Get the Latest Investment Ideas Delivered Straight to Your Inbox. Subscribe


Adrian Day: Adversity Often Presents Investment Opportunities
Contributed Opinion

Share on Stocktwits


Adrian Day Money manager Adrian Day reviews developments, both positive and not-so-positive, at several companies in his portfolio and he finds that some are cheap enough to buy.

Loews Corp. (L:NYSE, 31.19) is having a rough time, with several of its holdings severely hit by not only Covid restrictions but by broader market conditions as well.

  • Its struggling, majority-owned Diamond Offshore succumbed to weak oil markets by filing for bankruptcy.
  • Investment income at its CNA insurance unit declined sharply.
  • Virtually all its hotels have closed and laid off 90% of staff amid travel restrictions.

All this contributed to a loss for the quarter of $632 million loss, over $400 million of attributable to a no-cash impairment on some of Diamond Offshore's rigs. And the current quarter won't be better. It will write down its carrying value on Diamond this quarter. The bankrupt shares are currently trading at 20 cents in the pink sheets, down from $7 a share at the beginning of the year (and over $100 a share before the 2008 credit crisis). Loews' carrying value at quarter-end of over $1 billion; that will be slashed to about $15 million (in a non-cash loss). Given the bankruptcy, Loews no longer controls Diamond, and so will no longer consolidate Diamond's earnings.

Some units doing well

CNA's operations have been strong, driven by lower expenses as well as rate increases. Its business interruption policies do not pay on the virus related closures. But the decline in interest rates will affect its ability to earn on its reserves. Boardwalk Pipelines is doing well, notwithstanding the decline in the weakness in the O&G sector. Its plastic packaging manufacturer, Altium, has benefited from a surge in demand from the retail side during the virus shutdowns. Looking ahead, the hotels should start to come back, though it's unknown how much demand there will be, especially in the near term.

Lots of cash to see it through

The balance sheet remains rock solid, with over $3 billion in cash and investments held at the parent level (80% of that in cash and equivalents), and no significant calls on cash. Given its emphasis on maintaining liquidity, the company has repurchased no shares since quarter end, after buying back almost 10 million shares during the first quarter.

Loews is undervalued on an asset basis. At quarter end, its book value was $60.28 per share. Even after the expected Diamond write down, BV would be around $53.60. The current market value of Loews' interest in CNA alone accounts for around 90% of this value. So it is unquestionably undervalued and has a solid balance sheet. Patient investors can buy Loews on any dips.

Near term and longer term growth at Osisko

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$10.31) reported, with production (Gold Equivalent Ounces, or "GEOs") slightly less than expected. Although several mines had been hit by government mandated lockdowns, Quebec has now lifted the restrictions and mines are ramping back up to steady production. This includes two mines on which its largest royalties are, Malartic and Éléonore. Together with a third smaller mines, they represent 49% of this year's analyst estimated GEOs. The company has suspended its 2020 guidance. The Renard diamond mine remains on care and maintenance due to low prices.

Osisko has a respectable balance sheet, with $158 million cash and over $300 million available on its credit line; net debt as of the end of the quarter stood at $265 million. It also has investments in juniors worth $250 million. After quarter end, it raised $85 million from a Quebec investment fund.

Approach means more risk but also potential

Osisko's "hybrid" approach to the royalty model unquestionably adds risk. At the same time, the profile of its revenue generating assets is reasonably low risk, consisting primarily of royalties (not streams), with over 80% in gold, on primary gold mines (not by-products), mostly in Canada, and with a 91% cash margin. Given the recent stock price rally back to February highs, we are not chasing stocks here. But we would be buyers again on a pullback; Osisko has strong upside, if not imminent, from a resumption of Renard, and advancement of projects held by its so-called incubator companies, notably O3's Windfall.

Positioned for post-Covid

Kingsmen Creatives Ltd. (KMEN:SI, 0.199 x 0.23) has been hurt as Covid restrictions have postponed new jobs from retail and corporate build-outs to attractions and events. Some of these segments, such as retail, were already sluggish, while office real estate may take a longer-term hit from the lockdown.

But Kingsmen will rebound, we believe. Focused on design and creativity, it has proven itself to be nimble, with new investments in branded experiential attractions. There have been three so far, with partners including Hasbro and Animal Planet. This could be a very strong growth segment in the years ahead. Exhibitions and attractions, where revenue grew by 7% last year, but has been hit by the shutdown, could also come back strongly.

The planned investments in the new attractions, as well as the reduction in other areas, hurt revenue last year and will again in the first half of this year. But we think Kingsmen is very cheap here with solid growth potential over the next couple of years. We would use a limit of S$0.21 at present. It's a buy.

Lower guidance but strong balance sheet

Newmont Corp. (NEM:NYSE, 63.01) said 90% of its production was back on line, though ramp up to prior levels was still underway at some mines. Overall, guidance for this year was reduced slightly to 6 million ounces with costs raised slightly to $775. The balance sheet remains strong, with cash of $3.7 billion, and net debt of $2.4 billion, down from $3.9 billion at year-end 2019 due to several asset sales. It also repurchased $321 million of shares during the first quarter. This coming quarter, with mine shutdowns and ramp ups, is expected to be its weakest quarter of the year. We are holding.

Yamana continues to improve, but investors remain cautious

Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$5.25) has a stronger-than-expected quarter with cash flow and earnings higher than analyst estimates, as it drives down costs and strengthens the balance sheet. The company raised the dividend by 25%.

The balance sheet continues to strengthen, reducing debt during the first quarter by $20 million. After quarter end, Yamana sold some of the shares it holds in Equinox for $120 million. If all the proceeds went to debt repayment, net debt would be around $780 million. It is on track to achieve, by year end, its target of net debt to EBITDA of less than 1 times.

Yamana's valuation is at the lower end for larger mining companies. We could see a valuation re-rating if the company continue to strengthen the balance sheet, achieve consistent operations, including successful ramp-ups at mine expansions, and have success at the brownfield exploration around five existing mines. However, because of its history of mis-steps, we are holding.

TOP BUYS this week in addition to those discussed above include Midland Exploration Inc. (MD:TSX.V, 0.80). Most markets and sectors, including gold stocks and BDCs, have moved too far too fast in the current environment to be buying.

Originally posted on May 25, 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."


1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Midland 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: All. 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.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Midland Exploration, Newmont and Osisko Gold Royalties, companies mentioned in this article.

Adrian Day's Global Analyst disclosures: 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. © 2020.

Want to read more about Gold and Silver investment ideas?
Get Our Streetwise Reports Newsletter Free and be the first to know!

A valid email address is required to subscribe