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."[NLINSERT]
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