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Adrian Day: Huge Value Gap Presents Buying Opportunity
Contributed Opinion

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Adrian Day Money manager Adrian Day discusses developments at four disparate companies affected to varying degrees by the economic consequences of COVID-19, with two buys among them.

Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$1.15) continues to raise non-dilutive funds by monetizing non-core assets as it focuses on and advances the Mt. Todd gold project in the Northern Territories, Australia. The company is in a financially strong position and appears poised for negotiations that make it "reasonable to think that by early next year we will have an agreement with a partner," according to CEO Fred Earnest. Indeed, the company had a marketing trip to Asia planned for late February, but it was cancelled due to COVID-19-related travel restrictions throughout the region.

Now, with a higher gold price, the largest undeveloped gold property in Australia and one of the largest in the world, in a safe jurisdiction, must be attractive to many senior mining companies. Vista is not necessarily looking to sell the project outright but looking for any kind of partnership to maximize value for shareholders, including a financial partner to enable Vista to build the mine. (Vista has made clear it does not intend going it alone to raise the capital and build the mine.) The company is awaiting its final permit—the mine operating permit—with no apparent major obstacle, and it now expects to receive that in coming months.

Vista raises cash from various transactions
At today's gold and Australian dollar prices, the mine has a NAV (net asset value) of over $2 billion, with a potential 20-year mine life. The stock, even after its recent run, has a market cap of less than $120 million, so there is an enormous gap, sufficient for an incoming partner to pay a hefty premium for a stake and still make money.

Currently with $6.3 million working capital, the cash has been bolstered recently by two recent payments: $2.4 million to cancel a portion of royalties on the Awak Mas project in Indonesia; and $1.5 million from an option payment on Guadalupe de los Reyes project in Mexico. At a run rate of about $6 million a year, this is sufficient for the next 12months.

In addition, over the next 12 moths, Vista is due to receive a final $2.1 million from Prime Mining Corp. (PRYM:TSX.V)on the de los Reyes project, and another $2.5 million to cancel remaining royalties on Awak Mas; in that latter payment is not made, Vista may then sell the royalty to a third party. Vista also owns very liquid shares in Midas Gold Corp. (MAX:TSX), valued at almost $5 million, and a used mill, potentially worth $8 million to $10 million. So, even without a sale on the mill, Vista is reasonably certain to have cash for the next two years of expenses. An "at-the-market" (ATM)program can top up cash as needed.

Exploration upside remains
Vista is also continuing exploration at Mt. Todd, after identifying two areas of interest adjacent to the central Batman pit. A modest program is planned to add a small number of ounces, which would potentially change the design of the mine; and to test the continuity of the deposit trending northeast. The drill program is budgeted to cost $430,000. Such a program can be important, because a potential buyer wants to know that there is exploration upside at the property.

Our last "buy" on Vista was in May at $0.80. With a change in the gold price and partner discussions moving to the next stage, Vista can be bought again.

Generative Explorer to Start Receiving Income

Lara Exploration Ltd. (LRA:TSX.V, 0.84) received two pieces of good news last week. First, the long-awaited start-up of the Celesta Copper Project (formerly Curionopolis) is underway, with first shipments early this month. Lara has a 5% carried interest plus a 2% royalty. In addition, it is owed a $800,000 on a US$1 million late penalty fee. The initial target has an indicated resource of 2.14 million tonnes. At an average grade of 4.2% copper, that equates to nearly 200 million pounds of copper. This is an indicated resource only, but that back-of-the-envelope shows the potential for Lara.

Separately, another Lara copper property, called "Lara," has been sold to a Peruvian tin company currently building a nearby copper mine. The project was sold for staged payments of $5.75 million and a 1.5% royalty by a company of which Lara owns 45%.

Lara has a solid balance sheet, with low expenses and cash flow to start soon. It has multiple other projects in its portfolio, and remains a buy at the current level.

Is the 10% Yield Secure?

Gladstone Investment Corp. (GAIN:NASDAQ, 9.21), coming off one of its best years, reported that adjusted net investment income declined sharply in the second quarter, from $0.19 down to $0.11—not surprising given the economic lockdowns around the country. However, interest payments on its loans—its main recurring income—was "relatively steady," with only one new company going on non-accrual due to the COVID-19-related shutdowns.

The company is "optimistic" it can move back toward $0.19 cents, by a combination of recovery in a couple of companies after the COVID-19 restrictions end, and income from some new investments. Indeed, immediately after the quarter ended, it made a new $47 million investment, which will generate income for the quarter. It also has undistributed investment income of about $0.20 per share, which can meet any shortfall in the dividend for the time being.

CEO David Gladstone said he was "not worried about the dividend this year." However, since the quarterly dividend is $0.21—it was last increased at the beginning of the year—higher quarterly income is necessary over the longer term.

Although Gladstone is working with its portfolio companies, it has not needed to provide much additional financial support; a couple have received government PPE loans. It has the liquidity, having exited a few companies last year, and over $100 million is available on its line of credit.

Again, not surprisingly, as portfolio companies were marked down, the NAV declined to $10.87 from $11.17 at the end of March (and a record $12.40 at the end of the year).

Low valuations and high yield
We are positive on Gladstone—though, as the company emphasizes, the outlook is uncertain. No doubt the longer economic restrictions remain in place, the more some portfolio companies will be hurt. The stock is trading at 0.85xNAV and yielding just over 9%. This yield excludes the twice-annual special dividends paid from capital gains (unlike most business development companies, Gladstone takes significant equity interests in the companies to which it lends, accounting for about 30% of the portfolio currently). These special dividends have added almost two percentage points to the yield.

We are holding, but we would like a little more clarity on the economic outlook, or a lower price (better valuation) to be buyers again. We may get the opportunity in the not-too-distant future.

Slammed By Slowdown, Port Company Sees Recovery Ahead

Hutchison Port Holdings Trust (HPHT:Singapore, 0.108) reported a decline in revenues and cut its distribution again, as expected. Given the slowdown in the global economy and trade, as well as increased U.S.-China tensions, this was not a surprise. Revenues fell in the first half 12% from a year ago, on lower throughput. The distribution was cut to $0.043 (Hong Kong), down from $0.06 a year ago (and over $0.20 five years ago). The company has been consistently paying down debt from its capital expenditures even amid the business slowdown.

The company is expecting a gradual improvement as China's factories resume operations, along with some easing of restrictions around the world. We would expect this year to remain weak, but there would be significant leverage to an opening up of the global economy and resumption of trade. Timing remains unknown, of course.

Hutchison is inexpensive. Even after the cut, the yield is over 10%. More significantly, perhaps, it is trading at less than 2x cash flow and only 0.28x book. We are holding, but would like more clarity on the global outlook or a lower price before buying.

Originally posted on Aug. 2, 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: Gladstone Investments, 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: Vista Gold, Gladstone Investments, Lara Exploration and Hutchison Port Holdings Trust. 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 LLC 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 decision to publish an article until three business days after the publication of the 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 Vista Gold and Lara Exploration, 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.

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