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Royalties Face Mine Problems and Tax Bills
Contributed Opinion

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Adrian Day Money manager Adrian Day looks at two top royalty companies, both with a changing of the guard at the top, both with other important developments, plus he lists some companies he sees as buys.

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$115.82) (115.82) is facing uncertainty on its main asset, the Mount Milligan copper-gold mine in British Columbia, whose stream accounts for nearly 30% of the company's revenue and its book value. The mine has experienced lower recovery and higher costs, as well as water issues, leading the operator Centerra Gold Inc. (CG:TSX; CADGF:OTCPK) to take a 30% write down on the mine's value and announce a review of the long-term plan, including mine reserves.

This year will be OK
In the short-term, heavy rainfall enabled Centerra to store twice as much water as last year and announce that there would be no need to cut production over the winter as it did last year. This announcement, as well as steady stream revenue for the mine in the latest quarter, saw Royal's stock price stabilize after an initial drop on Centerra's announcement; it was $138 at the beginning of September.

But the story is not over. The publication of the long-term mine plan will be an important milestone for Royal, given the asset's overwhelming importance to the company. Royal has only said that "it is unclear at this point what impact, if any, this will have on the value of the company's interests in Mount Milligan." A negative report by Centerra would undoubtedly have a further impact on Royal's stock price. It is not clear when the study will be completed.

In the meantime, overall ounces for Royal declined in the last quarter, with the now-ended blockade at Penasquito as well as the strike at Andacollo, which ended last week, the main factors. Higher prices, however, saw revenue up. Royal continues to cut debt and increased the dividend again with the higher revenue.

A new CEO
Separately, long-time CEO Tony Jensen will be retiring in January, stepping down after 16 years with the company, 13 as CEO. Mr. Jensen has always been one of the top CEOs in the industry, straightforward, open and, above all, a gentleman. He is replaced by William Heissenbuttel, who has been at the company since 2006, and chief financial officer and vice president–strategy for 18 months. We are holding Royal, but waiting for more clarity of Mount Milligan's long-term future before buying more.

Changes at the Top for Franco

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$98.50) has also seen a changing of the guard, with CEO David Harquail becoming chairman of the board in May, while founder Pierre Lassonde becomes chairman emeritus. Paul Brink, president and chief operating officer, will become CEO. The appointment is not a surprise, since Mr. Brink has been groomed as next CEO for a number of years, and was the key business development officer for 11 years ending 2018. Notwithstanding the very special skills and reputation in the industry of Messrs. Lassone and Harquail, we expect the transition to be smooth. I have known both for many years—decades indeed—and both are extraordinary men, with character, integrity and insight. Mr. Brink has certainly proven himself over the years, while one of the key attributes of Franco is that the company has its own "DNA," its own way of doing things, embedded in the company. This will not change.

In its latest quarter, Franco generated another record, with GEOs (gold equivalent ounces) up 22%, with both Stillwater and Sudbury up, and, significantly, Franco's newest and largest stream investment, Cobre Panama, making its first deliveries after announcing commercial production Sept. 1, ahead of guidance. This removes lingering caution on the large, new investment. Franco has a strong balance sheet, with $1.2 million of available liquidity.

They don't give up easily
A negative development came with an update from Franco on the Canadian tax authorities review of its offshore streams, with the Canada Revenue Agency (CRA) now asserting that the majority of income generated by Franco's offshore structures should be taxed in Canada. This covers the years from 2012 forward. Despite the precedent set by their loss to Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE), CRA is become more assertive on Franco. Though the bill for past streaming revenue would be relatively modest should CRA prevail, it would have a significant dent on Franco's revenues going forward, as much as 7% of net asset value (NAV) according to one analyst. We doubt CRA will prevail in full, but their pursuing the case in the light of their loss on the Wheaton case is surprising.

Franco remains a core holding, one of the very few truly "sleep-well-at-night" investments around, in any industry. We are holding.

Best buys right now are mostly junior gold resource stocks battered by tax loss selling, including: Midland Exploration Inc. (MD:TSX.V, 0.74 x 0.79); Lara Exploration Ltd. (LRA:TSX.V, 0.48), Almadex Minerals Ltd. (DEX:TSX.V, 98.50); and Evrim Resources Corp. (EVM:TSX.V, 0.29). Other top buys include Ares Capital Corp. (ARCC:NASDAQ, 18.50), down after going ex its dividend.

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."


1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Royal Gold, Franco-Nevada, Evrim Resources, Midland Exploration and Lara Exploration. 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: Midland Exploration, Lara Exploration, Evrim Resources, Royal Gold, Franco-Nevada, Almadex Minerals, Ares Capital. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
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Adrian Day's disclosures: Adrian Day's Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor's opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2019. Adrian Day's Global Analyst. Information and advice herein are intended purely for the subscriber's own account. Under no circumstances may any part of a Global Analyst fax or e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.

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