Resource Companies Report Strong Results

Source: Adrian Day 05/15/2024

Several resource companies on Global Analyst Adrian Day's recommended list reported first-quarter results last week.

Fortuna Silver Mines Inc. FSM had a very strong quarter, with earnings more than 50% higher than consensus expectations, as higher production and lower costs drove the higher earnings. The company is now back on track after a series of problems and negative market perceptions.

All-in-sustaining Costs ("AISC") of less than $1,500 were at the low end of guidance as the Séguéla mine continues to report stunning results, with an AISC of $948. Across the company, cash costs were a low $879 per ounce, excluding San Jose, which is winding down only $744/ounce. Like most other companies, Fortuna said its first quarter is expected to be the lowest quarter for the year, and full-year guidance was re-iterated. Across the company, gold accounted for 81% of revenue, silver 10%, and base metals the balance.

The company is continuing to use its strong cash flow to pay down debt, repaying another $40 million in the last quarter on top of the $123 million repaid since the third quarter, when Séguéla got up and running. CEO Jorge Ganoza said that providing flexibility to its balance sheet was its top priority for cash flow. It is also repurchasing shares now that the debt is down significantly, buying back one million shares late in the quarter.

Might San Jose Have a Future?

The company had previously said that current reserves at the San Jose mine in Mexico would run out by the end of the year. But it is seeking to bring in new reserves, aggressively exploring the new Yessi discovery, adding another rig (now three) seeking to expand the mineralization. Ganoza said there were essentially three decisions that could be made on San Jose.

First, convert some of the resources into mineable reserves due to higher gold and silver prices. Second, put the mine on care and maintenance while continuing to explore until more tonnage and ounces have been discovered. And third, close the mine.

He said the discovery was exciting and he was "hopeful" but it needed to grow; "we are not there yet." He said the company needed more time and more information. It would be into the third quarter before there would be sufficient data to make a decision. But it sounds more likely that one of the first two options will be pursued before closing the mine.

I interviewed CEO Ganoza along with Chris Marcus of Arcadia Economics
on this webcast. Ganoza explained the quarter and the company's strategic plans.

All in all, this was a very strong quarter, further validating my view that Fortuna has turned the corner with strong operations, low costs, and a solid balance sheet with strong management. More importantly, the unwarranted negative perception of the stock has also turned. After virtually doubling since the end of February, stock valuations are now more in line with silver peers.

We expect continued growth from Fortuna, but after the run, are holding for now.

Wheaton Has a Strong Quarter as Problem Mines Recover

Wheaton Precious Metals Corp. WPM reported a strong first quarter, with a reversal of last quarter's poor contribution from Salobo, Wheaton's largest stream, as the Salobo III expansion continues to ramp up. Grades there were a little higher in the last quarter, but are expected to drop off during the year as lower grade ore comes into the mining sequence.

Two other large streams that had had issues, Peñasquito and Antamina, both performed well. With first-quarter production of 143,000 ounces, the company is tracking towards its annual guidance of between 550K and 620K ounces, which it reiterated. Company-wide, the revenue was 64% from gold and 32% from silver; the silver is significantly higher than other royalty and streaming companies (and higher than many "silver" mining companies).

Wheaton has a rock-solid balance sheet, with cash of $306 million and available liquidity of $2.3 billion, down marginally from the end of the year as Wheaton acquired several streams and royalties, including $450 million for several Orion Streams. After the quarter ended, it sold equity in Hecla for $177 million. Finally, the company increased its dividend in line with its "progressive dividend" policy. Wheaton is currently trading at a premium to Franco-Nevada, over 10% on a price to NAV and 16% on price to cash flow, mostly due to Franco's decline on the back of the Cobre Panama closure. It is also trading close to historical valuation highs on several metrics.

So, while Wheaton is a solid company with high-margin, long-life ounces, we are holding now.

Altius's Diversification Pays Off, With Growth Opportunities Ahead

Altius Minerals Corp. ATUSF reported earnings in line with expectations after the company pre-released attributable royalty income of $17.4 million, up from just over $16 million in the prior quarter, mostly due to growth from 58%-owned Altius Renewables (ARR). Revenue was down the year-ago quarter, however, due to a decline in potash prices from unusual highs and the end of the Genesee Coal Mine revenue.

