Gold Miners Recovered from COVID but Stocks Undervalued

Source: Adrian Day for Streetwise Reports   02/16/2021

Money manager Adrian Day reviews the latest news from several of the gold and silver miners on his list, with several “buy” recommendations.

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$11.34) reported its latest quarterly results, inline with expectations, with a total of just over 66,000 “gold equivalent ounces” (GEOs) sold in 2020. This is expected to increase to around 85,000 GEOs this year.

In addition to the resumption of all its operations following temporary Covid-related shutdowns, other operations are back on track. The Renard diamond mine, after a long shutdown due to low prices and the bankruptcy of the operator, has restarted operations. And operator Newmont Corp. (NEM:NYSE) has provided guidance of 270,000 ounces for the variable Eleonore mine (on which Osisko holds a royalty). Meanwhile, Osisko Development, in which OR holds 77% of the shares as well as royalties as its assets, said it expects to complete a feasibility study on Cariboo, its main deposit, before the end of the year.

Trading at less than net asset value (NAV), Osisko is at a significant discount to other major royalties, wider than justified. The stock popped Friday from under $11 after the release by the operators of a favorable preliminary economic assessment (PEA) and resource update on the Malartic underground, on which Osisko holds a rich royalty. Initial production is expected in 2023, though the full ramp up will not be for six years after that. The mine is projected to last until 2039, and possibly beyond. Osisko’s stream, up to 5% on parts of the ore body, is the company’s next large cornerstone asset. Buy.

Quality Royalty and Streamers Can Be Bought

Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$40.20) saw its stock price shoot up on the would-be recent silver squeeze from an exaggerated low of $37.30 to over $46, before sliding back. Wheaton recently acquired a silver stream on a copper-silver mine in Mexico, paying $150 million for half of the silver production. Any return on the transaction depends on operator Capstone converting resources to reserves, a quite likely event. Perhaps more significantly, Wheaton said it was in advanced discussions with Captsone for a gold stream on a large Chilean copper mine.

Wheaton is in a strong liquidity position; it expects to be net cash positive early this year and has $1.5 billion available on its credit facility. Overall, it has a high-quality portfolio, with long-life streams on low-cost mines with high-quality operators. It recently issued five-year guidance, projecting an average of 810,000 ounces of gold equivalent ounces. Wheaton is a buy for long-term investors.

Trading at Discount; Has High Growth Potential

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$111.03) saw royalty ounces back to pre-COVID levels, with the good quarter partly due to unexpectedly strong results from Penasquito. The last quarter also saw some sales from previous production and this current quarter’s ounces will decline, though Royal’s outlook for 48,000 to 53,000 seems low. Two new projectsóthe Khoemacau copper mine in Botswana, on which Royal has a silver stream, and the Pueblo Viejo expansion in the Dominican Republic, with a gold streamóare on track. These will be the two main drivers of growth over the medium term. Royal has a strong balance sheet with over $180 million in net cash plus $800 million available on its credit facility.

Selling at a discount on a cash-flow basis to its major royalty peers, Royal’s reliance on a single asset, the Mt. Milligan mine, has been reduced and next year will be even more so. Royal is a buy, though it is up 10% from its late January low.

Miners See Mixed Results

Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$4.80) had a generally positive quarter, with higher production and revenues, though free cash flow fell by almost 50% from the previous quarter on higher costs and capex. Costs were also higher than forecast, with cash costs at $675 per “gold-equivalent ounce” while “all-in sustaining costs” were $1,076. Full-year production was down, largely because of the ongoing restrictions in Argentina, which affected its Cerro Moro mine. This also was the cause of the higher-than-forecast costs.

The company guided for a return to one million GEO this year, a level it will sustain for the following two years until the Malartic underground, a 50/50 joint venture with Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE; see above, under Osisko), commences production. It largely replaced reserves at year-end, with the updated resource estimate on Malartic helping the overall numbers. Again, Yamana’s three-year guidance, until this project commences production, is lower than expected.

