Solid High Yield with More to Come
Ares Capital Corp. (ARCC:NASDAQ) (19.97) has another very strong quarter, with positive indications for the future. It reported its second-highest earnings quarter in his history and a record quarter for originations. Over half its loans are to companies with which it already has relationships. Loans on non-accrual remain less than 3%, at cost, almost back to pre-COVID levels. One company was removed, but one was added.
The company reported an increase in queries for loans, particularly from larger companies who see the advantages of private loans (as opposed to bank loans) in speedier and more certain closing as well as flexibility on conditions. Ares, being the largest BDC, is gaining share because of its size.
The company increased its regular dividend by $0.01. It continues to have significant spillover income which, though it does not have to be distributed, will likely lead to a special year-end distribution as it has paid in previous years (before 2020). A small extra dividend, payable in November, was announced.
Equity raise boosts already solid liquidity
The company surprised the market by announcing a 12.5-million share offering immediately after its quarterly results conference call, on which the size of its credit facilities was emphasized, and it was noted that its "at-the-market" share facility was "a nice tool to have so as not to surprise the market with a large overnight offering." The market was surprised, and the stock fell. During the last quarter, it had restructured much of its debt and credit facilities, in most cases increasing availability and lowering rates.
With a fully covered dividend (equating to a yield for the year ahead of 8.3%), and spillover income equivalent to three-quarters' worth of dividends, with a low non-accrual rate and deep pipeline, plus total liquidity of over $7 billion, Ares is a solid holding for income-oriented investors. If you do not own, you can buy for the above-average yield.
Nestle Is Core Holding but Valuation Stretched
Nestle SA (NESN:VX; NSRGY:OTC) (114.80) reported strong growth numbers, even as foreign exchange and inflation hit the bottom line. As sales increased by 1.5%, organic growth reached over 8%, above its long-term target. The figure is expected to decline to between 5% and 6% for the full year. Margins continue strong, in the high teens. During the first half, Nestle acquired the Bountiful Company, a leading manufacturer of vitamins sold under various brand names. It also announced an expansion of Starbucks ready-to-drink beverages into markets in Asia and Australasia, as well as Latin America.
Nestle remains a core holding, but valuations are at the top of the range. Price to free cash flow is at a nine-year high, while the dividend yield—notwithstanding dividend increases—is very close to a 13-year low. We are holding.
Hutchison Raises Distribution as Trade Returns
Hutchison Port Holdings Trust (HPHT:Singapore) (0.235) saw income jump by over 25% as economies continue to recover from the virus lockdowns, and trade recovers. The risks are of renewed lockdowns in response to new virus variants, as well as supply disruptions, affecting shipping volumes. The interim distribution was up almost 50% last year, with the company guiding for a full-year distribution of $0.11–0.13, equivalent to a yield of around 7%, which would still be the lowest yield in almost a decade. (The yield is in Hong Kong dollars, while the stock trades in U.S. dollars.) With the major capital expansion program behind it, we expect the dividend to be more stable going forward. We are holding, but would look to buy for income-oriented investors on dips.
Vista Moves Ahead of Study and Exploration, Though Deal Still Elusive
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) (US$0.909) announced it was starting a feasibility study (FS) on its 100% owned Mt. Todd project in Northern Territory, Australia, with expected completion in the first quarter of 2022. This follows an expanded district-scale exploration program to identify new resource areas. The FS will improve on the previous preliminary feasibility study (PFS) by including more of the previously measured and indicated resources into the mine plan, as well as by using a higher gold price than the US$1,000 in the PFS. Offsetting the higher gold price will be a higher Australian dollar, as well as higher copper and energy costs, though price changes are expected to be a net positive.
Completion of the FS is expected to cost around US$3.5 million, while new exploration is budgeted at another US$1.5 million, both fully funded from the recent US$13.5 million financing. The company has not announced how much of that "bought deal" was taken by the brokerage firm rather than sold on to investors. We are waiting for that data before buying more.
The company says it is continuing efforts to find a partner, though these efforts have been delayed by lockdowns over COVID. Though the FS and exploration are expected to improve the value of the project, we are waiting before additional buying to further clarify on progress on a partnership transaction. We would note that several officers and directors have purchased the stock after it collapsed following the equity raise. Vista is already on our list in two tranches.
Gold Miners Fell Short, but Promise Better Second Half
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) (US$13.64) reported an uneventful quarter, with production below consensus estimates. The miss came mostly from a single mine, Eagle. Production is expected to increase in the second quarter enabling Osisko to meet its guidance for the full year. The company also received a boost after Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) published an exploration update on its Canadian Malartic mine (50/50 with Yamana); Osisko holds royalties over the mine and exploration ground. Osisko continues to trade at modest discounts to its peers, significantly below the valuations of "the big three"—Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE), though these are much larger companies—and slightly belowSandstorm.
We are holding.
Newmont and Yamana Stick with Annual Guidance
Newmont Corp. (NEM:NYSE) (62.82) reported a mixed quarter, with operating results broadly in line with expectations, though financial results were marginally weaker on the back of higher costs. The company reiterated full-year guidance. We are holding.
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) (US$4.49) reported cash flow lower than expected, despite slightly higher production, as costs rose (cash costs at $720) on the back of continued COVID-related restrictions, and bad weather affected its new Cerro Moro mine. The company said it expected efficiency improvements going forward, and as with other companies, said it expects to meet its full-year guidance. It continues to improve its balance sheet, with net debt down modestly by $23 million in the quarter to $516 million. It used this improvement to boost its dividend by 14% for a yield of 2.8%. We are holding.
Open Orders: Our sell recommendations on thinly traded Reservoir Capital remain open. Maintain.
Top Buys: After recent rallies, we have few, but they include Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (US$4.75), Midland Exploration Inc. (MD:TSX.V) (0.71), Lara Exploration Ltd. (LRA:TSX.V) (0.71–0.75), and Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) (US$28.07).
Money and Inflation: James Grant points out that since the beginning of 2019, the minutes of the Federal (Reserve) Open Market Committee have not mentioned the words "money supply" a single time. This is the body that sets short-term interest rates (i.e., fixes the price on money). Prof. Milton Friedman famously said that "inflation is always and everywhere a monetary phenomenon," yet the modern Fed ignores its role in creating inflation.
Coming Up: The return of the in-person New Orleans Investment Conference, Oct. 19–22 features James Grant, James Rickards, Robert Prechter and Peter Schiff. I am also on some virtual conferences: the Money Show's Money, Metals and Mining Expo, Aug. 24–26, and Mines & Money Aug. 31 to Sept. 1. Plus, I shall have a private seminar in Denver on Sept. 11, in the afternoon. Reserve the date; details are to follow.
Originally published Sunday, August 1, 2021.
Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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