Great Discovery Gets Bigger for Royalty Holders
Global Analyst Adrian Day reviews year-end financials from several companies in the resource and global markets. Most of them had some disappointing news in their results, according to Day, but he leads with a junior that received some unvarnished great news.
Orogen Royalties Inc. (OGN:TSX.V) received good news when AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) held its yearend analyst call. In discussing its Beatty gold project in Nevada, it updated results on the "magnificent" Merlin deposit, announcing a "truly spectacular" resource of 9.1 million ounces. This result "beat all expectations," and "significant upside" remains.
The last resource announced for Merlin in August was for an expectation of 6-8 million ounces, so this new resource is indeed spectacular. In addition, the grade at Merlin is higher than at the adjacent Silicon deposit by about 20%. Combined with the 4.22 million ounces at Silicon deposit, this is over 13 million ounces so far on the ground covered by Orogen's 1% royalty.
And there is more to come.
Another portfolio company, Altius Minerals Corp. (ALS:TSX.V), has a 1.5% royalty on the entire regional project, though the part outside of Silicon/Merlin is disputed by Anglo and is currently in arbitration. The entire region has more than 16 million ounces to date, with many target and new deposits yet to be tested. The region is expected to support 500,000 ounces of annual production for decades, according to Anglo. It will start with the North Bullfrog deposit, which is now expected to commence production in the first quarter of 2026.
It should be noted that some of the Merlin and all of the Silicon resource is in the low-confidence "inferred" category, but given the robust nature of the drilling and reporting, as well as the fact these these are pit-constrained resources, one can reasonably expect the vast majority to eventually go into reserves.
A Very Aggressive Drill Program Leaves Anglo Uncertain
AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE)
A staggering $74 million was spent on drilling at the project last year (excluding other costs), with 102,000 meters on Merlin alone. Drilling continues, with the deposit open to the west. Significantly, the announced resource is for the oxides only; no resource for the deeper sulfides has been announced. This year, the company will conduct both infill drilling to improve the confidence of the resource and extension drilling. It has not announced a drilling budget yet.
AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) has finished, but not yet released, what it calls a "concept study" on the Silicon deposit. A Preliminary Feasibility Study is underway and expected to take 18-24 months to complete, but Anglo was clear that the parameters of the study continue to change as more drilling and resources come into play.
CEO Alberto Calderon said, "There is a lot we don't know yet; the way we optimize depends on things we do not know now." Although there are not yet detailed financial estimates and no estimate of capital costs, Anglo did say that the economics "look very strong" and costs "will be very competitive," perhaps under $900 an ounce AISC.
Calderon did not need to say that he was "very excited" about Merlin; his voice said it all!
Orogen Has a Balance Sheet, Free Cash Flow, and Upside
Orogen Royalties Inc.'s (OGN:TSX.V) royalty on Silicon/Merlin is clearly the value driver for the company. As discussed previously, it is possible that it, or the entire company, is sold to one of the major royalty companies. However, the "expanded Silicon" royalty is not the only valuable asset in the company.
As we have discussed, Orogen is generating positive free cash flow from its royalty on First Majestic Silver Corp.'s (FR:TSX; AG:NYSE; FMV:FSE) Ermita?o deposit in Mexico, as well as from various property payment, and it has numerous other royalties from sold or optioned projects. It has a solid balance sheet (with a working capital of $17 million as of the end of September; year-end financials have not been released yet) and no debt.
Orogen is one of our top holdings, and notwithstanding its size, given its balance sheet, free cash flow, and quality assets, it is suitable for all investors. The stock had well outperformed the sector over the past year before jumping 12% more on the Merlin announcement.
The stock belongs in every portfolio and remains a Buy, preferably on any pullback.
Pan American's High Costs Hit Stock
Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) reported fourth-quarter results that were weaker than expected primarily due to high costs from the ongoing ventilation problems at La Colorada mine; production had been pre-released. Costs were also a major issue. While All-In Sustaining Costs (AISC) for the gold segment fell 3%, better than expected (though still relatively high at $1,411), the silver segment saw costs of $26.55, significantly above expectations and the company's own guidance, as well as, of course, the silver price.
The new 2024 guidance looks for a weak first quarter, followed by sequentially better quarters throughout the year. Pan American has integrated the Yamana assets it acquired a year ago and has done well in selling some non-core assets after the acquisition.
