Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) reported another quarterly revenue record, following a first-quarter record, more-or-less as expected, but the financial results benefited from the liquidation of 44,000 of gold that had been stockpiled earlier, resulting in higher cash flow and earnings. The liquidation was to help fund the purchase of a large royalty on the Cȏté mine in Ontario.
The high gold price relative to other resources, especial oil, reduced the Gold Equivalent Ounces (GEOs) when converted. Revenue was another record, and costs somewhat below estimated. Franco reiterated its full-year guidance. Indeed, the second half should be strong given material revenue not included in the original guidance: the one-time Cobre Panama stockpile sales, the new Cȏté royalty, and increased revenue from the new Porcupine royalty.
Franco drew down $175 million on its line of credit for the purchase of a 1% royalty on the Arthur deposit from Altius (see Bulletin #973), Franco is now in a modest net debt position, with about $777 million credit still available.
Recent Purchases Have Great Long-Term Growth Potential
CEO Paul Brink said the last couple of years had been some of the most active in the company's history. This year, they have added to assets in the U.S. and Canada to redress the balance. The outlook for these royalties is strong. He said that Cȏté has the potential to rival Canada's largest gold mines, Detour and Malartic, while he "would not be surprised if the Arthur deposit grows at a similar rate as Goldstrike in its heyday."
Despite having unusual debt, Brink said he would be happy to use credit for additional acquisitions. With $1.3 billion of annual cash flow, he indicated the company would repay debt easily. A small amount of gold inventory remains — 2,469 ounces at quarter end — but he noted that the company receives bullion for some of its royalties and may build the inventory again. As we have said many times over the year, Franco is a core holding for us; if we could own only one gold stock, it would be Franco.
After the recent run, however, we are holding for now.
Revenue Down for Altius, but Strong Outlook With Enhanced Balance Sheet
Altius Minerals Corp. (ALS:TSX) reported results meaningfully below last quarter and the comparative year-ago quarter, but broadly in line with expectations. Royalty revenue fell from over $20 million in the year-ago quarter to $12.7 million, with all segments, other than renewal energy, falling.
However, the outlook remains positive, with some key development assets moving forward, and, following the sale of Orogen (in which Altius is the largest shareholder) and it own 1% royalty in the Arthur deposit, a much strengthened balance sheet. It paid down $2 million on its debt, but made no new share repurchases during the quarter because of a self-imposed blackout during the Arthur sales negotiations.
Company Will Be Disciplined in Deploying Capital
Following the sales, the company, as discussed in Bulletin #973), has about $360 million in cash, after anticipated taxes and fees, and liquidity of $541 million. It may use the cash to increase the dividend (indeed, an 11% boost was announced); for share repurchases (or what CEO Brian Dalton likes to call "internal M&A"); and for external M&A activity, with, he emphasized, a disciplined approach.
Dalton noted that the company has held cash in the past for long periods without buying anything and is prepared to do so again. Because the company would be able to fund acquisitions without additional equity, he noted, this means the dilution discount would be eliminated, opening the company up to being able to make more competitive bids.
It would also likely pay down small amounts on the revolver credit, but it decided against both eliminating its debt and paying a one-time special dividend. After the quarterly results, Altius announced it had essentially won the final Silicon arbitration; Franco will now pay Altius an additional $25 million for their 1% royalty.
Gold Component Could Increase Going Forward
Altius confirmed that the decision to keep a third of the Arthur royalty, amounting to a 0.5% royalty, means that precious metals is "a new pillar" of the company. Although Altius is open to acquiring additional precious metals royalties, it will likely not be able to compete against larger gold royalty companies with their lower cost of capital. It will, however, continue to explore for precious metals in its prospect generation business, where the competition does not exist.
In looking ahead, Dalton noted that both Nutrien and Mosaic had increased their production forecasts, positive news for Altius' potash division (where revenue follows with a lag). The renewable division is now self-funding and he noted that now there was clarity of the U.S. tax credit phase out, activity in that industry was picking up.
Champion Iron announced a definitive framework agreement with Nippon Steel for development of the Kami Iron Ore deposit, on which Altius owns a 3% royalty; a feasibility study is expected last next year. And the local government's process on the large Julienne Lake deposit is proceeding. Altius has submitted a big but stands to gain whoever develops the asset since it hold continuous claims to those being auctioned. Despite the disappointing — if expected — quarterly results, Altius is in a very strong position, with diversified revenue sources and a deep pipeline of exciting large-scale assets being advanced.
