Source: Adrian Day 01/17/2023
Adrian Day of Adrian Day Asset Management reviews preliminary 2022 results from a couple of gold royalty companies and updates us on the ongoing saga in Panama.
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) reported preliminary fourth quarter results, saying it received just over 25,000 gold equivalent ounces (“GEOs”), above expectations, leading to a record quarterly cash margin of CA$57.2 million, also above expectations. This brings revenue for the year to US$218 million on 89,367 GEOs.
Although below forecasts for the year, the company had warned last quarter that it would likely come in at the low end of its full-year guidance.
As of year-end, Osisko had US$90.5 million in cash and US$150 million drawn on its US$550 million facility. During the quarter, it repaid its CA$300M convertible debentures. It also bought back 1.7 million shares in 2022 at an average cost of CA$13.00 per share. It will release its full financials at the end of February.
Malartic Underground on Track for Production This Quarter
Two notable developments came in the fourth-quarter report. First, the Canadian Malartic underground project remains on schedule, with the first production from Odyssey South expected in March. The royalty on Malartic, which Osisko, in an earlier incarnation, found and initially operated, is Osisko’s premier asset. It has a 3% NSR on Odyssey North and a 5% NSR on Odyssey South, along with a 5% NSR on the Malartic open pit and East Gouldie.
Secondly, Victoria Gold Corp. (VGCX:TSX; VITFF:OTCMKTS), which experienced a conveyor failure late in the third quarter leading to three weeks of downtime, saw production for the quarter beat expectations, suggesting the mine is back on track.
Lots to Like With Many Milestones Ahead
We like Osisko for many reasons: the strong cornerstone assets; financially experienced top management; its conservative approach to acquisitions; and solid balance sheet. It also has a string of important milestones in the year ahead, which should lead to significant increases in revenue in the coming years. These include:
• Trixie: Osisko Development expects an initial resource in the first quarter.
• Victoria Gold resource update on Eagle and Raven deposits early in the year.
• Windfall: Osisko Development completion of the EIA study and commencement of
permitting in the first quarter, with a production decision early next year.
• Dolphin: Group 6 Metals’ first production during this quarter.
• Corvetter: Patriot battery metals maiden resource release during the first half.
• Mantos: Capstone study analyzing the potential to further expand throughput,
expected before the end of the second quarter.
• Hermosa: South32 Taylor deposit expects a final investment decision and pilot
production sometime in mid-year.
• Wharekirauponga: Oceanagold plans a prefeasibility study by the end of the year.
• Black Swan: Poseidon Nickel will make a final investment decision sometime this
• CSA/Metals Acquisition closing of the amended US$75m silver stream and potential
US$75m copper stream sometime this year.
• Seabee: SSR Mining expanded its exploration program throughout the year.
• Cariboo: Osisko Development receipt of final permits by the end of the year, with
production expected sometime next.
And there are several other projects on which Osisko has royalties moving forward or expanding, including Alamos’ Island Gold mine, Eldorado’s Lamaque deposit, Agnico’s Amalgamated Kirkland and Upper Beaver deposits, SolGold’s cascabel project; G Mining’s Tocantinzinho project; and the Marimaca Copper deposit.
This is a lot of pending news that should keep Osisko in the spotlight and provide more surety about timeframes for future revenue increases. As with most of the larger gold companies, it has run fast in recent months. We would hold and buy on a pullback.
Royal Beats Estimates, With Leverage To Rising Gold Prices
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) reported sales of just over 63,000 GEOs.
Gold sales volumes were significantly above estimates, though silver was about 10% lower.
Royal’s quarterly sales updates tend to provide only top-line numbers. It will report its full results in mid-February. Royal’s recent acquisitions provide it with leverage to a rising gold price. Hold.
Panama Agreement Provides Uncertainty for Franco
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) remains without certainty on the future of its stream on First Quantum’s Cobre Panama project, which represents its largest single asset, generating over 15% of the company’s revenues. The dispute between First Quantumn and the Panamanian government, after appearing to be close to resolution earlier in the week, became more acrimonious by week end. Operations at the mine continue without interruption as yet.
After First Quantium’s CEO gave a mostly positive report on the ongoing discussions with the Panamanian government over a new agreement for the mine, the Ministry of Commerce came out with a rather astounding rebuttal, saying that the company’s comments “don’t reflect reality” and that all options are under consideration, including giving the mine concession to another company. It would not be a stretch to think that Chinese companies may have approached the government with offers to run the mine.
The government said that “there are more than a few pending disagreements” between it and the company. In a surprising comment, it said, “in fact, the recent contract proposals presented by (First Quantum) have pushed both sides further apart.”
The government said that discrepancies remain on “fundamental issues like royalties, deductions for depletion . . . tax evasion . . . staffing . . . and others.”
