Royal Gold Inc. (RGLD:NASDAQ) said its recent transactions — the acquisition of Sandstorm and the purchase of a $1 billion stream on the Kansanshi copper mine — added diversification to the portfolio, even though they added geopolitical risk, which CEO Bill Heissenbuttel described as "incremental."
He said the company would seek to convert the equity interest in Turkey's Hod Maden project, acquired in the Sandstorm transaction, to a stream. Following these two large transactions, with $1.2 billion drawn on its debt facility, Royal Gold would be focused on debt repayment, though it would also look at new transactions in what it described as a favorable environment.
Despite the highest level of debt ever, it is not overleveraged on debt metrics, given its strong cash flow. Notwithstanding the recent additions of mines in Turkey, Zambia, and South Africa, Royal still has 40% of its NAV in the U.S. and Canada. It also has 90% in precious metals, among the highest of the royalty companies.
One Mine Extension and Another Major Discovery
Separately, owner Centerra published a new Preliminary Feasibility Study on Mount Milligan, Royal's largest single asset, which extends the mine life 12 years to 2045 and increases output. At one time, over 40% of the company's NAV and revenue, it will decline to around 12% of revenue post the Sandstorm acquisition. Overlooked as well by many (including initially by me) is that Royal has a 1.6% gross smelter royalty on Barrick Mining Corp.'s (ABX:TSX; B:NYSE) Fourmile discovery, which we discussed in some details last week (Bulletin #980); thanks to Dan Carthew of TD for pointing this out.
Royal stock is discounted owing to the overhang from the Sandstorm acquisition which is expected to close in October 15. Now, however, with anticipated over $1 billion in annual EBIDA, it can compete on transactions with the big two (Franco and Wheaton), and has strong medium- and longer-term growth, arguably with more leverage to gold than the big two. Its projected 2026 organic growth is a multiple of that of other two. It was criticized for paying up for recent large transactions, such as Great Bear and Cortez, and now Sandstorm, but with the gold price up meaningfully since particularly the first two and even since the Sandstorm acquisition (gold was $3,300 when the deal was announced), these acquisitions are not looking so expensive now.
I recall Mr. Heissenbuttel at the time asking me rhetorically, "In five years' time, will you be happy we own these assets?" It is currently trading at a wider discount to its traditional discount to the big two — P/CF of 23x vs 36x for Franco and Wheaton, and a price-to-NAV of less than 2x against nearly 4x for the other two. And its stock performance lags them this year to date, up "just" 50%, compared with 86% for Franco and 95% for Wheaton. We think the gap will start to narrow after the Sandstorm acquisition closes.
Though the stock has outperformed since its post-Sandstorm announcement lows, it remains a Buy.
Modest Growth in the Year Ahead for Silver-Rich Wheaton
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) has a strong medium-term growth profile, 40% over the next five years, supported mostly by mines that started production this year, as well as others due to commence next year. After strong growth this year, next year's organic growth will be relatively modest. Wheaton, however, just agreed to invest up to $400 million in a stream on the Hemlo mine, facilitating the mine's acquisition by a private group called Carcetti Capital, backed by some big names in the industry.
Hemlo offers Wheaton attractive near-term cash flow, as well as mine extension potential, plus a low-risk jurisdiction, helping to reduce Wheaton's overall risk profile. Barrick had long expressed a desire to sell Hemlo, which it saw as non-core. Though CEO Randy Smallwood said the company is alert to acquisition potential, any transactions would have to be accretive, while noting that corporate acquisitions carry higher risks than buying, or creating streams on, individual assets.
In some ways, Wheaton is lower-risk than its two largest competitors, though it does have higher silver exposure as well as higher asset concentration. Currently about 35% of its revenue comes from silver, and, absent new acquisitions, the percentage will be stable for the next five years. Salobo, Vale's mine in Brazil, is responsible for 40% of the company's revenue, though that is expected to decrease to about 25% by 2029. Still a larger percentage from a single mine than other larger royalty companies.
We are holding.
Steady as She Goes for Franco
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) discussed a more-modest, but high-conviction 5-year growth, with the possibility of additional growth from the restart of Cobre Panama, which represented almost 20% of Franco's revenue before the mine was shut. The restart is not included in the company's five-year outlook, given the lack of clarity on timing, but it is not unreasonable to think the mine will restart at some point in the next five years. Franco has made a couple of large gold-focused investments in recent months, over $1.5 billion, which led it to take on some debt, for only the third time in its history.