Now with a strong balance sheet and enhanced flexibility, it is in a good position to make acquisition, as well as resume repurchasing its own shares. Altius is a core holding for us. If the stock is expensive on a cash flow metrics, is remains undervalued on an asset basis, many assets not being fully recognized.
We would continue to buy.
Metalla's Revenue Grows, as New Assets Ramp Up
Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American) reported continued growth in royalty revenue, with GEOs up 29% from the previous quarter reflecting the ongoing ramp-up at Tocantinzinho (TZ), and lower-than-expected G&A, leading to solid financial results. Metalla reiterated its full-year guidance with GEOs heavily weighted to the second half, based on the continued TZ ramp up and anticipated first revenue from the newly restarted Endeavor mine in Australia.
Following the replacement of a credit line with a new bank facility (see Bulletin #968), Metalla has $9.9 million in cash and $12 million drawn on its new line of credit. Metalla stands at the cusp of a period of strong growth, with revenues forecast (by analysts) to grow from CA$15 million this year to $25 million next, after having essentially doubled in each of the previous two years.
Further out, many of the company's major non-producing assets are reaching development milestones. In many cases, other major companies also own royalties or streams on the same assets as does Metalla, guaranteeing high-profile discussion as these assets move forward.
Assets Are Progressing Well
- Gosselin: operator IAMGOLD will report next on an expected combined CȏtéGosselin super pit, which would see Metalla's royalty ground move to production sooner than previously expected. This is a good example of large royalty companies providing high-profile discussion of Metalla's assets; Cȏté-Gosselin was a major focus of Franco-Nevada's recent earnings call, in which CEO Paul Brink said that the entire mine has the potential to rival Canada's largest gold mines (see above).
- Endeavor saw first concentrate shipped in July and Metalla should generate its first cash flow this quarter, with a ramp up in Q4.
- HudBay announced an investment from Mitsubishi for a 30% joint-venture stake in Copper World, providing a clearer path towards a construction decision. Wheaton and Franco also hold royalties and streams on the project.
- Equinox's Castle Mountain project was accepted into the FAST-41 program, expected to streamline federal permitting, with a targeted completion of the end of next year. Franco also holds a royalty on the same asset.
Further out, Metalla holds royalties on major copper projects, including First Quantum's giant Taca Taca in Argentina. Again, Franco also holds a royalty on this project.
CEO Brett Heath was recently interviewed by Jay Martin. The insightful discussion looks at commodities, changes in the royalty landscape, gold's emerging role as a dominant reserve asset, and, of course, at Metalla itself. It is well worth watching.
Though Metalla remains expensive on a current cash flow basis, this is slowly changing as more assets coming into production. On an asset basis, however, it remains meaningfully undervalued.
As the development assets advance, helped by discussion from well-followed senior royalty companies, the market will begin to recognize and give value to these assets. The stock, after a long period of languishing, has formed a solid base, and we expect strong outperformance in the years ahead.
Metalla is a Buy.
Is Barrick Finally Turning?
Barrick Mining Corp. (ABX:TSX; B:NYSE) reported operating results largely in line, consistent with Barrick's targets. Copper production was a little higher t h an expected, due to good results at Lumwana. Lower capex spending helped earnings come in as expected. All-In Sustaining Costs (AISC) were a solid $1,684/oz, though higher than estimated.
Barrick took a not-unexpected $1 billion impairment on its Mali assets, though CEO Mark Bristow emphasized that the company wanted to reach an agreement with the government. It is seeking negotiations with the government as well as mediation, while also pursuing international arbitration. It repurchased $268 million in shares and paid a 5 cent bonus on is 10 cent dividend under its dividend policy.
The company finished the quarter with a small net-cash positive position; at the end of the first quarter it had net debt of over $600 million. Subsequent to quarter end, it sold a small mine for $50 million. Barrick reiterated its full-year guidance, though noting that higher gold prices increases its AISC. The company has consistently said that production will increase each quarter, so the production guidance looks on track, but costs are tracking higher than guidance. While the results were solid, they did not excite on the upside.
However, there is also reason to be positive that company-wide results have turned positive, and Barrick remains undervalued, particularly on an asset basis. Mali is now all upside, should it regain control of the mine.
Hold.
