Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) (154.88) had record production and revenue, with several mines producing above expectations, including their largest (and newest major) asset, Cobre Panama. Precious metals contributed only 75% in the last quarter — and gold less than 60% — but that was because the first contribution from the new Vale iron ore royalty covered more than a quarter. The company expects to be back to its 80% precious metals target going forward.
Due to the addition of the Vale assets, and due to the higher oil and gas prices, the company raised its guidance for full-year revenues from a range of $115 million–$135 million to $155–$170 million.
Diversified, with many opportunities eyed ahead
Franco is the most diversified of all the major royalty companies. Cobre Panama accounts for 19% of revenue, Candaleria 10%, with the rest all less than 10%. Following recent major investments in oil and gas and, more recently, iron ore, the company's focus is now on precious metals. They see opportunities to contributing capital financing to some of many medium-sized projects moving forward. Some of the assets on which it has existing royalties are also progressing, notably with BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) acquiring Norant's large Ring of Fire properties.
Not unexpectedly, the company's cash position was far lower than at the end of the first quarter following the cash purchase ($528 million) of the Vale assets, but it still has almost $200 million in cash and no debt. In the past, the company has taken on debt for a large acquisition a couple of times and then paid down quickly out of cash flow.
Solid balance sheet and low costs
With a rock-solid balance sheet, and low costs — general and administrative (G&A) expenses account for just 3% of revenue, while the company has a margin of 83% thanks to its large number of royalties (as opposed to streams) — the company is in top financial shape. The valuation looks high, but Franco — like the other large royalty companies — has always traded at high multiples because of the low-risk business model and the ability to increase revenues consistently over time.
Franco will be the gold investment of choice for generalists when they return to the market largely because of its long-term history of success. It remains a core holding for us, though we are not adding here.
Wheaton Raises Dividend After Record Revenues
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) (44.42) reported record revenues and cash flows, broadly in line with estimate, for a good quarter. It reported a slight delay in the construction of the third phase at Salobo, its largest asset; it added a small gold stream; and increased its dividend for the fourth consecutive quarter for a yield of 1.4%. Its policy is to pay around 30% of the prior four quarters cash flow. Wheaton, debt-free, increased cash to $235 million; it has $2 billion on its line of credit.
Wheaton is a long-term holding for us. For the past year, Wheaton (and Royal) have underperformed Franco and Osisko. If you do not already own it, you can buy it here.
New Assets Come Onboard for Royal
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) (116.09) also achieved record revenues. Two large assets are in the ramp-up phase — Cortez (as far as RGLD's royalty ground) and Khoemacau (with first delivery in July) — and these could see the company beat its full-year guidance.
The company's two largest assets, each a little under 20% of revenues, had mixed results. Pueblo Viejo had low silver recoveries, though the operators expect that to improve in coming quarters. Mount Milligan's operator said water access had improved and they expected the mine to perform well for the balance of the year as they continue to seek a long-term solution.
The company made two significant acquisitions during and after the quarter, including two on producing mines, a 1% royalty on Red Chris, and a large stream on producing NX mine. The company remains in strong financial shape with $226 million cash, $100 million in debt, and around $1 billion available on its line of credit. It can be bought by those under-invested in the sector.
Royalties Doing Well for Osisko, Though Financials Mixed
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) (12.57) reported record royalty ounces. Though 75%-owned Osisko Development reported some promising exploration results, particularly at Cariboo, that division affected Osisko's financial results negatively. Nearly half the attributable ounces came from Canadian Malartic, the mine Osisko originally discovered and operated before selling to Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE), retaining very attractive royalties.
The company made a couple of small but interesting royalty acquisitions, including a package of royalties over exploration properties in the western U.S., and a royalty on a Brazilian project that Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) subsequently sold, potentially setting up the project for development. Another new investment, initially a small one, is in a private company, Carbon Streaming, but gives Osisko the right to participate at 20% in all new transactions, with potentially mid-teen returns.
Cash declined as did debt, though by a smaller amount. Osisko, ex-OD, has $88 million in cash. It increased its credit facility to CA$550 million, and increased its dividend by 10% (for a yield of 1.4%). Osisko is trading at a small discount in valuation to similar royalty companies. Buy, under $12.50, if you do not own.
Barrick's Production Down Again, but Bonus Payout Made
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) (20.27) saw production down 7% and, unlike the royalty companies, missed revenue forecasts, but said it was on track to meet full-year guidance of 4.4 to 4.7 million ounces of gold and over 400 million pounds of copper, with cash costs of $680 to $720 per ounce. As always at such a large diversified miner, there were pluses and minuses to the quarter, most notably among the negatives, a failure at the Goldstrike, which reduced Nevada production by around 10%. The production numbers had already been announced last month.
Barrick's production, weak this quarter on top on longer-term declines in output, is expected to be modestly lower next year, before stabilizing and being moderately higher for the rest of the decade.
The company announced the second tranche of its planned $750 million return of capital distributions, but said it was unlikely to be repeated next year. As of June 30, it had more than $5 billion in cash. While Barrick may see continued softness into next year, with the anticipated slip in production, it is a very strong buy for long-term investors.
A Trading Halt and Top Buys
TOP BUYS NOW include, in addition to those discussed above, Midland Exploration Inc. (MD:TSX.V) (0.69); Lara Exploration Ltd. (LRA:TSX.V) (0.70); Orogen Royalties Inc. (OGN:TSX.V) (0.345); Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (4.38); and Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) (26.51).
Originally published Aug. 15, 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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