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Large Royalty Company Shifts Talk on Diversification as It Grows
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Adrian Day Adrian Day, in the Global Analyst newsletter, discusses Franco-Nevada's diversification of royalty assets, as well as providing updates on other precious metals companies he follows, including one strong buy.

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) (US$144.03) had a strong quarter, “setting the stage for a record year in 2021.” The increase in the price of oil and gas meant that revenue from energy grew about two-and-a-half times from a year ago, to account for over 17% of the company’s revenue. It expects further increases from oil & gas in the period ahead, driven largely from higher prices rather than increased production, and sees the year ending with revenues at the higher end of its guidance.

Nonetheless, the gold assets performed well, particularly the largest contributor (at 17% of total revenue), Cobre Panama, as it continues its ramp-up. Ounces received overall increased as the impact of Covid-related restrictions declined further, though the net profits interest on the Hemlo Mine fell and are expected to be minimal for the rest of the year. Net profits tend to be more volatile that “net smelter” royalties, where the revenue comes off the top.

Oil, iron ore, and more in the future

The most significant item from the analyst conference call, however, were the comments indicating a further shift in the company’s stance on commodity diversification. While all mining assets accounted for 83% of revenue, 10% of that came from the new iron ore assets. Gold’s contribution fell to 53.5%, a low for the company.

France clearly has the broadest commodity diversification of any of the large precious metals royalty and streaming companies. Over the years, as the company has grown and fewer large gold and silver opportunities are available, Franco has been less defensive about its non-precious metals revenue, now highlighting the diversification as a strength. As I have discussed previously, the non-precious metals revenue and diversification is far less an issue with generalist investors than it is with gold specialists, though gold royalty companies trade at significant valuation premiums over non-gold companies. The company’s comments took the diversification issue another step than in the past.

There is a new diversification target for the company

As the company has stated before, its current priority is to acquire new precious metals assets, which it expects to come from financing the development and construction of new mining. But it remains open to adding other commodities if there are good assets. CEO

Paul Brink even said that as the company grows, diversified commodities could make up a larger part of the portfolio, although precious metals remain the number-one focus. However, he admitted that the former goal of precious metals accounting for over 80% of the portfolio had changed, and now “longer-term, I expect the mix would be at least 80% mining assets.” He also noted that since commodity prices tend to be volatile, the mix can change in the short term (viz, energy prices in the last few quarters). He also emphasized that if a good asset came to market, they would want to acquire it regardless of the commodity mix, and then try to manage the mix over time. Interestingly, none of the questions from analysts on its latest call focused on the gold assets (though there were some on the commodity mix).

Cash, inflation, copper, and taxes

The company remains debt free, with around $350 million in cash and total available capital of $1.6 billion. Other topics were touched on during the conference call, and most were positive or less negative for Franco. Inflation is leading to higher costs for mining companies, but royalty and streaming companies tend to be far less affected than the miners. Indeed, if higher inflation leads to higher gold and silver prices, then inflation is a net positive for royalty companies. Brink noted that, although copper is subject to conflicting pressures at present (the negative being a slowdown in China’s demand), the mines on which Franco derives many of its gold streams are among the lowest-cost producers so he not concerned about any pullback in price of copper.

The newly agreed global minimum corporate tax would affect Franco, as it would other royalty and streaming companies which have offshore subsidiaries. In Franco’s case, the impact would be minimal, perhaps as little as 3% of NAV, even less if certain deductions for streams are permitted.

With a rock-solid balance sheet, top management, diversified assets, and a low-risk business model, Franco remains a core holding for us, with growing exposure to multiple resources. We would wait for a pullback to add to positions. Hold.

Production down and costs up at Newmont

Newmont Corp. (NEM:NYSE) (US$56.55) reported slightly lower-than-expected results, with Australian operations outperforming expectations while North America lagged. The drop in production is largely the result of lingering restrictions relating to Covid at various mines. In a large diversified mining company, some mines will always underperform and others outperform for periods, and none of this was material in Newmont’s latest quarter. The company updated its full-year guidance for production of 6 million ounces (down from previous guidance) at a cost of $790 per ounce (up from prior). The increase in costs is being felt across the industry.

Newmont is a mining leader in the move towards carbon reductions, with goals of reducing emissions by 30% by 2030 and becoming net-zero by 2050. As part of this drive, the company has formed an alliance with Caterpillar to produce an all-electric, autonomous haulage fleet. (Of course, the increased emissions from the additional mining for specialty minerals required for EV batters does not get mentioned.)