Orogen's Cash-Flowing Royalty To Expand
Orogen Royalties Inc. (OGN:TSXV; OGNNF:OTC) received good news when First Majestic's CEO Keith Neumeyer discussed developments on the expansion of its Santa Elena mine in Mexico. Though there was not a lot of hard data on the call, and the discussion linked together three new discoveries — Navidad, Winter, and Santo Nino, with Orogen holding royalties over the first two but not the last) — it was very positive. Neumeyer described the discoveries as "amazing" and said the discoveries could be larger than Ermitaño, which is currently generating most of the mill feed and all of Orogen's royalty income.
Neumeyer said the company was looking at the best way to develop these new ore bodies with the quickest timelines, what he called "our whole focus". On Navidad (which, together with a slither of Winter, has a 30 million ounce maiden resource), First Majestic hope to have the planning done by the end of the year or the first quarter.
The plant is being expanded to allow additional ore, and this should see Orogen's royalty revenue increase as well as for potential for it to have a longer life. With solid financial and technical management, multiple royalties on exploration projects at various stages, three alliances with BHP, Triple Flag and Altius, cash flow and a solid balance sheet, Orogen is a company we want to own and build larger positions.
We have been waiting for a stock pullback following the completion of the Triple Flag acquisition and spin off, but to date the stock has held firm. Look for any weakness to add to positions.
Fortuna Reports Strong Results at Next Growth Asset
Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) announced very strong drilling results from its Diamba Sud Gold Project in Senegal, including 22.7 g/t over 21.6 meters.
These results come after the cut-off date for its maiden resource estimate, but demonstrate the continuing potential at what Fortuna has called its next growth project.
Trading at virtually a four-year high, we are holding for now, but Fortuna remains a favorite intermediate gold producer.
Kingsmen Announced Strong Profits Increase and 'Robust' Pipeline
Kingsmen Creatives Ltd. (KMEN:SI) announced a 28% increase in first-half profit, despite a slip in revenue, as costs declined.
The Exhibitions and Attractions division saw a decline profit, though Kingsmen is adding several pop-up and experiential attractions.
Other units saw growth, including the interiors division.
The company said it had a "robust" pipeline of secured contracts, ensuring future growth. S$278 million is expected to be recognized this year; for context, the company generated S$162 million in the first half.
Despite these solid results and strong outlook, the shares fell.
They are a buy here.
Gladstone Reports Solid Quarter
Gladstone Investment Corp. (GAIN: NASDAQ) reported higher net investment income after expenses fell sharply, mainly due to the decline in incentive fees. The company had an increased level of investment activity, but there were no investment gains in the quarter. Gladstone maintained its dividend, which is covered by income. It has undistributed spill-over income equivalent to six months of dividends. The number of companies on non-accrual status remains at four.
The NAV per share decline by 56 cents, mainly due to the extra distribution made to shareholders. This was a solid quarter, with a good outlook for future activity, The stock is trading at 1.05 times NAV, which is not so high as to be concerned about large-scale equity issuances.
The yield based on regular monthly dividends is 6.7% but Gladstone, as we have discussed, frequently makes additional distributions, from net capital gains, the last being 54 cents in June. Including special dividends, the yield for the past 12 months is over 10%.
We are comfortable holding but will look for a pullback to buy.
TOP BUYS this week, in addition to above, include Gladstone Investment Corp. (GAIN: NASDAQ) and Lara Exploration Ltd. (LRA:TSX.V).
| Want to be the first to know about interesting Gold investment ideas? Sign up to receive the FREE Streetwise Reports' newsletter. | Subscribe |
Important Disclosures:
- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Franco-Nevada Corp., Altius Minerals Corp., Metalla Royalty & Streaming, Lara Exploration Ltd., Barrick Mng Corp., Orogen Royalties Inc., and Fortuna Mining Corp.
- Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: None. My company has purchased stocks mentioned in this article for my management clients: All. I determined which companies would be included in this article based on my research and understanding of the sector.
- Statements and opinions expressed are the opinions of the author and not of Streetwise Reports, Street Smart, or their officers. The author is wholly responsible for the accuracy of the statements. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Any disclosures from the author can be found below. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
- This article does not constitute investment advice and is not a solicitation for any investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Each reader is encouraged to consult with his or her personal financial adviser and perform their own comprehensive investment research. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company.
For additional disclosures, please click here.
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. © 2023. 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.