Further out, however, it has expansions at several mines, including Jacobina, Minera Florida and El Penon, the last two dependent on exploration success. Together with the Malartic underground, this puts Yamana in a better position for reserve replacement in the 5- to 10-year horizon than many other large producers. Yamana also has a dedicated generative exploration program, with several early-stage projects throughout the Americas; the goal is to discover a million-plus deposit to add to its production pipeline. It also continues to look for acquisition, and recently completed a CA$152 million cash and stock acquisition of Monarch with a promising project close to the Malartic mine. The company continues to reduce net debt from asset sales and cash flow.

One potential disposition is the Mara project in Argentina, formed from the integration of Agua Rico and Minera Alumbrera, which integration significantly derisks the project. Mara is a joint venture with Glencore International Plc (GLEN:LSE) and Newmont, Yamana holding 56%. The multibillion, primarily copper project offers various avenues going forward, including potentially selling or reducing its stake.

Yamama is continuing its long turnaround and on several criteria is better placed than its peers. We continue to hold.

Weak Results Anticipated, but Outlook Looks Good

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$7.65) had a soft quarter, with weak results from its San Jose mine, with the lowest grade since the end of 2013. Silver production was down 19%, offset partly by base metals production. Its Callyoma mine in Peru is moving through a part of the deposit with less silver. Overall costs were higher. With mines in Argentina, Peru and Mexico, the company’s operations were hit by COVID-restrictions more than most. Guidance for this year from the famously conservative company is somewhat disappointing across the board, with a further decline in silver production expected, while gold output will increase, but less than some analysts were expecting; costs are forecast to be higher than previously expected driven by higher sustaining capex.

Fortuna also received a legal setback in a dispute with the Mexican government over royalties on its San Jose Mine. The ruling is being appealed.

New mine off to good start

The new gold mine in Argentina is progressing well, however, after a delayed initial gold pour in October, with very good grade reconciliation. That augers well for the future. Fortuna stock has trended higher over the past 12 months, and though down from its “silver-squeeze” spike up, which saw it move just shy of $10; it is still up 14% from a late January low. However, as Lindero continues to ramp up, and probably exceed expectations, we think the stock will move higher, and will respond well to any rally in silver prices. Fortuna is a buy if you do not own it.

The remaining three senior gold companies on our list, Barrick Gold Corp. (ABX:TSX; GOLD:NYSE, US$22.14), Newmont Corp. (NEM:NYSE, 58.93) and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$121.16), are all buys. We shall update these companies following their earnings releases.

TOP BUYS this week, in addition to companies discussed above include Nestle SA (NESN:VX; NSRGY:OTC, US$100.72); Midland Exploration Inc. (MD:TSX.V, 0.79); and Lara Exploration Ltd. (LRA:TSX.V, 0.69).

Orogen Move, Poorly Communicated, Causes Controversy

Orogen Royalties Inc. (OGN:TSX.V, 0.325) announced a change in the board and an investment by the chairman. The move by Paul van Eeden to invest $2.7 million in a below-market transaction, with warrants, caused controversy because of the price and the fact that the placement is not open to other investors. In truth, I think the terms are generousóa market deal would have sent a much stronger messageóand more importantly, the way the news was delivered to the market, without providing any rational for the placement, left much to be desired. The announcement generated considerable backlash, and the stock fell.

However, Paulóhe is a longtime friend, so first name is appropriateóintends to step up the work he does for the company and this placement is by way of compensation for that work. As chairman, he receives a modest stipend and has no options. It is normal to grant key employees, officers and directors options. In Paul’s case, he is paying for his shares and warrants. Paul can bring a wealth of experience and a dedication to the new role as an executive. Having him make a substantial investment in the company at a market discount is a small price to pay for his taking a more active role.

Longtime director Dave Caulfield resigned from the board, a disappointing move given his sterling reputation and exploration insights. The vacancy enables CEO Paddy Nichol to rejoin the board. He had stepped down in order to get the merger with Renaissance Gold completedóa strong signal that he put the company ahead of any egoóbut his rejoining the board makes sense.

Originally posted on February 14, 2021.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Royal Gold, Midland Exploration, Lara Exploration, Orogen Royalties, Yamana Gold, Barrick Gold, Franco-Nevada, Newmont. 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 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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