Source: Adrian Day for Streetwise Reports 04/21/2020
Money manager Adrian Day discusses a general approach to the market, as well as recent developments at several companies on his list, including some buy recommendations, despite being overall cautious.
Most markets have enjoyed a meaningful rally off their lows of three to four weeks ago. The S&P is up nearly 30%, with the Business Development Companies up 50% and more, while global markets have also rallied, though typically less; the XAU index of gold stocks has risen over 40%. It is not unusual to see an initial strong bounce after sharp market declines, but what often follows is a retreat to the lows—perhaps new lows—with a more selective and more delayed recovery after that. When stocks hit their lows again, we should avoid the temptation to immediately load up indiscriminately expecting another sharp rally.
Looks for sales in you added last month
Because of these rallies, we would be buying very little right now, waiting for a pullback to start buying again. (See “Top Buys” near the end of this letter.) Indeed, we would look for possible sells, but so much depends on individual circumstances. If, for example, you managed to buy more Ares Capital Corp. (ARCC:NASDAQ) at a good price, maybe under $9, you could sell some of that additional purchase for a better-than 30% gain. I am most definitely not suggesting you sell all your Ares; I am just looking at possibilities depending on individual circumstances.
This general advice applies to gold stocks as well. If you doubled your position in, say, Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) under say, $26—you had seven trading days last month to do so—you could cut back over $34. Remember, be alert to tax-loss consequences. Since any sales of add-on positions at last month’s lows will not be outside the 30-day wash-sale rule, decide whether you want to sell shares in which you have a gain and preserve any tax losses for later sales; or avoid paying tax now but give up the tax loss. (You can designate which shares you are selling; talk with your accountant if it’s a meaningful amount.)
Evrim’s royalty gets more valuable
Evrim Resources Corp. (EVM:TSX.V, 0.28) announced that First Majestic had upgraded the resource at the Ermitano Project, which Evrim discovered and subsequently sold to First Majestic in exchange for a 2% royalty. The operator announced a 345% increase in the silver-equivalent ounces, and a 15% increase in grade, for an indicated resource of 311,000 ounces of gold and 4,730,000 ounces of silver. A pre-feasibility study is expected by year-end. Production, and revenues to Evrim, are estimated to commence in early 2021.
Separately, Evrim has regained 100% of the Cerro Cascaron project after Harvest Gold completed two seasons of exploration including drilling with promising results. Much of the project remains unexplored, and Evrim will seek another partner.
Although the stock price has recently moved up, at 28 cents, the market cap is C$24 million, about the same as the cash and value of the its Ermitano royalty, so it remains undervalued. If you do not own it, Evrim is a strong buy.
Fortuna’s mines all closed down, but stock cheap
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$2.36), like other mining companies, withdrew its production guidance for this year, following the closing of both of its operating mines, and the suspension of construction activities at its Lindero project, nearing completion in Argentina, all the result of the Covid virus. As a result, the commencement of operations and production has been pushed back again, with no new date announced.
The company is in a strong position, with $123 million cash, which includes $40 million just drawn on its credit facilities. As part of its response, the company said that senior executive compensation was being reduced.
At its current price, Fortuna is trading at only 6 times last year’s cash flow, 14 p/e, and 60% of book value. These are very low numbers for a mining company. Although clearly the impact of the shut downs in three countries on at least this quarter’s revenues will be significant, once the mines reopen and Lindero starts production, revenue will move up sharply. Fortuna is a very strong buy at this level. It traded as low as $1.80 last month, so if you already own a meaningful allocation, you might wait for an additional pullback to add to positions.
Royal well positioned to withstand closures
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$107.81) said its gold and silver sales in the first quarter were in line with previous guidance, though it ended the quarter with lower inventory. Several of the mines at which Royal earns its royalties and streams have temporarily closed because of the virus, including its principal earner Mt. Milligan.
The company drew another $200 million on its credit facility, bringing to just over $300 million the amount outstanding on its $1 billion credit facility, The drawdown was a “prudent precautionary measure,” the company said. Separately, CEO William Heissenbuttel said he has complete confidence in the revised mining plan for Mt Milligan put out by owner Centerra. We are holding.
Reopening, purchase and dividend continues
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, CA$8.31) received good news when the Quebec government announced mines were “essential,” and many mines, including Malartic (Osisko’s largest royalty earner) and Eleonore announced plans to resume operations, the latter on a “phased” schedule. Hold.
Reservoir Capital Corp. (REO:TSX.V, 0.04) has completed the previously announced acquisition of Olocorp Nigeria, which holds shares in an operating Nigerian hydro company. The final 40% of Olocorp was purchased for Reservoir shares. Hold.
Gladstone Investment Corp. (GAIN:NASDAQ, 9.96) said it was proactively engaged with its portfolio companies, providing assistance and support as necessary. These companies have been affected by Covid and the shutdowns to various degrees, depending on sector and location. It announced the monthly dividend would remain the same as last quarter, with a special extra 9 cents per share payment in June. If these payments continue, it would equate to a 12% in the year ahead. Hold.
TOP BUYS As per the discussion above, in addition to stocks mentioned herein, top buys right now include Altius Minerals Corp. (ALS:TSX.V, 7.88) and Kingsmen Creatives Ltd. (KMEN:SI, 0.22).
Originally posted on April 19, 2020.
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 securities of the following companies mentioned in this article: Ares Capital, Evrim Resources, Gladstone Investments, Royal Gold, Osisko Gold Royalties and Altius Minerals. 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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Adrian Day’s Global Analyst disclosures: 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. © 2020.