Source: Adrian Day for Streetwise Reports 01/07/2020
Fund manager Adrian Day reviews recent developments with precious metals producers in his portfolio.
Newmont Goldcorp Corp. (NEM:NYSE, $42.83) is in our portfolio because Newmont acquired Goldcorp. Over the past eight months, it has been active with major sales, including 50% of Kalgoorlie in Australia—Barrick also sold the other 50% just a little before—and Red Lake (which came with Goldcorp), both sold to Australia companies. It has also sold its stake in Continental Gold. Together, the dispositions have raised $1.48 billion ($800 million from Kalgoorlie), reaching the upper end of its targeted sales.
However, we believe it is likely that Newmont will make several more smaller dispositions, mostly assets acquired in the Goldcorp purchase that don’t fit the company’s hurdle rate or profile.
These sales have dramatically improved the balance sheet, now with $4.4 billion of cash, net debt down to $2.8 billion. Newmont has also initiated a $1 billion share repurchase program.
Costs, though low, are increasing
In its recent “Outlook 2020 and Beyond,” Newmont guided for reduced production (largely because of the sale of producing assets), and with it a reduction in sustaining capital requirements. Costs are estimated to increase, however, though at cash costs of $750/ounce and “All-In Sustaining Costs” of $975, they remain low.
So, an improved balance sheet and low costs, as well as strong political-risk profile, are all positive for Newmont. The modest growth profile as well as the slow integration with Goldcorp (including alleged cost savings) offset that, at least in the near term. The valuation is high, given the lack of growth. But in a strong gold market, Newmont will be a beneficiary, both from index buying and retail investment as a well-known name. We are holding.
Turnaround underway at Yamana
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, NY, $3.83) appears to be slowing turning around, though it has seemed that way before. The balance sheet has improved after last year’s sales, with a current $100 million in cash. Debt remains high, however, with debt-to-equity of 44% and a “quick ratio” of just 0.2x. It’s not a great balance sheet, but the company appears to be out of the danger zone.
There are also several opportunities for growth in the year ahead and beyond. Cerro Moro, the major deposit in Argentina, continues to expand, now with drilling on new zones. Jacobina and Malartic both have major expansions underway. And drilling at El Penon suggests that profitable mine can be expanded.
With its current valuations reasonable—price-to-cash flow of 8.5x and less than book (though price-to-free cash flow is less satisfactory 36x)—we are holding for now.
Fortuna’s new mine: Almost there
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, NY, $4.03) reported improved production at its two existing mines, but costs continue to be high. However, the company is maintaining full-year guidance, though at the upper end of its cost range.
The major news, of course, is in Argentina, where its large Lindero gold mine is nearing completion. The company failed to meet its goal of putting ore on the pad in 2019, but that will occur any time now, with ore processing in mid-January. Under new regulations, mining companies have to convert their dollars to pesos and hold them a year before exporting dollars, and the potential for further declines in the peso could significantly affect earnings. Fortuna is looking at its options, though hedging is too expensive.
Fortuna has cash of $72 million. A successful start to operations will see the stock advance nicely, though it may take a couple of quarters for the market to be convinced. Developments in Argentina, outside the company’s control, could hurt (or help) the stock. It has already advanced from the below $3 in November to over $4 as the mine gets closer to completion. With that, the short interest in the stock fell, though it remains high, so a successful ramp-up and the stock rally could be leveraged. The stock remains undervalued against other silver stocks. We are holding for now, but ready to buy on any set back.
Osisko plans caught market offguard
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, NY, $9.64) is not a producer, of course, but we are including it in this report since it is exposed to production, development and exploration at its “incubator” companies more than pure royalty companies. It is a hybrid royalty, and trades deservedly at a lower valuation because of the higher risk. It was severely punished recently for going too far, and buying an entire exploration company, Barkerville, as we discussed recently. It also announced a new initiative, Northern Spirit, a “project development program…the next step in the evolution of our accelerator business.” The lack of details also hurt the stock. Osisko also had another black eye; following the bankruptcy of Stornaway, now Lydian, on whose project in Armenia it holds a stream, has sought protection from creditors. The impression, fair or not, is of a company a little too aggressive in spending its money. However, we think the stock is oversold; Osisko will not be building Barkerville’s mine itself, and we hope there will be more details on Northern Spirit and Osisko’s role in it soon. Meanwhile, two of its major units, Osisko Mining and OIII, are continuing to advance their projects, the former more advanced than the latter.
More clarity on its plans, as well as a major success at one of its main investments, will certainly help the stock recover. Selling at 20x free cash flow, and 12x book, Osisko stock is significantly undervalued relative to the pure royalty peers. It is in the midst of a major stock repurchase program, which has been the stock recovery from its post-Bakerville low under $8.50, and has another 13 million plus shares to go. Osisko is a buy at the current level.
In our next report, we will briefly review some of the non-resource companies on our list.
BEST BUYS at current prices include, in addition to above: Midland Exploration Inc. (MD:TSX.V, 0.94), Kingsmen Creatives Ltd. (KMEN:SI, Singapore, S$0.42), Lara Exploration Ltd. (LRA:TSX.V, $0.59), Ares Capital Corp. (ARCC:NASDAQ, $18.66), and Evrim Resources Corp. (EVM:TSX.V, $0.325).
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.”
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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Evrim Resources, Midland Exploration and Lara Exploration. 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: Newmont Goldcorp, Yamana Gold, Fortuna Silver, Osisko Gold Royalties, Midland Exploration, Kingsmen Creatives, Lara Exploration, Evrim Resources and Ares Capital. I determined which companies would be included in this article based on my research and understanding of the sector.
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( Companies Mentioned: FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE,
YRI:TSX; AUY:NYSE; YAU:LSE,