Resource Companies Advance in Strong Market

Source: Adrian Day for Streetwise Reports   05/20/2021

Money manager Adrian Day reviews how several companies, mostly resource companies, are making good progress in what he calls a “strong environment.”

Altius Minerals Corp. (ALS:TSX.V, 17.16) reported revenue up 9% in the first quarter from a year ago, despite a drop in sales. Net earnings jumped 75% from last year, excluding special items. Strong base metals prices, offset by an unplanned interruption of production at Chapada, saw revenues for the quarter up 12% from last year.

Base metals account for 43% of the company’s royalty revenue. It received its first (nominal) payment from a new mine, Gunnison. Potash, the second largest revenue source, was down on a year ago, but with strong demand and price increases in recent quarter continued the improving trend, up 33% on the prior quarter. Most analysts expect increased demand to continue, and Altius will see higher price realization on sales in coming months. Altius’ CEO Brian Dalton said he believes the market is undervaluing its potash assets.

In the resource sector, one must be a contrarian

Dalton has a reputation as a contrarian. He believes that we are now past the point in the cycle for outright buying some, though there will always be opportunities to add capital for development, or perhaps specialty minerals. Altius did an excellent job accumulating prospective land during the long bear market that followed 2012, and has been selling and optioning the last over the past couple of years. In broad terms, the company wants to use its cash flow to reduce leverage; the time to add leverage is at the bottom. But he added that he was not “maniacal” about going to zero debt; the current debt “does not threaten us at all.”

Altius continues to work with junior companies in the project generation business, which is run separately and funds itself. Most of the assets in this business are gold, giving Altius exposure to that metal. The company has done a great job-generating gains as well as increasing the value of the project generation portfolio.

The company ended the quarter with just under $20 million in cash, after repurchasing shares for $7.4 million. The miss on sales in first quarter saw the stock drop, after a very strong spurt. Altius is for us a core holding; if you do not own any, you can buy here.

Vista Continue to Advance Mt. Todd Without Excess Dilution

Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$1.05) continues to advance its Mt. Todd project in the Northern Territories of Australia with ongoing drilling, progress on its final permits and seeking a strategic partner.

The drilling is looking at connecting mineralized structures as well as boosting the resource at the main Batman deposit. Drilling will be increased in the coming quarter. The company is awaiting its last major permit, approval of its “mine management plan,” which is essentially the same as an operating permit in North America. It expects to have this “in the very near future,” though in December the company said much the same, after the Minister of Mines made a surprise announcement that the approval was “imminent.” The company said it understands now that two of three signatures required for the approval have already been received, and it is just awaiting the Minister’s signature.

CEO Fred Earnest said he sees no reason they will not get the approval.

COVID delays partner deals

The company continues to seek a strategic partner Mt. Todd, which, at today’s prices, has a net present value (5% discount) of $1.5 billion. Vista has said what is clearly the case—that Mt. Todd is too large a project for it to attempt to finance, build and operate itself. The travel restrictions over the past year have definitely delayed progress on this front, and international travel to Australia remains difficult.

Vista continues to generate non-dilutive financing, with cash currently at $7.2 million. In the past quarter, it received another $1.1 million for Prime Mining for its purchase of Guadalupe de los Reyes, an option payment from Nusantara, and $600,000 from “at the market” equity sales. It expects a final payment for Guadalupe of $1 million in July; and by the end of January 2022, $2.5 million for cancelation of the royalty on the Awak Mas property in Indonesia.

The stock fell initially after it reported its quarter, mainly on the delay in receiving the final permit, and is now right in the middle of its six-month trading range. Results from drilling are encouraging, and the company has done a very good job of continuing to generate non-dilutive financing.

But the remaining options for such financing are dwindling; and there needs to be clarity and progress in bringing in a partner or selling the asset, particularly as gold prices move up and travel restrictions ease. This is what the market wants to see, in my view. We are holding, but would buy on any pullback.

Newmont Improves Balance Sheet

Newmont Corp. (NEM:NYSE, 70.75) had a soft start to the year, with production below expectations across most assets, although costs were slightly better. The company maintained its full-year guidance of 6.5 million ounces at cash costs of $750/ounce, expecting the second half to be better than the first (which it typically is). Newmont has net debt of around $700 million after repaying maturing notes last month. The company should be modestly net cash position by the end of the year, after paying the highest dividend in the sector.

Newmont, being the largest gold miner, will attract investment when generalists return to the sector. It has production from generally stable jurisdictions, a deep pipeline, a good operating team and free cash flow. The stock is up over 30% since the late February low. We are holding.

Yamana Continues Turnaround

Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$5.12) reported slightly weaker production and costs in first quarter, though there was variability across mines, and the company is maintaining its full-year guidance of one million “gold equivalent ounces” at cash costs of $655-$695 per GEO (gold equivalent ounce). Malartic, in particular, had a very strong quarter. There are several projects underway that will increase production, including an expansion at Jacobina, and increased production at El Penon. Longer term there is the new Mara mine, and the underground at Malartic, which will expand production for another decade.

Yamana has a stable production profile, an improving balance sheet, and a valuation below peers. We are watching to see if improvements in production and the balance sheet continue. Hold.

Gladstone Earning Dividend Again with Strengthening Portfolio

Gladstone Investment Corp. (GAIN:NASDAQ, 13.41) has seen net investment income improve for the last two quarters after weakness following the COVID pandemic, which saw additional companies put on non-accrual and debt payments postponed. In the last quarter, net investment income (NII) exceeded the dividend once again. The company also has undistributed NII of $0.34 per charge, equivalent to almost five month’s worth of dividends.

The net asset value (NAV) increased to $11.52 per share, as two companies came back on accrual status. This is particularly important for GAIN since it generates about a quarter of its income from gains. The regularly monthly dividend comes from interest on loans (as well as other fees) and it pays a special distribution each year from net gains. It is making such a distribution again, next month, though it is reduced from the last two years.

The stock is historically high

GAIN is trading 21% above its NAV, while the yield is down to 6.7% (including the special dividend). In today’s environment that is an attractive yield, but it is the lowest yield since early 2011. And the price-to-NAV matches the high at the end of 2006 (although I do not see the need for a large equity offering). Nonetheless, the valuation is not low on an historical basis. We are holding.

BEST BUYS NOW include Midland Exploration Inc. (MD:TSX.V, 0.76), Lara Exploration Ltd. (LRA:TSX.V, 0.69)), and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, 6.32).

Originally published May 16, 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: Altius Minerals, Lara Exploration, Midland Exploration, Newmont Corp., Fortuna Silver Mines, Gladstone Capital and Yamana Gold. 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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