With a higher gold price (in the fourth quarter) than in the same quarter a year ago, results have been generally positive. But last week's jump in the gold price on concerns about coronavirus have taken many gold stocks to short-term overvalued levels and made them vulnerable to any easing of concerns.
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$109.09) reported strong production and revenues, the latter up 27% to a new record, though results were somewhat below expectations. (Royalty companies talk of "production," and the metric often used is "gold equivalent ounces"—or GEOs—translating value of various resource royalty streams to gold equivalence.)
There were several positive items in the quarter. The strike at Andacollo ended, with operations resuming in early December, though it was down for most of the quarter. The blockade at Penasquito, which caused a suspension of operations, ended in mid-October, though again, it was out for half of the quarter. Mount Milligan, the company's largest revenue source, saw improved production on the same quarter a year ago, and particularly higher copper shipments, which helped Royal. And Rainy River had a good quarter operationally.
Troubled assets have good quarter, but what's the long term?
Mount Milligan's operator, Centerra Gold Inc. (CG:TSX; CADGF:OTCPK), has announced a complete review of the mine, which will see lower reserves and a shorter mine life. Last year saw a partial shutdown of the mine due to a lack of water. When the mine review was announced in the fall, it caused Royal's stock price to drop from the high $130s, and it continued to slide almost nonstop until last week and the good results. No date has been announced for release of the mine review, and Royal's stock will be sensitive to this study.
New Gold Inc. (NGD:TSX; NGD:NYSE.MKT) released an optimization study on Rainy River, reducing the reserves and mine life. The plan envisions a smaller, higher-grade open pit through to 2025 and, concurrently from 2022, selective underground operations to 2027, though with the possibility of extending the mine life beyond. Royal anticipates it will increase its depletion rate but it is not expecting to take an impairment, though it clearly reduces the revenue stream the company had been expecting.
Royal's next major revenue source will come from the new Khoemacau copper mine in Botswana, with Royal receiving a silver byproduct stream. Royal has made its first two payments, totaling $88 million, over the past few months. It will pay a total of $212 million for 80% of the silver, with a further $53 million for the final 20% at the operator's option. First shipments are scheduled for mid-2021, and the initial mine life is expected to be 21 years. This will help diversify Royal's asset base, reducing the
importance of Mount Milligan, though it will also reduce the approximately three-quarters of revenues from currently come from gold, and add some (albeit modest) political risk.
Mount Milligan still the key in near term
Royal paid down its debt again this past quarter, though only modestly. It currently has around $1 billion of capital available, including $865 million on its revolver. The quarter was William Heissenbuttel's first as president and CEO, though he has been with the company in senior positions since 2016. This follows the retirement of longtime CEO Tony Jenson, as mentioned earlier.
The stock was arguably overvalued last summer, as we mentioned, so the bad news on Mount Milligan hit the stock hard. Valuations are now reasonable compared with the company's peers, and discount some reduction in revenue from Mount Milligan. The stock is by no means undervalued, however, and vulnerable to another hit if the study is worse than expected. The longer the wait for the study, arguably the less will be the impact on Royal, since Khoemacau will be closer to production. After $7 was tacked on to the stock price in the last four days, we would wait for a retracement to buy. There is no rush.
Yamana's Slow Turnaround Continues
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$4.66) reported reasonably strong operations in the latest quarter, with costs under control, though guidance for this year is soft. The balance sheet, though significantly improved over the past year, is still not the strongest, with net debt of over $800 million.
The company has capital requirements over the next three years of $53 million, which it is anticipated will add 1.5 million to reserves. One would normally expect that amount to be funded comfortably from cash flow, but Yamana said it will fund this from further asset sales and from more equity raises (of flow-through funding). It is also stepping up exploration efforts, looking for tier-one assets in mining-friendly jurisdictions.
Looking ahead, it has a couple of large assets that are not fully reflected in the share price. The Agua Rica deposit in Argentina, a joint-venture with Newmont Goldcorp Corp. (NEM:NYSE) and Glencore International Plc (GLEN:LSE), is one of the longest-life, lowest-capital copper projects in the world. A feasibility is expected by early 2021. Malartic underground has generated some very high-grade exploration results, but Yamana has said it won't proceed unless the royalty owner—Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE)—makes concessions.
Yamana's turn-around continues, though there is further to go yet, particularly on strengthening the balance sheet. The valuation is reasonable compared with peers. We continue to hold.
Top Assets Perform for Wheaton
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$32.90) surpassed expectations in its recent results, with strong performance from its major asset, the Salobo mine in Brazil, partly offset by the shutdown as Penasquito for half the quarter. It generated 706,900GEOs, with over 400,000 of this from gold and most of the rest from silver and palladium. This year should produce similar, though the total production should increase slightly, up to a five-year average production of 750,000 GEOs.
The stock jumped from under $29 in the last week on the better-than-expected results, particularly from Salobo, which is Wheaton's largest revenue source. Arguably it is now ahead of itself relative to its peers, particularly given modest anticipated growth in the coming year. Since we are bullish on the metals in the company year, we are holding, but want to see a pullback before buying.
Newmont Maintains Guidance Despite Reserve Cuts
Newmont Goldcorp Corp. (NEM:NYSE, US$49.43) also reported a strong quarter, beating analyst expectations, with generally strong operations. It has already raised $1.4 billion in promised asset sales following the acquisition of Goldcorp. Improvements at many underperforming Goldcorp mines are underway, and costs remain low. The five-year production and cost guidance remained unchanged, while a dividend hike, to $1 a share, was announced.
The year-end reserve study cut reserves at several Goldcorp mines, including Eleonore, while downgrading reserves to resources, at others. The move was not unexpected. The new Nevada joint venture with Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) also saw lower reserves for Newmont, but meaningfully higher grades from the Barrick mines.
As the world's largest gold miner, Newmont will benefit from renewed interest in gold. We are holding.
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."[NLINSERT]
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