Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$113.69), following most of its royalty peers, pulled its guidance for both GEOs (gold-equivalent ounces) and energy. Cobre Panama, which had been ramping up well and accounted for 15–20% of its previous 2020 guidance, has shut down because of a virus infection at the work site. The local health ministry said it would remain closed until they were satisfied with quarantine procedures at the mine, suggesting it could come back on stream reasonably soon.
The three largest revenue sources after Cobre all continue to operate; of a total of 56 cash-flowing assets, 11 of them now are shut down or operating at reduced production. Before Cobre Panama was shuttered, the company estimated its annual GEOs would be cut by only around 6–7% because of virus-induced mine suspensions. The energy revenue will be down as well, but with the added potential for write-downs of some assets. The benefit of royalty companies in not being responsible for higher and unusual costs will be very clear in this pandemic environment; they are not responsible for the care and maintenance costs of the shutdown, which will hurt many of the mining companies. Reduced revenue is only deferred.
A time for deals
Franco has around $200 million in cash and over $1 billion undrawn on credit facility. It is still expecting to pay a dividend. It is in a strong position to buy new royalties or streams at a time when some producers will be struggling with lost revenues and higher costs. It has a good pipeline of potential deals with some at $500 million or even $1 billion. At half a billion, Wheaton and Royal are their only competitors; at $1 billion, maybe only Wheaton. Franco was particularly closed-lipped about future deals on its latest quarterly results call, indicating perhaps that a major transaction could be close.
Over the last decade, Franco has a compound annual growth rate of 17% compared with 7.5% for the Dow. In addition to ramp up at Cobre, when it reopens, there is strong near-term growth potential from expansions at Stillwater, and Tastiast (the latter probably being delayed), and further out, potential from any number of its almost 400-strong pipeline of royalty assets. They won't all become mines, but some will.
Franco remains my favorite gold company; if I could hold only one, this would be it. But at the current price and valuation, and given the potential for its largest producer to be offline for longer than expected, we are holding, not buying.
Full steam ahead at Wheaton—so far
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$31.98) reported good results, as its main operations continue in operation. It largest revenue source, Salobo in Brazil, is operating as usual and continues with its expansion, now 40% underway. This mine represents over 30% of Wheaton's NAV and 37% of its projected 2020 GEOs.
Wheaton has continued to reduce its debt, down over 35% in the last year. It has cash of just over $100 million, but liquidity of $1.2 billion. It reiterated that it sees debt as more attractive than equity for financing new transactions. It said it was currently conducting due diligence of 10–12 streaming transactions, three of them over a half-billion dollars and one at $1 billion. As expected, most of the counter parties are base metals producers.
Why the discount?
Even after the Canadian tax dispute has been settled, Wheaton is trading at a discount to Franco, largely because of its greater asset concentration (two assets, Salobo and Penasquito, representing virtually 50% of GEOs), and its higher debt. Now, given relative stock performance, it is trading at a small premium over Royal. We think Wheaton has the potential to trade at higher multiples over time, but given the recent strong stock performance, we are holding not buying.
Results in Quebec but no activity in Mexico
Cartier Resources Inc. (ECR:TSX.V, 0.105) reported more drill results from its Chimo project in Quebec, which validate the concept and provide potential for resource expansion. In this environment, we favor larger and stronger companies, so are holding Cartier for now.
Azucar Minerals Ltd. (AMZ:TSX.V; AXDDF:OTXQX, CA$0.095) continues to see good drilling results on its large El Cobre copper/gold porphyry exploration property in Mexico, currently on shutdown. Fortuitously, the company has just completed its most recent drilling program before the government shutdown order was issued earlier this month. The last three of the drill holes will be assayed and released while the company is working with an outside consultant to evaluate the results and program going forward.
The company continues to be well financed, not yet having expended all the funds from the 2018 equity placement by Australia's Newcrest, and a top-up last year. Given the slow pace of results and the lack of near-term news, as well as our preference for larger companies in this environment, we are holding.
Almadex Minerals Ltd. (DEX:TSX.V, 0.165) is the junior member of the Almaden/Azucar family, focusing on a range of early-stage exploration in Mexico and British Columbia. To us, it is arguably the most undervalued, and it has exposure to both of the others' projects through royalties. It has a strong balance, though it lent its gold to Almaden, which is unlikely to be repaid until Ixtaca, Almaden's property, is in production. All Mexican exploration activities are on hold during the virus shutdown. We would pick away at Almadex on weakness but there is no need to chase prices.
TOP BUYS NOW: Given the uncertainty and probability of a deep economic contraction, as well as the volatility in the stock market, we are being particularly disciplined about buy targets. Given recent stock rallies, we are not buying much right now. The Business Development Companies, for example, are up 20–25% from the prices in our March 22nd Bulletin, and we are standing back for now. Of the stocks on our list, best buys would be Altius Minerals Corp. (ALS:TSX.V, 7.89), Midland Exploration Inc. (MD:TSX.V, 0.56), Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$2.42), and Kingsmen Creatives Ltd. (KMEN:SI, 0.185).
Originally posted on April 12, 2020.
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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