Ares Capital Corp. (ARCC:NASDAQ, 14.57), the largest Business Development Company ($6.2 billion market cap) had a good quarter, although lending activity (and associated fees) was muted, something the company expects to continue. In the event of a long slow recovery, which it expects, however, then it would expect to see good opportunities at some point. The liquidity of the companies in its portfolio is good, with 98% of interest due being paid. The book value actually increased from last quarter, due to portfolio gains, even though there was a slight uptick in nonaccruals.
Ares has a diversified portfolio, primarily in defensive sectors including healthcare and software, with none-to-little in highly exposed sectors such as travel. It has a strong balance sheet, with leverage a modest 1.08 times. Net investment income more than covers the dividend, with a 93% payout ratio. Moreover, it has large spillover income of 98 cents per share, representing virtually two and a half quarters of full dividend payouts, so it is unlikely there will be a dividend cut, not for the foreseeable future. Moreover, it has pre-funded its 2022 debt maturity.
The stock has recovered more than 50% of its March drop, and now trades just under book, with a yield just over 11%, including small special cash distributions. We are holding, and new investors can look to buy cautiously on declines.
Covid restrictions hits mining company, slowing development
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$6.37) had a difficult quarter, as expected, due to Covid restrictions affecting its mines in Peru and Mexico and development of its new mine in Argentina. San Jose in Mexico was shut down for much of the quarter, while operations at Caylloma in Peru were curtailed. And Lindero in Argentina was pushed back by about three months, and will start on a smaller scale. Still, the company reported neutral cash flow, partly because of higher metals prices, partly because of higher gold and silver and reduced costs in Peru, though a loss overall. It is reasonable to expect a much better 3rd quarter, with limited Covid-related reductions.
Lindero is now 97% complete, with an abbreviated circuit, and ore is being placed on the leach pad. As discussed previously, the tertiary crusher (an HPGR system) is by-passed in the revised circuit because of travel restrictions preventing skilled technicians being on site, and this will cause lower recoveries. The company expects to have the HPGR operational within three months, with commercial production in the first quarter of 2021, a quarter's delay over earlier projections.
The balance sheet is strong, with $77 million in cash (and $132 million total liquidity), for about $50 million net debt. With increased production and metals prices, it should be cash positive by the end of the quarter. We are holding, and would be renewed buyers on any price decline.
Strong results from Wheaton, though not inexpensive
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$50.55) reported that all mines on which it receives streams have now restarted. With strong cash flow due to higher prices, Wheaton cut its debt by $80 million; it now has a little over $130 million cash, with $641 million outstanding on its revolver. In the current environment, Wheaton has deliberately utilized debt as the most attractive form of financing.
Wheaton has now issued revised guidance for 2020, expecting 655,000 to 685,000 ounces equivalent, just over half of it from gold, with an average of 750,000 ounces over the next four years.
Wheaton stock has performed very well since the settlement with the Canadian tax authorities at the end of 2019 (when it was trading around $15) and then again from the sell-off in March (when it fell to under $25). At the current price, if not out-of-line with other major royalty companies, it is hardly undervalued. We are holding, but will wait for a better opportunity to buy.
Merger on track to close next week
Evrim Resources Corp. (EVM:TSX.V, 0.46) announced its merger with Renaissance Gold is expected to become effective around August 18th, following the overwhelming vote of Stalinist proportions (over 99%) in favor by shareholders of both companies. The combined company will be renamed Orogen Royalties (OGN:CSE) (see article). Paddy Nicol and another Evrim director will step down to make room for Renaissance nominees, though he remains president and CEO of the combined company. Evrim is a buy at current levels, though, not unusually, there could be some volatility as shareholders get their new shares.
TOP BUYS: Lara Exploration Ltd. (LRA:TSX.V, 0.72), and Kingsmen Creatives Ltd. (KMEN:SI, Singapore, 0.22). Part of our hesitance to mark more stocks, including gold stocks, as "buys" is concern about a pullback after such a strong move. If, however, you are new to the sector or underweight, the following on our list can be bought: <Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$1.22); Midland Exploration Inc. (MD:TSX.V, 1.05), and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$147.42), in addition to Fortuna and Evrim discussed above.
Originally posted on Aug. 16, 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]
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Ares Capital, Evrim Resources, Lara Exploration, 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.
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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.