Separately, the company has settled its tax dispute with the Canadian Revenue over transfer pricing. Franco will not be required to pay additional taxes on the years from 2013 to 2019 which were the subject of the audit, but will be required to increase the mark-up on the fee it charges its offshore subsidiaries going forward. Previous penalties has been reversed. CEO Paul Brink emphasized that the company was focused on returns, and was not averse to building up cash if suitable investments were not available, though it sees "little challenge" in deploying its $1.2 billion of annual cash flow in the present environment.
Hold.
Organic Growth Means or Can Be Patient
OR Royalties (OR:TSX; OR:NYSE) discussed what it sees as differentiators in its business from other large royalty companies. It has high growth (40% over the next four years); the lowest geopolitical risk; the highest margins; the highest exposure to precious metals (94%); and the upside of its flagship Malartic Mine. Half of its projected growth will come from the expansion of existing mines, which is more certain growth than building new mines. It also has possible growth from assets it does not currently have in its guidance (including from the restart of the shuttered Eagle Mine in the Yukon, and Orla's new Railroad project in Nevada).
It said that given assets in its portfolio that promise growth over several years, it can afford to be disciplined on new deals; indeed, over the past year, Osisko has had a lower level of activity than its peers. Its strict economic filters were not focused on gold price appreciation. However, CEO Jason Attew told me that the company was certainly open to consolidation, whether a merger or being acquired. It is thought that some M&A discussions were underway before stock moves scuppered the talks.
Given the 100% stock appreciation in the last six months, we are holding.
Triple Flag Open To M&A
Triple Flag Precious Metals Corp. (TFPM:TSX; TFPM:NYSE) also discussed the long-term growth in its portfolio, including the royalty on the Arthur Deposit that it purchased from Orogen.
Triple Flag, noting its $1 billion of liquidity, said it was open to corporate M&A, including potentially as an acquisition target.
Given its 6-month outperformance, we are holding.
Fortuna Sees Production Growth and Lower Costs, Without Acquisitions
Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) sees a clear path for its production to return to 500,000 oz/year with mine expansions and a new mine at Diamba Sud. Next year, its All-in Sustaining Costs (AISC) with be down to between $1,500 and $1,600.
In addition, the company is spending $19 million on generative exploration in Central and South America as well as West Africa, while it is also looking at possible mine acquisitions. CEO Jorge Ganoza emphasized, however, that the company is "chasing value not ounces."
Despite the strong stock price appreciation over the past year, trading at less than 6 times cash flow, Fortuna remains a Buy, particularly for investors who do not own it.
Orogen Moves Ahead After Royalty Sale
Orogen Royalties Inc. (OGN:TSXV; OGNNF:OTC) is making fine strides since the acquisition of the Arthur royalty by Triple Flag (technically a purchase of the company and concurrent spin out). It has completed three transactions since the July spin-out. It has four alliances, with Triple Flag, BHP, South 32, and Altius, in addition to several option earn-ins. It expects over CA$3 million in generative exploration this year, with 75% of the funds from partners, as well as 30,000 meters of drilling by partners on projects being earned into or on which Orogen holds royalties.
Among these is the high-potential La Rica in Colombia, owned by a private company with little public information; the company recently completed a US$75 million financing, where drilling is expected late this year or early next. News from this project, which is not in the stock price, could spur excitement. Orogen will be presenting a project generation webinar, October 8 at 1 pm eastern.
Orogen is one of our favorite junior resource companies — indeed, one of our favorite companies with a great team, a spread of projects and partners, plus cash flow and a strong balance sheet (CA$19.5 million cash, no debt).
Nonetheless, I'd like to buy more on pullbacks.
TOP BUYS this week, in addition to above, include Ares Capital Corp. (ARCC:NASDAQ), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), and Lara Exploration Ltd. (LRA:TSX.V).
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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 Barrick Mng Corp., Franco-Nevada Corp., Or Royalties Inc., Triple Flag Precious Metals, Fortuna Mining Corp., Orogen Royalties Inc., Metalla Royalty & Streaming, Lara Exploration Ltd., and Wheaton Precious Metals 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.
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