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Recent Acquisitions Pay Off for Royal Gold
Contributed Opinion

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Adrian Day Global analyst Adrian Day looks at the quarterly results from three large royalty companies, a large miner, and a development company. Most of the companies had pre-released production and costs (except Franco) so Day notes few surprises when the full quarterlies came out. Day continues to be cautious in buying.

Most of the companies reported moderately weak first quarters in terms of production and revenue, though all reiterated full-year guidance, with production for most back ended.

The softer quarterly results were for the most part anticipated.

Barrick's Cash Flow Up, Despite Lower Production

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), as expected, saw production down in the first quarter, both in the last quarter and the year-ago quarter, largely because of various planned maintenance and processing changes in Nevada, including maintenance on the Goldstrike roaster.

Free cash flow nonetheless increased. CEO Mark Bristow said that, notwithstanding the lower production from Nevada Gold Mines this past quarter, Nevada remained "our value foundation."

The company reiterated that it was on track for full-year 2023 guidance, both for gold and copper production as well as costs, and expects a steady increase throughout the balance of the year with new processing plants at both Gold Quarry and Turquoise Ridge as well as the ramp up at Pueblo Viejo to full capacity by July.

Costs continue to be low, with full-year cash costs for gold estimated at between US$820-880/oz.

Is Bristow Softening Towards an Acquisition?

Although Bristow has been somewhat outspoken about various acquisitions of other companies — recently saying it would not be bidding for either Newcrest or for Teck — and has always emphasized the company's organic growth prospects, he did say that "we are casting our net wider and stepping up the hunt for fresh opportunities."

He mentioned the company had "opened up new frontiers and secured multiple interesting prospects" in Canada among other countries, specifically mentioning the new option agreement with Midland on the Patris property in Quebec (see Bulletin 859).

The Financial Times quotes Bristow today as saying he was looking for takeover candidates. On the analyst call, he stated firmly that Barrick did not have any acquisitions in order to grow.

Of the largest two gold companies, we continue to favor Barrick, with superior management, balance sheet, and mines, plus a strong, organic growth pipeline.

We are holding.

Sales Lag Production for Wheaton, as Rest of Year Promises Growth

Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) reported results a little lower than expected, with production marginally down and sales lagging production. Most noticeably, at its largest asset, Salobo, there was a meaningful build in inventory, though to some extent anticipated.

This will reverse in the second quarter, and the company is on track to meet full-year guidance, and it also reiterated its five-and-10-year guidance.

In particular, the second half of the year will see the ramp-up of the Salobo III expansion, as well as better grades at Constancia. The balance sheet is rock solid, with virtually US$800 million in cash and US$2 billion undrawn on its credit facility.

The new proposed Global Minimum Tax (of 15% on companies), to which Canada is committed, will likely be effective next year. Wheaton estimates that it will cut its NAV by about 10%. Strong management, balance sheet, and assets make Wheaton a solid holding.

As with the other gold stocks, we are holding for now.

Recent Acquisitions Pay Off for Royal Gold

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) reported a strong first quarter largely driven by higher copper sales from Mount Milligan, its largest asset, Khoemacau in Botswana, on which Royal has a silver stream, that has now achieved nameplate capacity, while the new royalties on Cortez started paying.

Gold from Mount Milligan was below expectations, largely as a result of sequencing. In addition, G&A was up. Despite these items, the company appears well on track for its full-year guidance.

Royal has about US$134 million in working capital with about half a billion available on its credit facility, which it expects to fully repay by mid-2024 (absent other large-scale acquisitions, of course).

We are holding, though nimble traders might sell here and look for buyback toward US$130.

Franco's Production Should Rebound After Soft Quarter

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) reported a modest miss in the first quarter, which was already forecast to be a weak quarter due to disruptions at Cobre Panama (because of government actions) and Antapacaya in Peru (affected by protests).

Oil and gas prices were also lower in the quarter. Nonetheless, with both mines back up and running, gold equivalent ounces (GEOs) should be back on track in this quarter, with a little catch-up, particularly from Cobre Panama, where ore has been backed-up ready to be shipped, while Antapaccay will also be stronger.

The company is expecting a strong second quarter, with the second half to be better than the first but not as strong as the second. Franco remains a blue chip, with over 400 assets, of which over 119 are cash-flowing. Precious metals accounted for 77% of revenue, up from 71% in the prior quarter. Its margin in the quarter was 83%, while G&A was less than 4% of EBITDA. Three new mines are starting up this year, including, this quarter, Fortuna's Séguéla.

Over the next five years, it has nine gold mines and one copper mine coming online, on which it holds royalties (not including any new streams). It sees good opportunities for financing new mines. Franco has a rock-solid balance sheet, with US$2.3 billion available, of which more than US$1 billion is cash.

