDX, the largest gold and silver equity ETF, saw over US$927 million in net outflows since the beginning of September, continuing the trend we have experienced all year.
Other gold and silver equity funds similarly continue to see net outflows.
This all the while that mining companies are recording record cash flows and stock valuations in their lowest quartile ever. In the quarter just past, we expect profits to be lower than in the second; the average gold price for the quarter, at about US$4,300, is down US$200, while the silver price at US$63.52 is down US$10.
Nonetheless, with costs under control, margins and cash flows will continue to be strong, and with the sector net cash positive, with many companies without debt, the free cash flows should also be strong. So the low valuations are a perverse anomaly.
To be clear, we believe that gold prices will continue to be volatile so long as yields continue to back up and the conflict with Iran continues.
An end to the war would bring the oil price down immediately (if only temporarily), leading to expectations that the CPI would decline, easing pressure on the Federal Reserve and other central banks to raise rates, while the dollar would immediately lose its geopolitical premium and resume its long-term slide, as we saw in 2023-2025.
This would be bullish for gold.
Stocks: Record Valuation and Bad Breadth
As for the U.S. stock market, it too is holding up well in the face of higher yields. Valuations remain extremely high, the highest on record by most measures, while the internal dynamics continue to weaken.
The market is highly concentrated, with tech (including AI) representing over 40% of the S&P index, higher even than at the height of the dot.com bubble in 2000.
Another way of looking at concentration: the S&P index vs its own equal-weight index has fallen to under 0.6, the lowest in its 15-year history, and well below its average of over 90.
The index, in other words, is no longer representative of most of the stocks in it, but equally many individual stocks are far better value than the index.
So we see high risk in bonds and U.S. stocks, low risk in gold equities.
Important Disclosures:
- As of the date of this article, officers, contractors, shareholders, and/or employees of Streetwise Reports LLC (including members of their household) own securities of Or Royalties Inc., Triple Flag Precious Metals Corp., Fortuna Mining Corp., and Orogen Royalties Inc.
- Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: None. My company has purchased stocks mentioned in this article for my management clients: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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