Barrick Boosts Reserves by 10% Without Acquisitions
Contributed Opinion

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported an increase in reserves and resources for gold and copper, beyond replacing ounces mines. Gold reserves and resources increased by 10%, mainly driven, as expected, by Pueblo Viejo, where a new tailing facility enables Barrick to extend the mine life and push more resources into the reserve category.

Nevada overall was unchanged again, after depletion) at 30 million ounces of reserves and around 100 million of attributable resources, with some mines increasing and others declining. Copper reserves increased by 3% while resources jumped 124%, led by Jabal Sayid in Saudi Arabia and its largest copper mine, Lumwana in Zambia. 

Several Large Projects Not Yet Underway

These reserve increases are due to exploration success and development, as well as higher gold and copper prices used to calculate reserves. Barrick increased its gold price from US$1,300 (up from US$1,200), and its copper price to US$3/lb (up from US$2.75). these prices are still considerably below current spot prices, US$1,865 and $4.01 respectively.

Significantly, almost half of the company's resources are in large development projects to which the company has not yet committed, including Donlin and Pascua-Lama, and which are not in the company’s five-year plans. Notwithstanding this, the higher metals prices used for calculation, it is a notable achievement to increase reserves by a solid amount without acquisitions.

Separately, CEO Mark Bristow in his inimitable way ruled out a competing bid for Newcrest, which currently is considering a bid from Newmont, saying that “there’s a difference between value merger acquisitions and getting bigger for the sake of getting bigger.”

Barrick is one of our two preferred large miners (Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) being the other).

We would look to buy on weakness toward US$17.

Panama Giving Franco Headaches

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) received further bad news from First Quantum on its Cobre Panama stream, which represents Franco’s largest asset (about 17% of NAV).

First Quantum reported that the Panama Maritime Authority had ordered the suspension of loading operations at the local port until evidence of the calibration of scale had been provided, stopping the company from exporting its concentrate as of February 3rd.

Because of limited storage facilities on site, this would require the company to stop mining by mid-month. First Quantum called the move “part of a series of escalating attempts to pressure the company” into accepting the government terms for a new contract, reporting that the company had also been subject to extraordinary inspections.

In addition, the government attorney had filed motions in two proceedings asking the Supreme Court to rule that prior extension resolutions, giving First Quantum the authority to mine through 2037, be deemed without legal effect. The court has not yet ruled on the motions. 

What Is Behind This Move?

I have spoken with numerous contacts and all are puzzled by what appears to be the government’s intransigence and pettiness. There is either something going on that we don’t yet know about, or this is nothing more than a simple government shakedown or an asked-for bribe unpaid. Whatever lies behind it, the way the government is handling itself is doing the country’s erstwhile business-friendly reputation no good at all. It also makes international arbitration more likely.

Cobre Panama had a successful ramp-up, achieving record production in the third quarter, and an expansion underway was expected to boost production to a higher steady state by the end of this year. We expect Franco’s fourth quarter, when released, to receive a strong boost from Cobre Panama, since, due to the timing of shipments, some of the third-quarter production will be included in the fourth-quarter revenue.

At about 15% of revenues, Cobre is Franco’s largest contributor, and any suspension of operations (or worse) would be a meaningful blow to the company. However, the company’s broad diversification, with over 110 producing assets, means that the company can survive a blow to any single asset, even its largest.

With a rock-solid balance sheet, top management, diversified assets, and a deep pipeline, as well as a low-risk business model, Franco remains a core holding. Given the current uncertainty about Cobre Panama, however, we would like to see lower prices before adding to positions.

Pan American Shareholders Give the Green Light

Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) announced that shareholders approved the proposed acquisition of Yamana, whose shareholders also approved the transaction. Yamana’s Canadian operations, including its 50% ownership in Canadian Malartic, will be sold to Agnico, and the rest to Pan American.

The transaction is on track to be completed this quarter.

We have discussed the acquisition before and in particular our concern about some short-term selling from erstwhile Yamana shareholders who will represent 45% of the combined company.

If you do not hold it, however, this is a good time to buy, but there is no need to pay up now. 

Midland UPS Its Lithium Exploration

Midland Exploration Inc. (MD:TSX.V) continues to garner attention for its prospectivity to lithium. As discussed in the last Bulletin, there is a staking rush in James
Bay (and elsewhere) for lithium, with mania in the stocks.

Midland has land strategically located, though there has not been exploration for the mineral on its land previously.

