Diverse Issues Offset Mostly Strong Revenues

Source: Adrian Day 08/16/2024

Global Analyst Adrian Day reviews results from six major resource companies, four of which are royalty companies.

The quarterly results we look at today from six major resource companies mostly include higher revenues and cash flows, which is not unexpected given that the gold price was $250 an ounce higher than in the first quarter.

However, they also show some companies are still struggling with costs. Above all, they clearly illustrate Robert Friedland's quip that "Murphy works overtime in the mining business."

The last quarter includes a power outage, equipment failures, arbitration, a heap leach failure, a broken agreement, and construction delays. And more. It reinforces that mining is a difficult business, and so too for the royalty companies that reap some of the rewards. Guidance and market forecasts are all too often set with the expectation of perfection. Companies that had unexpected problems saw their stock prices slammed.

Wheaton Has Strong Quarter as It Ramps up Production

Wheaton Precious Metals Corp. WPM was the exception, with a strong quarter in which nothing meaningful went wrong. It is on track to achieve the upper end of its full-year guidance. Production was stronger than expected, driven by outperformance at its largest asset, Salobo, as Phase III continues its ramp-up, as well as strong performance at Peñasquito and Antamina.

Sales were lower due to timing differences between production and sales. There are some major new assets on which it holds streams moving towards production, including Ivanhoe's Platreef, where an updated feasibility study is scheduled for the fourth quarter; this will be one of the world's largest platinum producers. There are six other projects under construction and more predevelopment projects, allowing Wheaton to move from this year's production range of 550,000 to 620,000 GEOs to over 850,000 a year from 2029 onwards.

Company Has Strong Pipeline With Balance Sheet To Transact

The pipeline for new deals is very busy, with larger transactions under consideration, mostly in the pre-construction phase, with some over half-a-billion in size.

This is a change from recent Wheaton activity which saw it making some very small transactions, some as small as $20 million. The company has a rock-solid balance sheet, with $540 million in cash, up $234 million on the quarter, with total liquidity of $2.5 billion.

We are long-term holders.

Royal on Track To Meet Guidance With Strong Revenues

Royal Gold Inc. RGLD reported quarterly financials better than expected, even after pre-releasing its streaming sales, which constitute the bulk of its revenues. Revenue was up 17% quarter-on-quarter, primarily due to higher metal prices but also higher copper sales at Mount Milligan and higher gold and silver production from Peñasquito, partially offset by lower sales at Pueblo Viejo, where the expansion is still in ramp-up. G&A cash costs remain flat. The company is tracking its guidance, which remains unchanged.

During the quarter, Royal acquired additional royalties on B2Gold's Back River project. The royalties are different in structure (NSR and GSR) as well as having hurdles and variable rates; the company estimates that, in aggregate, their royalties approximate a 1.1% gross smelter royalty. With a further $100 million paydown on its debt, the company is now net cash positive, with just $50 million of debt outstanding and available liquidity of $1 billion. The debt is expected to be paid off next week, eliminating the debt taken on to acquire three major royalties over the past two years (Cortez, Great Bear, and Back River), which the company acquired without any equity dilution.

Royal has strong free cash flow, and near-term growth as well as some longer-term potential.

Osisko Lowers Full-Year Guidance as It Writes off Mine Royalty

Osisko Gold Royalties Ltd. OR saw a reasonable second quarter, in line with its guidance, but due, as acknowledged by the company, to higher metals prices. Gold Equivalent Ounces (GEOs), which had been pre-released, declined slightly. It lowered its second-half guidance on the back of the suspension of the Eagle Mine in the Yukon following a heap leach failure at the end of the quarter.

Osisko decided to take a full impairment on the royalty it holds on the mine, stating that it has no visibility on when the mine might restart and is not expecting any ounces for the rest of the year. There is also a delay in the ramp-up of one of its new royalty assets, Mantos Blancos, contributing to the lower-than-expected second half. It does have three new assets paying in the second half, including Tocantinzinho, which has already started producing but on which royalty payments have a three-month delay. It has already received initial payments from a new Agnico Mine as well as the CSA copper assets in Australia.

New Assets Starting Up

Paying down debt is the company's first priority, other than doing new transactions. After repaying $44 million during the quarter, it now has $109 million in debt and $67 million in cash. With a credit facility, it has access to capital and a strong balance sheet.

Though the second half will be weaker than earlier expected, there are three new paying assets, and behind these a strong pipeline. Osisko has 20 producing assets, with 98% of revenues now from gold and silver and a very strong political risk profile. The new CEO is proving himself to be capable and focused.

Osisko is a Buy.

Altius Financials as Expected, as Major Decision and Transaction Awaited

Altius Minerals Corp. ATUSF reported financials for the quarter more-or-less as expected after pre-releasing royalty revenue. As always, with a diverse portfolio, there are winners and losers: potash fell again from its extraordinarily high pricing levels in 2023, while base metals saw continued gains. The iron ore segment recovered, and renewal royalties, while lower than an exceptional first quarter, are growing strongly, more than 50% above the year-ago quarter.

