Gold Co. Beats Estimates as Panama Goes to the Polls

Source: Adrian Day 05/08/2024

Global Analyst Adrian Day looks at quarterly results from a couple of gold majors, as well as mostly positive developments at some others.

Franco-Nevada Corp. FNV reported first-quarter results somewhat above expectations as it looks ahead to production growth of 2.3% this year, driven by new mines on which it holds streams, Greenstone and Tocantinzinho, both ramping up in the second half. Franco's guidance now excludes Cobre Panama, which it has written off, though opportunities for recovery, either from a mine restart or from an arbitration award, are real. Franco has a rock-solid balance sheet, with $2.3 billion of available capital.

It has an active pipeline of new deals, with a focus on gold, though CEO Paul Brink said they were looking at other resources, including lithium. Most opportunities it is reviewing now are streams on byproducts of base metals producers, with the company seeing somewhat larger opportunities than recently, with opportunities above $300,000.

Hope for Cobre Panama as Country Votes

Elections for a new president in Panama are taking place today. Polls have already closed, and the results are expected late tonight. All of the candidates except one are, to differing extents, pro-business. The front runner, José Mulino, who was the running mate of the popular ex-President Ricard Martinelli — he dropped out after a court upheld his conviction for money laundering — is known to support new negotiations with First Quantum to reopen the mine.

However, as Brink noted, the candidates have been mostly circumspect in commenting on what their approach will be, adding that once a new government is in place, he is sure dialog will take place. In addition to the loss of GDP, tax revenue, and jobs from the mine closure and the threat of an international arbitration award, there are also heavy costs to permanently closing the mine, estimated at between $3 billion and $6 billion. Some politicians have suggested that mine owner First Quantum should pay those costs, but that is highly unlikely. All in all, the country stands to lose huge amounts of money if it shuts down the mine permanently, in addition to the credit downgrade and loss of credibility. With top management, a solid balance sheet, and a well-diversified portfolio by asset, operator, geography, and commodity, Franco remains a core holding.

Given the recent price recovery, we are holding, except for new investors who can buy.

Barrick Can't Get No Respect

Barrick Gold Corp. GOLD reported first-quarter earnings somewhat better than expected, though of course the company had already pre-released lower production and higher cost guidance. It was a weak quarter, but for Barrick, production usually increases during the year, and the company re-iterated its 2024 guidance, looking for increased production from Pueblo Viejo on the back of the plant expansion as well as the restart of Porgera.

Gold cash costs at $1,051 were up from less than $1,000 in the prior quarter but in line with implied guidance as per-ounce costs increased on lower production. Other costs are under control, and G&A was down.

Talks With Mali and Company Says "No" to Anglo Bid

CEO Mark Bristow rejected reports that the Mali government is about to nationalize the Loulo-Gounkoto mine, saying that the government had assured the company, in writing, that it has no intention of expropriating the mine. Bristow said that there were ongoing discussions with the government about "an equitable sharing of benefits."

A new mining code, introduced in September, exempted existing operations, including Barrick's mine. Separately, the company announced an exploration earn-in on some land in Jamaica, which Bristow said had geology comparable to that of the Dominican Republic, where Barrick's large Pueblo Viejo mine is located. Bristow also said the company would not make a bid for AngloAmerican, which has received an offer from BHP, adding that the company had plenty of organic opportunities.

After the results, Barrick stock fell once again, in what I consider an irrational response to the headline numbers, given the production decline had already been announced (and the stock fell on that) as well as the credible reasons for seeing higher production later in the year. Barrick's higher jurisdictional risk profile is well known, but on most metrics, including the net debt levels, Barrick is superior to major peers.

Buy.

Pan American Boosts Its Balance Sheet as It Eyes Growth Ahead

Pan American Silver Corp. PAAS has agreed to sell its La Arena mine and the associated La Arena II project in Peru to Zijin Mining for $295 million, with $245 million in cash now and and a contingent payment of $50 million upon production from La Arena II. In addition, Pan American will retain a 1.5% gold NSR royalty on the La Arena II project. The price is considered a good one for Pan American.

The company has been selling certain non-core assets after it purchased Yamana last year, using proceeds to cut debt. It ended the year with $441 million in cash and a total debt of $802 million, some related to construction debt and leases, as well as notes that came with Yamana. There are no maturities until the end of 2027, and with an undrawn $750 million credit facility, Pan American is in good shape.

The company has, however, traditionally operated without debt (other than project debt), and there is potential for additional asset sales, though, as with La Arena, the company is now in no rush and can wait for good prices, particularly since the debt carries low interest rates. The La Colorada Skarn deposit will require major capital, however, and the company is looking for a partner on that project. We continue to like Pan American, with strong management and a broad asset base, as well as growth, not only from La Colorada but from the potential restart of the large Escobal silver mine in Guatemala.

Though the company remains reasonable value, given the 50% move in the stock since the beginning of March, we will hold for now.

Another Project Comes Back to Lara

Lara Exploration Ltd. LRAXF has received back its Curionopolis Iron Project after settling a lawsuit with Vertical Mining. The project, in the Carajás District in northern Brazil, had been optioned to Vertical in 2009, which undertook much exploration and technical work, including putting out a resource estimate, but it defaulted on payments to Lara.

The return of the project is a positive for Lara since it can now look to option or sell it to a new partner, receive payments, and keep a royalty. This is one more example of the value in Lara's portfolio in addition to the flagship Planalto Copper project, where a resource estimate is expected by early June. With top management and sufficient capital for its near-term work, Lara, at a market cap of less than C$40 million, is extremely undervalued. Planalto alone is worth a multiple of that, while several other projects could add real value.

Despite the run-up in the stock price — it has almost doubled since an exaggerated low in mid March— Lara remains a strong buy.

Metalla Royalty & Streaming Ltd. MTA stock fell sharply after a widely read newsletter writer put out a sell recommendation after it hit his stop loss. The stock was at $3.20 in late April.

Take advantage of the selling to buy.

TOP BUYS this week, in addition to the above, include Nestlé SA NSRGF, Midland Exploration Inc. MIDLF, and Orogen Royalties Inc. OGNRF.

CENTRAL BANKS STILL BUYING According to new numbers from the World Gold Council, central banks bought almost 290 tonnes of gold during the the first there months of the year a first-quarter record.

Although higher than most quarters last year, it is less than the third-quarter peak of 358 tonnes. Nonetheless, contrary to what appeared in January and early February, bank buying is now on track to exceed last year.

Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Franco-Nevada Corp., Barrick Gold Corp., Pan American Silver Corp., Lara Exploration Ltd., Metalla Royalty & Streaming, Midland Exploration Inc., and Orogen Royalties Inc.
2. 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.
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