The company has about $10.5 million in cash (excluding the $91 million held within ARR, which is consolidated on the balance sheet) and virtually $112 million in debt after repaying $2 million during the quarter. There is $93 million available on its credit facility. Although this might not appear to be a particularly strong balance sheet, Altius also has holdings in various publicly traded shares, including $178 million in ARR shares, $108 million in Labrador Iron Ore Royalty, $35 million in Lithium Royalty, and a project-generation equity portfolio of just over $45 million.

Although Altius does not intend to sell these, they do lend support to the balance sheet. The company was also active on its share repurchase program, buying nearly 430,000 shares for $8.2 million. Finally, the dividend was increased by 15%. As we have discussed (see Bulletin #907), the Albert Court of Appeal rejected Altius's takings claim over the Genesee coal mine.

The court ruled that it did not want to uphold a law requiring compensation be paid for property expropriations when a regulatory decision was made on environmental grounds. CEO Brian Dalton comments that "it is a sad day for the law on property rights" noting that when Altius made its investment in Alberta, the province topped the Fraser Institute's ranking of safe mining jurisdictions globally. The company is considering whether to pursue to Canada's Supreme Court.

Might Altius Keep the Silicon Royalty?

More recently, the in-person part of the arbitration between Altius and AngloGold over the extent of its royalty on the Silicon district has ended. Post-hearing briefs are due by the end of the month, with an essentially binding decision sometime after that. Altius' 1.5% royalty over the vast majority of Merlin and all of Silicon is not in dispute, only the royalty on the broader district landholdings.

Altius is known to have talked with several companies about selling the royalty of swapping it for base metals royalties. Given Anglo's technical study on Merlin published last month and the inference of significant growth potential, however, Dalton said now that the company was open to keeping the royalty as a "very core part" of its portfolio. "It ticks all the boxes that (we look) for" with strong upside, counterparty, long life."

With exposure to the broad commodity complex, the very best management, both technically strong and innovative, and lots of organic upside, Altius is a core holding for us. Since the stock, which can be volatile, is up 35% in the last three months, we are holding.

However, we feel very confident about growth in the year ahead, and if you do not own one, you can buy one now.

Costs Down at Pan American

Pan American Silver Corp. PAAS reported a strong first quarter, with earnings above and costs below expectations. As expected, gold production was down, by 17% on the prior quarter, with silver, up 5%, only partially offsetting that. Costs, however, improved significantly in prior quarters and came in better than both guidance and expectations. Pan American uses by-product accounts, so higher zinc and lead prices reduced gold and silver costs, while weaker currencies in countries where it operates (other than Mexico) also helped reduce costs.

The company said it expects steadily higher production throughout the year. Pan American ended the quarter with cash of $331 million, and debt just over $800 million, with $750 million undrawn on its credit facility. During the quarter, it repurchased 1.7 million shares for just over $24 million. Following the recent sale of La Arena, CEO Michael Steinmann said he would seek further portfolio rationalization, but going forward it would be mostly small assets that would be sold.

There had been delays in the consultation process in Guatemala over the restart of the Escobal mine, after a new government took office. The government confirmed its intention to complete the consultation process–ordered by the country's Supreme Court–but gave no timeline, and no future consultations have yet been set. Pan American has a solid balance sheet and strong management, with major catalysts — particularly the La Colorada skarn and possible restart of Escobal — offering the potential for significantly higher stock prices.

However, following the 66% price rise since the end of February, we are holding for now.

Osisko Improves Balance Sheet at It Readies for Growth

Osisko Gold Royalties Ltd. OR released financials somewhat ahead of expectations; production (royalty GEOs) had been pre-released. There were no significant portfolio surprises or changes in the quarter, and the company said it was on track for its full-year guidance with a stronger second-half expected to include the CSA copper stream (with first deliveries in mid-June), and the start-up of two new mines, Tocantinzinho in Brazil and Namdini in Ghana.

The company repaid $43.6 million of its outstanding debt, ending the quarter with $70.6 million in cash and $152 million in long-term debt. It has available liquidity a little over $500 million. CEO Jason Attew said the company had repaid an additional $18 million this quarter, as continuing to pay down debt remains "a real focus." Absent any deal transactions, we would expect the company to be net cash positive before the end of the year. The company increased its dividend by a little over 8%.

