Barrick Gold Corp. (ABX:TSX; GOLD:NYSE, US$23.92)reported gold production down slightly in the quarter, mostly because of various operational issues—planned and unplanned—at various mines, but nothing of deep and lasting significance. And the gold price was down for the quarter, even as input costs increased. The result was that costs—both cash costs and "all-in sustaining costs"—rose.
Copper production and prices increased (and copper production costs declined). Copper represented just over 20% of gold-equivalent ounces, up from 16% in 2020. Earnings overall fell from the last (blockbuster) quarter, though up nearly 80% from a year ago. Overall it was a neutral quarter, but follows a very strong one. The company reiterated its full-year guidance, saying that the second half was expected to be stronger than the first.
Mine disposals as other grow
The company continues to sell non-core mines. This year, it is paying a special $750 million return-of-capital distribution, doubling the payment, from the proceeds of previous sales. Net cash increased to over half-a-billion dollars, from just $33 million last quarter. This represents a dramatic turnaround on the balance sheet. There are no significant debt repayments until 2033.
There are several opportunities for large-scale increases in production over the next year or two, including the restart of the Porgera mine following an agreement with the government; a potential agreement with the government of the Democratic Republic of the Congo allowing repatriation of funds; the ramp-up of underground mining at Bulyanhulu; and the expansion at Pueblo Viejo. CEO Mark Bristow said that Nevada— which saw first gold pour at Goldrush in the last quarter—still is the "most prospective area" in the world with "the potential to increase production very strong."
Barrick stock has underperformed peers since the sector peak last August—though it had outperformed for the six months prior—and remains one of the most undervalued of the senior miners. Although it has added $5 since the low at the end of February—and $1.70 in just the last two days—it remains a buy for those who do not own it.
Mixed Results at Royal
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$119.95) had a mixed quarter, with revenue and net income down. Gold-equivalent sales were down almost 6% from the last quarter and 8% from the year-ago quarter, though revenue was up 5% from last year. Much of the quarter's decline was attributable to a sharp drop in gold sales from Mt. Milligan, its largest asset. This was partly offset by an increase in gold inventories.
The good news was that Royal was able to pay off its debt completely ($50 million during quarter, and the remaining $150 million after the quarter); cash at the end of the quarter stood at $370 million. Its next major asset to start cash flowing, the Khoemacau copper mine in Botswana, is now over 90% complete, and expected to start production next quarter. With its final payment now made, Royal has a stream on 84% of the silver byproduct (on the initial 34 million ounces of silver, and half that thereafter). This asset represents about 9% of the company's net asset value (NAV).
Khoemacau, in February 2019, was Royal's last major deal, so now, with that mine almost complete and a nearly $1 billion undrawn credit facility, Royal is in a position to make a major purchase to reinvigorate its stock price. The stock has, indeed, moved since late March, when it was around $103, but has underperformed its major royalty peers in the recovery. We are holding.
Record Revenues for Wheaton
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$43.74) reported record quarterly revenues for the first quarter of the year. Although its "gold equivalent" sales fell 1.9% from the previous quarter (though up 5.6% from a year ago), its attributable production was nearly 8% more than sales, due to delays in cobalt deliveries from the Salobo mine, the first quarter of cobalt deliveries.
Although the gold price fell in the quarter, the realized price of silver and palladium both increased, more than offsetting the gold price decline. Similarly, gold sales fell by 13% while silver sales jumped 45%. Overall, Wheaton's revenues increased, by 13% relative to the prior quarter and by 27% compared with a year ago. The silver share of total revenues rose to 54%, while gold revenues fell from 57% to 42%.
New streams acquired, even as debt paid off
Wheaton's cash position remains virtually unchanged, at $191 million. During the quarter Wheaton acquired a new gold stream on Capstone's Santo Domingo, and repaid debt of nearly $200 million. Wheaton now is essentially debt free, with over $2 billion in available liquidity. Santo Domingo, a long-life copper mine in Chile, is expected to commence production in 2024, generating about 35,000 ounces per year for the first five years. This is the third small stream acquired by Wheaton over the past six months, for a total of $550 million.
The stock has rallied, up from under $36 in early March, though it has been a laggard since the sector peak last August. Compared with other major royalty companies, it is undervalued. On the price-to-cash-flow metric, only Royal Gold is less expensive, but on price-to-free-cash-flow, it is by far the lowest valuation: 24x, compared with 32x for Royal, 74x for Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) and 77x for Franco-Nevada Corp. (FNV:TSX; FNV:NYSE). If you are underweighted in the sector, Wheaton would be the top buy now.
Ares Still Sports Safe 8%+ Yield
Ares Capital Corp. (ARCC:NASDAQ, 19.24) had strong results, with income of $0.43 a share, up from a year ago (though down from a spectacular fourth-quarter at $0.44), but well covering the dividend. The net asset value increased to $17.45, a new record, as the company saw no new portfolio companies on non-accrual, and upgrades outpacing downgrades by seven to one.
ARCC CEO Kipp deVeer said activity in the space was picking up, with a 14% increase in the number of transactions that Ares was reviewing. Two lending trends favor Ares, the largest BDC by far. First, there is a trend toward direct lenders, away from banks and other traditional lenders, because direct lenders offer more flexibility, greater certainty of closing and a long-term relationship.
In addition, larger companies are generally performing better than small ones as the economy exits from the year of COVID, but there is no risk premium for small companies. Ares is in a position to do the largest transactions out there. It has over $5 billion of available liquidity, with a reasonable leverage ratio (1.2x, at the high end of its leverage goal, but still very comfortable).
Dividend safe with excess cash
With net investment income exceeding the dividend for another quarter, Ares now has undistributed spillover cash of $1.04 per share, equivalent to two-and-a-half quarters of the regular dividend payment.
Trading at just over NAV—but with little danger of another equity raise to take advantage of the premium—and a yield of over 8%, with the potential for another special cash distribution—there were four in 2019 but none last year, as the company went into defense mode—Ares is a very strong holding. If you do not own, it can be bought as a long-term holding.
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$6.45) moved off the post-deal announcement lows as the gold and silver prices jumped, demonstrating that the metals prices matter as much as company specifics. As discussed last time, we think there will be some selling from various disaffected shareholders on both sides of the transaction. But we also think the combination creates a first-class intermediate producer, undervalued relative to peers. We want to own it. If you do not already own it, you can look to buy now; for additional buys, there is no need to chase, but pick opportunities.
Originally published May 9, 2021
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: Franco-Nevada, Barrick Gold, Fortuna Silver Mines, Ares Capital and Royal Gold. 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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