Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$70.43) revenue is up, driven largely by its oil & gas royalties, however. Looking ahead, Cobre Panama, Franco's largest ever single investment, will see phased commissioning beginning later this year for first production in January. Cobre will drive the growth of 16% in gold-equivalent ounces by 2020. Under the unusual royalty, Franco will receive a fixed amount of gold and silver for each 1 million pounds of copper the mine produces, thus negating swings in the composition of the ore body. By 2020, this could be generating over $100 million a year for Franco.
After $523 million of investments in the first quarter, most of it at Cobre, Franco still has $1.2 billion of liquidity.
Franco is now the most widely held gold stock among generalist funds and institutions, other than gold ETFs, and this likely weighs on the stock in a period of general market volatility. However, at the current price—down from over $80 at the beginning of the year—Franco is a buy, particularly for those who do not own any.
Growth without a tax dispute
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$91.71) saw revenue from another new mine, Rainy River, in the first quarter, and overall is expecting growth from last year to next of 19%, independent of the gold price. The previously announced suspension of milling at Mt. Milligan in January will affect the current quarter's results (because of the timing of shipments), but this should not come as a surprise to the market.
Apart from the growth profile, the fact that Royal is a U.S. company and therefore unaffected by the Canadian tax authorities challenge to treatment of offshore royalties has helped the stock surge ahead, up from just over $80 at the beginning of March.
The company took an impairment on its investment in Barrick's large but troubled Pascua-Lama project, where work was recently suspended. However, now Royal, with a 5.45% gold royalty and 1% copper royalty on this large deposit, essentially has a low-cost option.
Given the sharp rise in the stock price and high valuation—with a price-to-book higher now even than Franco's—we are standing aside for now.
Turning the corner…again?
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$2.99) reiterated its annual guidance for 900,000 ounces of gold, excluding assets for sale and the Brazilian assets in Brio, which has been acquired by Leagold Mining Corp. (LMC:TSX.V; LMCNF:OTCQX). Yamana now owns 21% of Leagold. This sale is a positive for Yamana, since Leagold will likely put the energy and focus into the assets that were non-core for Yamana. It also reduces the average cash cost for Yamana's mines since the Brio mines had a cash cost about 25% higher than the rest of the mines.
Separately, the first gold pour has taken place at its next major mine, Cerro Moro, in Argentina. The ramp up of this mine will largely drive a 17% increase in production by 2020. Some sales of minor assets have helped improve the balance sheet, with net debt now $1.55 billion, down from over $1.7 billion at year-end. Assuming the ramp up goes up, cash flow from Cerro Moro should help cut debt further in coming years.
Certainly, there are signs of improvement at Yamana and the valuation is competitive, particularly the price to book value at just 0.7x relative to 1.26 x for the XAU index. However, we have been burned before, so, particularly given the move from $2.60 in the last three months, we are holding.
Slow progress towards its lofty goals
Goldcorp Inc. (G:TSX; GG:NYSE, US$14.21) had a slow start to the year. Despite somewhat improved production, driven by Peñasquito, operating costs also rose. Two new mines still in ramp up, Cerro Negro and Éléonore, actually saw lower production. Ramp up is taking longer than expected, though these long-life mines should generate strong revenue for the company once fully operational. We are holding but not buying at the current price.
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: Franco-Nevada, Royal Gold. 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: Franco-Nevada, Royal Gold, Yamana Gold and Goldcorp. I determined which companies would be included in this article based on my research and understanding of the sector.
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