On the quarterly earnings call, there was a lot of blather about ESG, which led
the presentation after a brief introduction to the results. Perhaps this focus is to
make up for the inadequate and conflicted governance policies of the past. The
company said it was "reinforcing (its) commitment to robust oversight" and
maintaining a commitment to diversity, with a new "comprehensive training,
focused on diversity, equity and inclusion." Rest assured, I shall be seeking
clarification of the DEI goals when I next meet with management!

Osisko is well positioned, with virtually all of its revenues from precious metals (71% gold and 25% silver), and most from Tier 1 jurisdictions (95% if one includes Chile), with a high cash margin of 97%. In addition, there is a deep pipeline.

We are holding, looking for a better entry point for additional investments.

Royal Gold Mixed, but Problems Resolving

Royal Gold Inc. RGLD reported mixed results, with revenue on the yearago quarter down due to lower contributions from Mt Milligan, Pueblo Viejo, and Cortez. The company had already pre-released its stream sales, while royalty revenue came in lower than expected. All three of these problem mines are being resolved.

The Mt Milligan stream has been renegotiated, allowing for the mine life to be extended, with Royal receiving a one-time payment of $25 million and a lower stream going forward (though it retains an option for additional payments if the mine does far better than anticipated). The other two mines that were lower, both operated by Barrick, are expected to see improvements this coming year.

It is tracking well on its full-year guidance. Royal continues to focus on bringing down the debt it took on in 2022 for some large acquisitions, repaying $100 million in the last quarter (plus another $75 million this quarter, bringing total debt down to $75 million). In addition to the upfront payment on Mt Milligan, Royal also received $37 million this past quarter from a change of control on the Kumacau mine in Botswana. It believes it will be in a position to repay the rest of its revolver this year, while it currently has nearly $1 billion in liquidity, so if a large transaction came along, Royal would be in a position to finance it.

Royal has exposure to some large-scale mines expected to come on around the beginning of the next decade, giving the company higher leverage than some peers. It has 9% of its revenue from copper, again, above peers and arguably a positive. With a strong balance sheet and diversified assets, Royal will do well in a strong gold market.

However, given the more than 25% rally since the beginning of March to its highest price in a year, we are not chasing to buy more, but holding.

No Quick Fix for Franco's Cobre Stream

Franco-Nevada Corp. FNV received cautiously positive news on its Cobre Panama stream when the pro-business front-runner won the election for Panama's new president. He gained 34% of the vote out of eight candidates, handily beating the runner-up, who received 25% of the vote. However, it will take time before the mine is reopened, even after the new government takes office in July, and will not be smooth going. The voting produced a fractured legislature, and the left-wing runner-up used his concession speech to warn against "attempting to renegotiate" to reopen the mine, saying he would bring people into the streets were that to happen.

Moreover, the incoming president has said that he will not engage in talks until operator First Quantum drops arbitration proceedings. He also said somewhat nebulously that "the solution does not involve another contract . . . the scheme has to change" calling for an entirely different operating model. Currently, the government expects First Quantum to handle the multi-billion closure process, but has barred it from retrieving any copper during the process. If the president means what he is saying, it could spell difficulty in getting any agreement with First Quantum.

An analyst for J.P. Morgan wrote that protests erupted last year "over the
concession of a large mining project to a foreign owned company". But of course
when the concession was granted, it was not "a large mining project". It did not
become such until the foreign-owned company spent more than $6 billion over a
quarter of a century with no certainty of a financial return.

Franco, as we discussed last issue, expects its streaming and royalty GEOs to increase even without Cobre, which it has written off. France has its own separate arbitration proceeding against Panama.

Franco is a core holding for us, now trading at close to its recent low valuation on many metrics, and, as mentioned above, below closest peer Wheaton. It can be bought if you do not already own.

TOP BUYS this week include Metalla Royalty & Streaming Ltd. MTA, Lara Exploration Ltd. LRAXF, Midland Exploration Inc. MIDLF, and Orogen Royalties Inc. OGNRF.

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 Fortuna Silver Mines Inc., Altius Minerals Corp., Pan American Silver Corp., Osisko Gold Royalties Ltd., Franco-Nevada Corp., Metalla Royalty & Streaming, Lara Exploration Ltd., 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.
3. 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.
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Adrian Day Disclosures

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. © 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.