Franco & Royal Make Major Investments
Expert Adrian Day discusses recent purchases from two royalty companies, as well as preliminary quarterly reports from several gold companies that he considers top buys right now.
Preliminary second-quarter results from gold companies are coming out. For most of the major miners, production has been broadly in line with forecasts, with record revenues for some (although there have been some shipping delays), while costs have risen modestly; next quarter could see higher costs.
We will have more information once the companies release full results and hold their conference calls. There have also been some
significant acquisitions in the royalty space.
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) has provided a $352 million financing package to the well-regarded G Mining on its Tocantinzinho Project in Brazil, its largest gold stream investment since 2018. The financing includes a stream on 12.5% of the gold (to be reduced to 7.5% after the anticipated end-of-mine life) as well as a loan and equity.
This financing represents over 75% of the total capex to build the mine, and the company now has more than sufficient funds available, with production expected in the second half of 2024.
One of the significant aspects of Franco’s investment is its “right of first refusal” on future G Mining projects.
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) also made a major acquisition by buying Great Bear Royalties Corp. (GBRBF:OTCMKTS) and its 2% royalty on Kinross’s Great Bear project. It paid virtually CA$200 million in cash, representing a 43% premium to its 20-day average price.
Kinross famously acquired Great Bear at an early stage, without a resource estimate let alone a PEA or feasibility. However, Great Bear is potentially one of the largest undeveloped gold projects in Canada so is an attractive acquisition.
On an asset basis, Royal’s acquisition is accretive. In order to gain comfort with the asset and the price it paid, Royal obtained the right to examine Kinross’s non-public data on the deposit in exchange for Kinross obtaining the right to buy back one-quarter of the royalty. Separately, Royal reported attributable “gold equivalent ounces” (“GEOs”) above expectations, with full-year guidance of 315,000 to 340,000 GEOs unchanged.
Record Quarters for Osisko and Altius
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) reported 22,240 “GEOs” received in the second quarter, up 22% from the first quarter and a record, though revenues were slightly lower than expected. The second quarter included revenue from the Renaud diamond mine after a long period of restructuring.
Two mines are expected to ramp up through the second half, which should result in higher overall attributable production.
Altius Minerals Corp. (ALS:TSX.V) reported a record quarterly revenue of $28.2 million, ahead of the previous record in the first quarter, on the back of higher-than-expected revenue from thermal coal and potash; base metal revenues were lower, due to metal prices.
The second half of the year may see lower revenues, however, due to expected lower metals and iron ore prices.
Barrick, in Line, Announces Start of Work in Pakistan
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported production more-or-less in line, with strong performance across all assets. Copper production rose on Q1 while gold production was slightly down. Costs are expected to come in 2-4% above the first quarter, which is in line with Barrick’s projections; 2Q costs are expected at $857 cash costs and $1,211 all-in sustaining costs.
Barrick reiterated its full-year guidance of 4.2 to 4.6 million ounces of gold and about 450 million pounds of copper. The first half accounted for about 45% of the anticipated full-year output, which the company had already indicated would be the case.
Separately, the Chilean Supreme Court upheld a lower court decision shutting down Barrick’s massive $8.5 billion Pascua-Lama project straddling the Chile-Argentina border. Barrick has not commented on this ruling yet and any future for the portion of the project in Argentina is unclear. By far the largest part of the pit lies in Chile.
The company also announced that the first phase of the Reko Diq copper/gold project in Pakistan, which will cost about $4 billion, is expected to begin next month, with the second phase about $3 billion, after an updated feasibility study.
The study will take two years, with the first production expected in 2027-2028. The project is 50% owned by Barrick with the other half owned by various Pakistani government entities and companies.
Barrick, which is the operator, is targeting 50% debt financing.
Wheaton Receives Bad News on Major Asset
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) received bad news when Vale reported that copper production from Salobo was significantly below expectations, by almost 30%, and it has also lowered its full-year guidance. This is the second quarter in a row with lower production (about 20% in the first quarter).
A stream on Salobo’s gold byproduct is Wheaton’s largest asset, representing about 26% of its revenues last year. Operational difficulties could also the schedule of the Salobo II expansion, which had been on track to commence production by the end of the year.
Separately, Wheaton has signed a “sustainability-linked” amendment to its $2 billion undrawn credit facility, whereby the rate of interest the company will pay is based on three “ESG” criteria.
We are not fans of this kind of debt. In Wheaton’s case, the criteria are emissions from third-party mines (which are beyond Wheaton’s control); the percentage of women and minorities on its board and in management (which in my view is irrelevant window-dressing); and the company’s S&P ESG score.
All Fortuna’s Operations on Track
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) reported its second-quarter production results, with silver in line while gold was somewhat lower than expected with both Lindero and Yaramoko producing under expectations. However, significantly, stacking at Lindero was in line, so production may catch up. Management reiterated full-year guidance.
There were no meaningful issues at any of its mines.
Extension for Midland, but Property Dropped at Lara
Midland Exploration Inc. (MD:TSX.V) announced a one-year extension of the “generative phase” of the Strategic Alliance with a unit of BHP, the world’s largest resource company, with additional funding from BHP of up to $1.4 million. The Alliance is looking for nickel across Nunavik, Quebec.
This agreement is very positive, indicating strong interest from BHP.
Lara Exploration Ltd. (LRA:TSX.V) said that Hochschild had relinquished its option to buy the Corina gold project in Peru. The move was not unexpected, but once Lara has reviewed the results of the drilling, it could seek another partner.
All of the companies discussed above are good buys at current levels. In addition, this week, top buys include Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) and Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE).
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Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. www.AdrianDayGlobalAnalyst.com. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. 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. © 2022. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.
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