Goldcorp Inc. (G:TSX; GG:NYSE, US$11.52) looks set to be acquired by Newmont, but not without continuing controversy, particularly over chairman Ian Telfer's egregious "retirement allowance" payment, almost tripled after the acquisition announcement. After my comments last bulletin, I was invited onto BNN/Bloomberg to discuss the merger. See TV interview here. The response was overwhelming, and positive.
- Following the noisy opposition, Newmont and Goldcorp announced that Telfer would not be continuing as vice chairman of the combined company. But Telfer keeps his payment.
- A few Newmont shareholders weighed in, saying Goldcorp should not benefit from the recent Newmont/Barrick Nevada joint venture, and opposing the large payment to Goldcorp's chairman. Goldcorp agreed for current Newmont shareholders to receive an extra cash dividend. But Telfer keeps his payment.
- Shareholders are down by about two-thirds since Telfer became chairman. But Telfer keeps his payment.
We are holding the shares for now. We have voted our shares against the merger, opposing both the payment but also the sale of the company close at barely one-third the share price when Telfer took over in 2006. Confucius he say: "To receive a salary when you have lost the Way, that is shameful."
Ups and downs with strong outlook
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$74.37) had mixed results for the quarter and year. Earnings were down a little, mostly because of weak revenue from one major asset, Candelaria, where lower-grade ore from the stockpile is being processed following a pit slide in late 2017. Strong oil & gas revenues helped offset this.
Guidance for 2019 is also a little lighter than previously estimated based on a slower start-up at Cobre Panama, the major copper mine where first ore was processed in February. However, five-year guidance remains in line. Candelaria is mainly a timing issue, while Cobre Panama has a fairly steep growth, from 40,000 to 60,000 ounces (to Franco) this year, to 270,000 next year, and up to 300,000 by 2022. Overall, gold equivalent ounces (GEOs) are expected to increase by 30% by 2023, largely because of the Cobre ramp up and normalization at Candelaria.
Risk and opportunity
The biggest (known) near-term risk for Franco is the ramp-up at Cobre, but we think the guidance provided is conservative. With over $1 billion in available liquidity—just $70 million in cash—Franco is in a good position to take advantage of any opportunities, including, for example, helping finance acquisitions of the non-core assets that both Barrick (following the acquisition of Randgold) and Newmont (if the Goldcorp acquisition succeeds) will be looking to sell.
Franco remains our core gold holding. We are holding, but would buy more on any break, say to the low $70s.
Strong move after tax settlement
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$23.58) reported 2018 "production" in line, with both San Dimas and Stillwater (palladium) strong, while Peñasquito was down. The settlement of the tax dispute with Canadian authorities also involved costs of $30 million, in taxes payable and legal expenses. Peñasquito, Stillwater and Constancia are all expected to see major growth in the years ahead, contributing to growth from 690,000 GEOs this year to an estimated 857,000 over five years (without any new acquisitions).
Given the jump in the stock price since the tax settlement was announced, from $16, we will refrain from chasing the price, but look to add to positions on any meaningful pullback. We are holding as a long-term exposure to gold, silver and other metals.
Record revenues and aggressive share buy-back
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$11.28) has benefited from the company's aggressive share buy-back program, following a record-year for ounces and revenue. It took a write-down on its Éléonore royalty, which has experienced a difficult start up, hurting reported earnings. Its revolving credit line has been completely paid off; C$450 million is now available. As of its fourth-quarter results call mid-February, it had acquired 1.7 million shares for about C$20 million. The buy-back is for up to C$200 million.
In addition, Osisko has been active on additional investments, mostly reasonably small, including a $10 million silver stream on Falco's Horne Property, and a 5% royalty on Victoria's Eagle gold mine in the Yukon. It also acquired additional shares in exploration company Harfang, bringing its ownership to almost 17% of the shares outstanding.
The shares are well-supported by the share buy-back as well as revenue growth, but we would wait for a pullback to buy. We are, however, holding.
Two active exploration companies made progress
A first drilling program is underway at Midland Exploration Inc.'s (MD:TSX.V, 1.21) Mythril property. Several targets will be tested, and initial results could be available within six weeks or so. The potential is huge and Midland would have no difficulty finding a partner should the drilling support the grab samples from last fall. The stock, after running up to $1.45, has retreated, probably from investors wanting to lock-in gains. However, to us the risk-reward is favorable; Midland stock is supported by a strong balance sheet and multiple other projects and partnerships. If you do not own, or want to add some speculative juice to your long-term investment, take advantage of this pull back.
Mostly good news for Evrim
Evrim Resources Corp. (EVM:TSX.V, 0.30) remains very active, with both good and not-so-good news in recent months. First drill results from Cerro Cascaron, which it has joint-ventured out to a junior, were lackluster, with low grades, but not a bust. Partner Harvest Gold has a payment to make shortly, and may pass unless the deal terms are revised. On the positive side, Newmont has designated a property (Astro) from its regional alliance with Evrim in the Northwest Territories for an option earn-in. And First Majestic has published an update to its maiden resource at Ermitaño, the property Evrim discovered adjacent to First Majestic's Santa Elena mine. The resource, at 8.8 million silver-equivalent ounces, is up on previous estimates. Santa Elena is running low on ore, so the property could be advanced expeditiously; Evrim maintains a 2% royalty. The value of this royalty alone, plus Evrim's $12 million cash, is worth the entire market cap of the company. It may require patience from here, but Evrim is a quality exploration company and a strong buy at these levels.
Editor's note: an earlier version of this article incorrectly stated that First Majestic's resource estimate is its maiden estimate; it is an update to the maiden estimate.
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: Midland Exploration and Evrim Resources. 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, Midland Exploration, Evrim Resources, Goldcorp, Osisko Gold Royalties, Wheaton Precious Metals and Newmont. I determined which companies would be included in this article based on my research and understanding of the sector.
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