Wheaton Precious Metals Corp. (WPM, NY, 15.85) is on track to meet or exceed its guidance both for this year and for the next five years. Silver production was a little light, commodity prices were down, and costs increased (due mainly to the termination of an old stream); this quarter saw the first platinum revenue from its new Stillwater stream.
Recent acquisitions by Wheaton have been long-maturity assets with low returns over any reasonable time frame. This is one reason the stock is meaningfully undervalued relative to the two larger royalty/streaming companies, Franco and Royal. It also has a weaker balance sheet, with net debt of around $1.3 billion; the debt is up after the company drew on its credit line to fund the Stillwater stream. And of course, Wheaton is engaged in a battle with the Canadian tax authorities over the structuring of its offshore streams. The case goes to court in September next year.
Potential for leverage
Each of these negatives has some potential for mitigation. Wheaton has strong leverage to higher metals prices. It also has project optionality at Peñasquito and Salobo, where an expansion has been given the go-ahead. Wheaton has to pay 50% of the expansion capex, though this is not expected to be due until 2023 (after the completion test).
Notwithstanding the debt, Wheaton has $119 million cash, up 25% in the last quarter, and availability on its line. It is looking at streams smaller than recent acquisitions and these could be easily handled with the credit facility and potentially would have higher short-term returns. Given the projected cash flow, Wheaton could fully repay its debt by the end of 2022 (that is, before the new debt for the Salobo expansion). So, given the strong cash flow, the balance sheet is not particularly stretched.
With regard to the tax issue, there is some encouragement after Cameco won a not-totally dissimilar case in court, though the government has appealed the decision. A positive decision for Wheaton would also likely be appealed, but it would boost the stock. Wheaton's discount is significant: it trades at 27 times earnings, half the figure for Franco and just over half for Royal (48x). The dividend at 2.3% is higher, and on other metrics it also trades at a discount. A tax court win or higher metals prices would boost the stock price meaningfully. It traded over $20 for most of the year-and-a-half prior to August, and could rally quickly back to that level at least. Wheaton under $16 is a good buy.
Balance sheet clarification; still solid
Osisko Gold Royalties Ltd. (OR, 7.54) has long-term debt of C$419 million in addition to the $100 million drawn on its credit facility. It has paid down the debt by $65 million last quarter and so far this quarter. On the other side of the ledger, it has cash of C$137 million, with another $150 million to be received by year end from Pretium for the repurchase of its stream. It also has an investment portfolio valued at quarter end at $365 million. Plus there is another $350 million available on the facility. So this is a strong balance sheet, with availability for additional purchases.
Like Wheaton, Osisko is undervalued relative to the big two. As mentioned in our last review, though some discount is justified, we feel the current discount is exaggerated, and Osisko is a buy at current levels.
Vista: Great asset and very undervalued
Vista Gold Corp. (VGZ, NY, 0.46) continues much as before, doing work to improve anticipated returns from Mt. Todd, but spending a little more than it is earning. Vista owns the Mt. Todd deposit in the Northern Territories, the largest undeveloped gold deposit in Australia, in a great mining jurisdiction. It is well advanced, with all environmental permits, and substantially de-risked. Recent metallurgical work has improved gold recoveries from the 86.4% announced earlier in the year to 91% (and higher in the early years), thus boosting both the project's NAV and returns. The company is correct in stating that it has added significant value for "a very modest expenditure."
As of October 31, Vista planned to submit it final mine management plan (similar to an operating permit) "in the coming days." This is for the final review of the project. It is also undertaking drilling on nearby exploration licenses. The company did say it was in a position to move "very quickly" with a final feasibility study given the level of work already done.
Strong balance sheet now, but ongoing expenditures
Vista has cash over a little over $10 million, with no debt. In the latest quarter, it had a loss of just over $2 million. Going forward, fixed costs at Mt. Todd as well as fixed G&A costs are trending higher, and each expected to be about 20% higher next year (the latter, because of increased investor relations spending). Partially offsetting these increases, discretionary expenses at Mt. Todd are expected to be meaningfully lower than last year, since most big programs have been completed. Most of the Mt. Todd expenditures are in Australian dollars.
Looking at the full year ahead, we expect total expenditures of over $7 million, with revenue mostly from option payments on the sale of the Guadalupe de los Reyes. Vista recently agreed to extend the due date for a $1.5 million payment in exchange for an additional $150,000 cash plus interest on the $1.5 million.
In addition, Vista has two meaningful assets, used mill equipment which could bring in between $5 million and $10 million, and a little less than C$5 million shares in Midas Gold. Clearly, one of other of these assets must be sold over the next year or so to avoid a dilutive equity financing or some other financing (including a partial sale of the project). Each could provide the company with plus or minus one year's extra runway.
The company, however, is confident that its existing working capital plus a potential source of non-dilutive financing is sufficient to fully fund the company into 2020.
Undervalued and leveraged to higher prices
Vista is very undervalued on the basis of its Mt. Todd ownership, which should see the stock trade at least $1.50 to $2 per share. However, the company is in a phase where additional work, however valuable, is unlikely to excite the market; additional drilling, in my view, is unlikely to move the needle. At the same time, one can see how at the current spend rate, it will eventually hit a wall. An equity financing would be disastrous in my view and to be avoided at all costs.
The stock is leveraged to higher gold prices, which it needs before the project can be sold for a good price. But even at existing gold prices, Vista is very undervalued. But the stock could see additional tax-loss selling before the year is out. It was 85 cents nearly the beginning of the year and has essentially been in a decline all year, so is an ideal candidate for tax-loss selling. Note: I am not suggesting you sell for a tax loss at this point, rather that the stock may go lower based on other people selling. At that point, Vista would be a great buy for patient investors.
Nice goals but where is the execution?
Goldcorp Inc. (GG, NY, 9.42) has once again failed to show progress on its much-vaunted 20/20/20 goals (20% increase in production and reserves, 20% reduction in costs, by 2021). Operations were down a little on estimates, while costs rose (cash costs up 13% and "all-in sustaining costs" up 23%). Guidance for full-year 2018 has been revised again, with gold and silver production lower and costs up.
The company keeps reiterating its 20/20/20 goal, but so far it is going in the wrong direction. Reserves are up, but only because the company overpaid for difficult projects in the high Andes, projects unlikely to be in production for years.
Not surprisingly the stock plunged when the company announced these results in mid-October, down from $10.60, and has barely inched higher since. Goldcorp may see a strong rally on any major move up in the gold price, but whether it would be able to sustain any move is less certain. We are standing aside until there is clear evidence of improvement on operations and costs, and no more marginal acquisitions.
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: 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: Wheaton Precious Metals, Osisko Gold Royalties, Vista 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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