Midland has now completed magnetic surveys on its properties in the Mythril Regional project and has identified a potential new area. It is planning for exploration programs on these projects, to be launched in the coming weeks.

As expected, the stock had been correcting from its more-than-double at the end of January that took it up to 0.72. Midland is one of our top exploration holdings. I was ready to announce Midland as a “best Buy” before the stock jumped 15% on Friday. I’ve never liked chasing stock prices.

So let’s be ready to buy if it gives back some of Friday’s extraordinary move.

Osisko Project Advances

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) saw one of its pipeline assets advance after Osisko Mining raised US$75 million to progress its Windfall project. An EIA is expected to be released before the quarter's end, with a construction decision expected in early 2024.

OR holds about 14% of Osisko Mining, but more importantly has a royalty on Windfall, so anything that advances the project to production, even at the cost of ongoing dilution cost, is a positive for OR.

Osisko has a strong growth profile over the next few years, solid management with a conservative focus, and a solid balance sheet.

For those looking to increase exposure to the gold space, Osisko is a Buy here. 

Another Record Quarter for Ares

Ares Capital Corp. (ARCC:NASDAQ) had another strong quarter as the company begins to benefit from rising rates, reporting record quarterly core earnings of US$0.63 per share, up 26%. The spreads on new deals have widened over the past year. The company reported a 13% ROE in the last quarter, as it shifts to larger businesses that find BDCs and other alternate financing sources easier than banks.

Its new loans in the quarter were to companies with a weighted average EBITDA of over US$500 million, compared with US$275 million for the entire portfolio. CEO Kip deVeer said the company was being cautious in the present environment and maintaining low leverage.

Credit remains good, although one company was added to nonaccrual status, bringing the total of loans on nonaccrual, at cost, to 1.75% of the portfolio, well below the 10-year average of 2.4%.

Compared with larger BDCs (those with over US$700 million market cap), Ares says it has the highest core dividend, highest NAV growth rate, and highest return on NAV. It increased its dividend paid at the end of December to a new level of US$0.48 per quarter, up over 5% from the previous regular dividend. It has undistributed “spillover” income equal to nearly three-quarters of dividend payments.

Ares has a yield of 9.7% on the regular dividend (excluding special cash dividends it has paid, though did not forecast for the period ahead), even after the strong run-up in the stock price from US$18 in mid-December.

We are holding but will be buying on pullbacks.

Hutchison: Poor Last Year but Higher Hopes for This

Hutchison Port Holdings Trust (HPHT:Singapore) reported soft full-year results, with a decline in revenue on 7% lower throughput, even as operating expenses rose. Nonetheless, the trust maintained its per-unit distribution, giving it a yield of over 9% on improved prospects for the year ahead.

The company had been particularly hit by the renewed covid lockdowns in China, though the year has begun with “some encouraging developments,” the company said, and it expected gradual improvements in international trade, in addition to the return of containers to Hong Kong with the opening of the Hong Kong-China border.

The trust is hedged on over 70% of its long-term debt. Hutchison is a good addition to a diversified income portfolio.

Buy.

BEST BUYS this week, in addition to the above, include Orogen Royalties Inc. (OGN:TSX.V) and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE).

BE WARY OF EQUITY BULLISHNESS Two surveys of investor sentiment toward the stock market (the American Association of Individual Investors and Investors
Intelligence) shows an increased amount of bullishness, both showing the highest since the end of 2021. At the same time, the number of bears has dropped to the lowest level in over a year, with AAII showing only 25% of investors bearish, down from over 52% at the end of December, even as (because?) the market has risen. Given the market’s high valuation and the prospect of slowing earnings as the Fed tightens, this is dangerous.

UPCOMING CONFERENCES Early next month is the annual PDAC convention in Toronto. On Sunday the 5th is a one-day investor conference with many well-known letter writers and others. I’ll be talking about gold’s drivers. Register here. Then July 23-27, in Boca Raton, Fla., is Rick Rule’s annual resource symposium which promises to be even better than last year’s superb event. Once again, Robert Friedland will keynote the conference. For details and to register, visit here.

LIMIT? WHAT LIMIT? Once again, Congress goes through the drama of raising the government’s debt limit. But given that the limit has been increased 79 times over six decades (according to Ray Dalio), it can hardly be called a limit, can it? A limit would be one where the government controls its spending so that it needs to borrow only up to that limit.

Adrian Day Disclosures:

Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. www.AdrianDayGlobalAnalyst.com. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. 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. © 2022. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.

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