In addition to its broad portfolio, it has key potential growth areas, including the massive Colorada skarn deposit, which it will likely partner with a major base metals producer, and the huge Escobal silver mine in Guatemala, suspended since before Pan American bought it at the end of 2018. (The consultation process between the government and local people continues, and we are hopeful that the project will receive authorization to restart production later this year or next. Nothing has been announced yet, though).
The balance sheet is strong, and the company has been somewhat aggressive in paying down debt after the Yamana transaction. It has cash of $441 million and total debt of $802 million, mostly former Yamana debt. The market, however, is looking for more consistent mine-site execution as well as for costs to come down. We have confidence in management. The share price has recovered a little from the earlier low after it announced its production, but it remains at its low since the March 2020 COVID-19 sell-off.
We are buying.
It's Not What Wheaton Did but What It Will Do That Hit the Market
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) fell sharply after it released financials. It was not the fourth-quarter results that spooked the market. Indeed, production was better than expected, leading the company to meet its full-year guidance. Rather, it was the guidance for this year that shocked the market, with the company expecting production to be in a range of 550,000 to 620,000 Gold Equivalent Ounces (GEOs), flat year-on-year and almost 20% lower than the consensus estimates.
Gold production, in particular, is now expected to be between 425,000 and 470,000 ounces, down more than 100,000 ounces at mid-point from analyst estimates. Lower grades at Salobo, Wheaton's largest asset by far, will lead to lower production.
Although the company changed its methodology for providing five-and-10-year guidance, generally, they remain on track, with 2028, the end-point of its five-year guidance, and 2033, 10-year guidance, the same as previously. The stock collapsed over 10% before a very small recovery Friday as gold moved up. Though the guidance for this year is a shock, we like the company at this level. Solid management, a debt-free balance sheet, strong assets and partners, and powerful cash flow make it a Buy.
It also has 97% of its revenues from gold and silver, the most of any major royalty company. We would like to see great diversification in assets.
But overall, we should take advantage of this stock price decline it was over $50 at the end of last year and buy.
Osisko's New CEO Wins Over Investors
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) reported fourth-quarter financials generally in line with estimates, capping a record year of GEOs, as new CEO Jason Attew said he aimed to give realistic expectations going forward and restore credibility as it simplifies its story. Guidance for this year was a little lower than expected, while the longer-term was reset, with the company taking a more conservative stance.
This sets it up to achieve or exceed targets going forward following some recent misses. Attew said that Osisko is "not in business to be portfolio investors," though it could take equity if it was part of a transaction that enabled it to maintain or enhance a royalty or stream. But it would not be long-term holders and will look to sell down its equity holdings further as opportunities arise. It would not, however, sell aggressively where the other company needed capital; in such circumstances, "it would be counterproductive for us" to sell.
But "we will never buy a mining asset going forward, I can promise you that," Attew emphasized, repeating what he had told me in a one-on-one conversation earlier. "We want to be a pure royalty and streaming company."
The company undertook five new transactions in 2023, an active year, and will look to do additional transactions. It has $68 million in cash with about $165 in long-term debt (after a further repayment this year). It has $550 million available on its credit facility, noting that a transaction of $250 million is "not out of reach."
Precious Metals Royalties in Safe Areas Main Focus
It remains focused on precious metals transactions in low-risk jurisdictions, adding that it "has room" to expand into different areas. Similarly, with one of the highest precious metals concentrations in the royalty group, "we have the ability to diversify."
Attew said whether or not to buy a non-precious metals asset would depend on the particular opportunity, with no specific red line on a limit. As a holder of royalties predominantly rather than streams, Osisko has a high cash margin of 93%, though that could come down as recently acquired CSA gold and copper streams have a full year.
In terms of capital allocation, Attew said that if there were no accretive deals, the first priority with cash would be to pay down debt. After that, maybe a special dividend and then buybacks. The company has a deep pipeline of assets that could come on over the remainder of the decade. New CEO Mr. Attew has won over investors, in particular with his emphasis on simplifying the story and providing more realistic guidance. This is no small feat as he follows the popular Sandeep Singh.
The stock bounced after the results, so we are holding for now.
Nestl? Can't Keep up With Inflation
Nestl? SA (NESN:VX; NSRGY:OTC) reported soft results for 2023, warning of shopper hesitancy in the face of higher prices. Although organic growth grew over 7% last year, what it calls "real internal growth" its key metric for sales growth was negative, with price increases of 7.5% accounting for the growth.