Newmont is somewhat overvalued relative to other large mining companies, though still well below its historical norms. As the largest gold mining company in the world, with no huge warts, a good balance sheet, and a respectable dividend (3.9% yield at today’s price), Newmont will be an obvious beneficiary of renewed interest in gold stocks by generalist investors and funds. We are holding.

Fortuna updates on Mexico mine

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (US$3.83) said it had obtained an extension of the requirement in its line of credit to have a permit or permanent injunction to operate its San Jose mine in Mexico, following the environmental agency’s denial of its application to renew its mining license. The new deadline is February 18, 2022. Meanwhile, the company said it expects to file a court appeal to the denial order by the end of the month. The company is currently operating the mine under a temporary injunction that it hopes to make permanent. The entire appeals process could take up to a year, the company said, so we could be revisiting the line-of-credit issue in a few months.

The stock, after a brief rally, slid again to end the week at a new recent low. We continue to think that the decline in the stock price exaggerates the potential loss, even of the closing of the San Jose mine, and that Fortuna is good value at these levels. Equally, the next several weeks are unlikely to see a meaningful rebound as the story unfolds. Fortuna can be accumulated by long-term gains investors.

Cartier active on many fronts, though timeline has slipped

Cartier Resources Inc. (ECR:TSX.V) (0.175) continues to advance its various projects in the Abitibi area of Quebec. It is moving ahead with a preliminary economic assessment (PEA) on its flagship Chimo property, following a third resource estimate in May; this shows 684,000 ounces indicated and 1.4 million inferred, a significant increase from previous estimates. The company has been drilling two other properties, including Benoist, currently underway, while it has executed option agreement on two more. Earlier this year, it also acquired all rights in the prospective Fenton property.

The Chimo resource is the most significant development, and the increase in ounces is impressive (up 73% from last year’s update). However, the cut-off grade was reduced, and (partly due to this) the grade fell 30% to under 3 grams per tonne, on the low side. The PEA should be completed by year end or early next, with a possible sales process thereafter.

Though the activity is impressive, the stock has been a disappointment, falling in half from earlier in the year. Partly, the weak stock has been due to overpromising. A little over a year ago, we were expecting a sales process for its Chimo within months, following publication of a resource estimate, but that was delayed. Given the updated resource estimate and renewed expectations to monetize Chimo, we are holding.

Promising drilling underway for Lara

Lara Exploration Ltd. (LRA:TSX.V) (0.60) announced that drilling has resumed at its Planalto Project, following its receipt of long-expected permits. Unusually, the company said that “a preliminary inspection of the …drill core from (the first) hole” indicated it was “very similar” to the main Homestead discovery which excited the market in 2018. A second drill rig has been mobilized. The market has barely moved to this potentially very promising news. Lara is a strong buy for this project, but also more generally for strong management, which operates on a low spend across multiple properties.

Orogen’s first royalty property to start within months

Orogen Royalties Inc. (OGN:TSX.V) (0.415) received positive news on its two main royalties. Project owner First Majestic announced that production at the Ermitaño deposit in Sonora, Mexico, will begin “in the coming months” with up to 60,000 tonnes of ore expected to be stockpiled by year end. First Majestic continues to explore the deposit, which is adjacent to its depleting flagship Santa Elena mine. Orogen has a 2% NSR royalty on the deposit and surrounding ground.

Separately, AngloGold has reported on the Silicon and Merlin projects in Nevada. Following its proposed acquisition of Corvus Gold, which has land surrounding Silicon, Anglo said exploration results “indicate for potential of significant oxide orebodies at Silicon and Merlin, as well as additional sulphide potential at Silicon at depth.” Production at Corvus’s land could begin in the next three to four years and would later move onto to Silicon, over which Orogen holds a 1% royalty.

Given the recent strong move in Orogen’s stock price, and our plentiful opportunities to buy lower, we are holding for now. But certainly if you do not own, you can accumulate.

TOP BUYS THIS WEEK include, in addition to any above, Altius Minerals Corp. (ALS:TSX.V) (15.92); Midland Exploration Inc. (MD:TSX.V) (0.58); Kingsmen Creatives Ltd. (KMEN:SI) (0.25); Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) (20.25); Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) (US$26.78); and Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) (US$54.35).

Originally published on Nov. 21, 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."


1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Franco-Nevada, Fortuna Silver, Lara Exploration, Midland Exploration, Altius Minerals, Kingsmen Creatives and Orogen Royalties. 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, which is unaffiliated with Adrian Day’s newsletter, 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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