The new global minimum tax is expected to have a 3-4% negative impact on its NAV. Separately, the Canadian tax authorities vacated its dispute with Franco on domestic issues, while the transfer pricing dispute continues, with discovery expected at the end of the year or early next.

Top management, diversified assets, a rock-solid balance sheet, and a strong growth profile all add up to make Franco a core holding for us. Higher precious metal revenue, as well as a strong growth outlook, should see the stock regain some of its historical premium valuation multiples.

We are holding.

Vista Continue To Seek Deal That Rewards Shareholders

Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) is reducing expenses as it continues the process of seeking a transaction on its Mt Todd project that would realize full value for shareholders. It said that its plan for a smaller-scale development, announced in March, had seen both new and renewed interest. There continues to be a cautious approach to large-scale development projects.

The plan envisions much lower capital costs, though higher operating costs, but critically would retain the flexibility to enlarge the project later (see Bulletin 855). This plan, the company said, has "resonated" with a number of companies. There have been some site visits, and some companies have drilled and undertaken their own metallurgical studies.

The company's priority, CEO Frederick Earnest said, was to maximize shareholder value, "to realize the full value of Mt Todd" (emphasis the speaker's).

"We are holding the line on that," he said. He said the company was confident that it would be able to complete a transaction "at the right time" that fully rewards shareholders. There is no intention to develop the project separately. Apart from the large capital cost of the project, there is a headwind of people who remember the earlier mine, which eventually bankrupted its operator on the back of difficult metallurgy.

Earnest said that companies had endorsed its extensive technical work and been complimentary of the support of local communities it has achieved for the project.

Project Economics To Improve, but Capital Raise Lies Ahead

The Northern Territories has issued proposals for the mining industry that, among other recommendations, would significantly reduce the royalty regime from the current 7-9% to the levels of other global tier-one jurisdictions, typically from 2.5% to 5%, and that would enhance the economics of Mt. Todd. Recurring costs are on track for a 7% decline — down to US$1.2 million in the last quarter — while holding and exploration costs at Mt Todd have been reduced to about $800,000 a quarter. Sufficient exploration work is being undertaken in order to main various exploration licenses, but that is very low cost without drilling.

The company ended the quarter with US$6.6 million in cash and no debt. The net loss for the quarter was US$2 million. Clearly, without additional revenue — the old mill is their only remaining asset for sale — the company would need to raise new capital later this year-end if no transaction is effected.

The stock continues to trade at a significant discount to the value of the project. The main difficulty now is finding a formula that would allow a company to acquire the project while Vista shareholders obtain "full value." In addition, another equity raise, without any concrete advance on a transaction, would hurt the stock.


More Trouble in Mexico for Fortuna

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) reported that operations at its troubled San Jose mine in Mexico had been halted again by a blockade of unionized workers. The union represents about 15% of the total workforce.

Fortuna said it is holding talks with the union leadership in an effort to end the illegal blockade. The mine is the largest employer in the region.

The stock ignored the news, responding instead to higher gold and silver prices.

We are holding.

TOP BUYS this week include Altius Minerals Corp. (ALS:TSX.V), Midland Exploration Inc. (MD:TSX.V), Lara Exploration Ltd. (LRA:TSX.V), Nova Royalty Corp. (NOVR:TSX.V), and Hutchison Port Holdings Trust (HPHT:Singapore).

BAD TIMING FROM THE CHAIRMAN Fed chairman Jerome Powell began his Wednesday press conference by stating that "the U.S. banking system is sound." A Q&A session followed.

Question: Are we in the early stage or nearing the end stage of the banking turmoil among regional banks?

Answer: There were three large banks from the very beginning that were at the heart of the stress that we saw in early March. Those have now all been resolved. I think that the resolution and sale of First Republic kind of draws a line under that period. Bad timing! Within a few hours of that comment, PacWest Bancorp announced that it was in talks with several potential investors to shore up its capital and was open to a sale. This raised concerns about its financial strength and viability and saw the stock further decline. It fell 58% after Powell spoke (and at one point was down 90% since March).

GOD SAVE THE KING! What a spectacle, what pageantry. And I must say that the Royal Family is very fortunate to have Catherine as Princess of Wales, with her charm, smile, and quiet dignity.

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Important Disclosures:

1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: All. 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: AllI determined which companies would be included in this article based on my research and understanding of the sector.

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5) From time to time, Streetwise Reports LLC and its directors, officers, employees, or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in the securities mentioned. Directors, officers, employees, or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company release. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Barrick Gold Corp., Franco-Nevada Corp., Vista Gold Corp., Fortuna Silver Mines Inc., Altius Minerals Corp., Midland Exploration Inc.,  Wheaton Precious Metals Corp., Lara Exploration Ltd., and Nova Royalty Corp.,  companies mentioned in this article.

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. 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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