The margins remain strong. Earlier, the company said that it expected real internal growth to turn positive in the second half of the year, but results failed to achieve that.
All geographies and categories saw growth, with pet care the largest contributor; the China region continues to be the slowest area, while Health Sciences, with growth in the low single digits, continues to be the weakest segment.
Slower Growth Is Expected in Year Ahead
The company is looking for slow growth of about 4% in the year ahead, down from 2023 and lower than analyst expectations, with what it describes as "a moderate increase" in the underlying operating profit margin. Nonetheless, it still expects earnings per share to be up between 6 and 10%. CEO Mark Schneider acknowledged that inflation had put pressure on many consumers, affecting demand. Nestl? has increased prices but at a slower rate than its input costs over the past two years.
In the coming year, it expects inflationary-based price increases to generally be more moderate, although cocoa, coffee, and sugar prices continue to see higher prices; all three are key inputs for Nestl? products. The company has shrunk the number of products it produces, many of which are variants of other products, and hopes this will optimize production.
The balance sheet remains strong, and the company is repurchasing shares under its three-year Sfr 20 billion program, which began in January 2022. Last year, it repurchased Sfr 5 billion of shares. It announced a modest dividend increase, the 29th consecutive year of increases.
We continue to like Nestl? as a global blue chip with a highly diversified portfolio, strong balance sheet, and consistent long-term growth. The stock fell initially after its earnings were released, but since has partially recovered. The forward yield of 3.2%, the highest since 2012, is reasonably attractive.
For investors wanting to build a solid, long-term portfolio, it can be bought here, though I would not be too aggressive at this time.
Kingsmen Is Set To Grow Again
Kingsmen Creatives Ltd. (KMEN:SI) six-month results saw both revenue and costs higher, the former up over 10%, with net profits for the full year down 37% to S$2.9 million. Profits-per-share fell sharply, from over S$3 in the first half to S$1.12 in the second, as the company took several impairments on receivables prior to the COVID-19 shutdown.
However, CEO Andrew Cheng said that business had returned in all segments and that the outlook was positive, with several developments, both secured and potential, in the pipeline. All divisions saw revenue growth in 2023 and anticipate growth in the year ahead.
With a strong balance sheet and a low-risk business model, Kingsmen is undervalued, selling at half book value and yielding almost 4%. As the company returns to the kind of revenue growth (albeit volatile) that it was seeing in the years before COVID-19, we expect the stock to recover, too. The shares fell 7% on the headline earnings-per-share drop to its lowest price in a year.
Buy.
Midland Sets Aggressive Exploration Program
Midland Exploration Inc. (MD:TSX.V) said it aims this year to follow up on new discoveries made in 2023, including on properties in partnership, in announcing an exploration budget of $19 million for the year, of which $3 million is from Midland, the rest from partners including BHP, Rio Tinto, Barrick and more.
The budget includes nearly 25,000 meters of drilling across multiple properties. Probe will follow up on a copper-gold discovery on La Peltrie; Barrick will commence drilling on Patris, while Rio will continue exploration for lithium in James Bay.
Some of these projects are owned by Midland but under option, while others are being explored in partnership.
Trading at its 12-month lows, Midland is a Strong Buy.
TOP BUYS this week, in addition to above include Hutchison Port Holdings Trust (HPHT:Singapore) Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX), Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), Altius Minerals Corp. (ALS:TSX.V), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), and Lara Exploration Ltd. (LRA:TSX.V).
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Important Disclosures:
As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Orogen Royalties Inc., Altius Minerals Corp., Orogen Royalties Inc., Pan American Silver Corp., Osisko Gold Royalties Ltd., Midland Exploration Inc., Franco-Nevada Corp., Fortuna Silver Mines Inc., Barrick Gold Corp., Metalla Royalty & Streaming, Wheaton Precious Metals Corp., and Lara Exploration Ltd.Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with All. I determined which companies would be included in this article based on my research and understanding of the sector.Statements and opinions expressed are the opinions of the author and not of Streetwise Reports, Street Smart, or their officers. The author is wholly responsible for the accuracy of the statements. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Any disclosures from the author can be found below. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy. This article does not constitute investment advice and is not a solicitation for any investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Each reader is encouraged to consult with his or her personal financial adviser and perform their own comprehensive investment research. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company.For additional disclosures, please click here.
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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. (C) 2023. 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.