In all, royalty revenue of $21.7 million rose nearly 25% in the last quarter (and 17% from the year-ago quarter). The outlook looks strong. The renewables company saw one new project come on line in the last quarter, with another this quarter and several new deals closing. Altius holds royalties on three projects in its base and battery metals division, which are currently under construction, while Champion Iron is continuing discussions on finding a partner for its Kami iron-ore project, for which Altius holds a royalty. The high-priority iron ore that Kami will produce was recently designated as a "critical mineral" by Canada.

Silicon-Merlin Will Be the Major Drive in the Near Term

In the near term, however, the major development will be the disposition of the royalty it holds on AngloGold's Silicon-Merlin deposit in southern Nevada.

The deposit continues to advance, with some exceptional assay results from its infill drilling at Merlin, including a stunning 0.53 g/t gold over 144.5 meters. It drilled 66,000 km during the first half, mostly infill, though we know there has also been aggressive drilling to the west of the Merlin deposit, with the company saying it had hit "very exciting" new intercepts. A Pre-Feasibility Study on Merlin is expected to be finished in late 2025. The region has a current resource of 17.5 million ounces, and Anglo projects the district producing 500,000 ounces a year. Altius holds a 1.5% royalty with the area of interest under arbitration; another recommended company, Orogen, holds a 1% royalty on the main deposit, which is undisputed.

Altius has already received preliminary bids from companies, with CEO Brian Dalton saying that the "strong and diverse proposals . . . highlighted a meaningful disconnect between how its value is perceived by (the) financial industry versus the royalty industry professionals." Once it has received the decision on its arbitration, it intends to seek final bids and will then make a decision on whether to accept a bid (to sell or swap for base metals royalties) or to hold the royalty. I do not want to read too much into that comment from Dalton, but it was interesting to hear him raise again the possibility of keeping the royalty.

Altius Buyback Stock, as Improving Balance Sheet Improves

Altius repurchased 119,000 of its shares during the quarter, and it is no secret that the company wants to repurchase more shares if it sells that royalty. It has cash of a little over $19 million after receiving $9 million in settlement of a loan receivable, plus holdings in public companies totaling over $371 million. These include over $176 million of shares in Altius Renewal Royalties and nearly $56 million in its Project Generation" portfolio.

I am not suggesting that these are all for sale — though it has been sold some shares from its PG portfolio — but they do strengthen the balance sheet. It has $93 million available on its credit facility. Altius is a core holding for us, offering broad exposure to the commodity universe with some of the most astute management in the business.

Hold and look to buy on any weakness.

Pan American's Production Down at Ongoing Mine Problems

Pan American Silver Corp. PAAS had a mixed quarter with slightly lower production and overall costs higher, though with lower costs for silver quarter-on-quarter ($14.49/oz cash costs). Ongoing issues at two mines, La Colorado and Dolores, hurt production. However, boosted by the higher metals prices, Pan American saw record cash flow from operations during the quarter.

The company reiterated its guidance, expecting production to be weighted towards the fourth quarter and, overall, silver production to be at the low end of the range. The rest of the year should bring improvement from La Colorada following the completion of the new ventilation system and $245 million in cash from the closing of the La Arena sale. There is also potential for the re-start of Escobal; several meetings with the government were held recently after delays caused by the change in government.

The company has a strong balance sheet, with $369 million in cash and a net debt of $472 million. It continued to buy back stock, bringing the total for the year to date to 1.7 million shares for just over $24 million (indicating that most shares were bought early on in the year, given the average cost of just over $14). The company reiterated that it expected additional divestments of non-core assets.

Pan American is a Buy, for operational turnaround, and Escobal potential, as well as strong management and balance sheet.

Fortuna's Revenue Disappointments but Issues Are Temporary

Fortuna Silver Mines Inc. FSM reported revenue slightly lower than expected and costs higher. All-in sustaining Costs (AISC) at $1,656/oz were meaningfully higher than the first quarter's $1,495 due to three factors: higher power costs in West Africa, planned maintenance at Lindero, and higher per-ounce costs at San Jose as that mine runs down as it approaches the end of its reserve life. The first two factors here are temporary; Fortuna now has full generator capacity at its Séquéla mine, so costs are expected to come down again in the second half of the year.

Despite these challenges, Fortuna is on track to meet its full-year guidance. Operations are doing well, and there has been some good exploration success, in particular around the Séquéla mine. At San Jose, in Mexico, the company is continuing to explore alternatives: continuing to mine, closing the mine, or putting it on care and maintenance pending greater reserves from exploration. It will have a decision in the third quarter. The company continues to strengthen its balance sheet. A convertible issue allowed it to fully repay its credit facility and redeem an existing convertible, partly in cash and partly in shares.

Overall, the new convertible reduced its interest rate from over 7% to just 3.75%. Net debt is now just $66 million. It has $350 million in available liquidity. We like Fortuna for its diversified asset base, its strong management, and solid balance sheet, as well as strong brownfields potential.

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 Wheaton Precious Metals Corp., Osisko Gold Royalties Ltd., Altius Minerals Corp., Pan American Silver Corp., Fortuna Mining Corp., Franco-Nevada Corp., Lara Exploration Ltd., Metalla Royalty & Streaming, and Fox Riv Res Corp.
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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