Company Provides More Optimistic Update Than Government
The government statement came after the company had said that the two sides were “not very far away” on reaching a new agreement, saying that they had agreed on revenues to be paid to the government, including a minimum of US$375 per year. Importantly, the company has agreed to limit tax credits each year, while the promised tax holiday in relation to capital investments, in the agreement, inducing the company to make its investment, would be canceled.
Under the proposed profit-based royalty, the government would receive revenue that is a multiple of the existing contract and the Panama mining code, making it among the highest in the Americas, the company said. The government replied that its demands are still low compared to Latin America.
The company indicated that the main stumbling block pertained to protections in the agreement. In order to promote development and protect the company’s investment, it is seeking legal certainty, including protection of surface rights, stability of the tax regime, and protections against expropriation and the early cancelation of agreement.
Company Makes Investment After Promises, Then Government Wants More
First Quantum invested over US$10 billion in the project, making it the largest private investment ever in the country. Korea Resources has a 10% stake in the mine since 1991, pre-dating First Quantum. The mine accounts for 5% of Panama’s GDP and nearly 75% of the country’s export of goods.
Panama had supported it through a long-standing agreement from 1997. However, in 2018, just as the mine was generating its initial shipments, the 1997 agreement was declared unconstitutional by the Panamanian Supreme Court. However, the government issued public statements reaffirming that the company’s rights would not be affected.
First Quantum “continued to invest on that basis.” However, once the mine was fully operational, the government made additional demands, and discussions on a new agreement have been going on now for more than a year. The issue came to the fore in the middle of December when the government ordered the company to prepare to put the mine on care and maintenance. That order has been appealed, and so far, the 10-day clock on a mine shut-down has not started, but the final appeal is underway now.
First Quantum has now initiated arbitration both domestically and internationally under the Canada-Panama free-trade agreement, a step it earlier said it wanted to avoid and a sign that negotiations are not, in fact, going so well.
Is There an Underlying Issue?
Panama presents a modern face to the world, with the pretensions to be a first-world country, welcoming to foreign investors, but it was not so long ago that it was run by a corrupt and violent military dictatorship, eventually overthrown by the U.S. military.
It now says it is considering “all options” regarding Cobre Panama, including granting the concession to another company. (In truth, most governments have acted like tin-pot dictators at some point. Britain, the U.S., and other “first-world” governments stole the assets of so-called Russian oligarchs, after the invasion of Ukraine, without any due process.)
Despite First Quantum’s soothing words, both the statement from the Panamanian government and the actions of the company indicates that an agreement may not be so close. It is surprising that events have got to this point and suggest other factors at play.
I do not know, and cannot guess, at what these might be. It could be as simple as a severe clash of personalities among the negotiators or that someone at First Quantum has annoyed a key government official at some stage. Some close to the situation suggest that this is nothing but a common-or-garden shakedown by the government, such as mining companies are used to in more corrupt areas of Africa or Latin America. I do not know, but at minimum, the way the government has handled this does not look present a good image.
We are holding Franco-Nevada, a well-diversified company with strong management and a solid balance sheet. The loss of Cobre Panama, if it came to that, would be a serious but not fatal blow.
Vista Revaluates Mine
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) said it is evaluating a smaller-scale project for Mt Todd, due to what it calls an ongoing “cautious view” among interested parties towards new, large-scale development projects. A smaller-scale project would have significantly lower initial capital costs while maintaining similar operating costs and would retain the potential for subsequent expansion or mine-life extension.
The company said it expects “to be able to demonstrate these attractive alternate development strategies” early this year, and it believes they will attract the interest of new potential partners. There is little dispute that Mt Todd is a very large project in a strong mining jurisdiction, one that already has the support of the local government and local people, albeit one with a large projected capex.
It is undeniably true that Vista’s share price significantly undervalues the value of Mt Todd, which Vista owns 100%. The dilemma, as I have written before, is that no buyer is going to pay the sort of premium that Vista believes it is worth, and likewise, most major companies are not going to want to partner with a small company unless they have clear control.
You Can’t Always Get What You Want, as Mick the Philosopher Told Us
My preference would be one of two alternatives: either slash costs and put the project on a “care and maintenance” until the gold market significantly improves, or be prepared to sell the project in total but for less than it is worth. The first has risks of ongoing costs, possible loss of local support at some point, and even missing the opportunity to sell the project.
The second, of course, means giving up the project upside. My preferred option would be to sell the project for the best price that can be obtained (to a solid company, of course), along with a royalty that flows to shareholders or with some kind of upside security that pays off if certain benchmarks are met within a certain time frame.
In this scenario, the project would be sold, and development started sooner rather than later, while shareholders would receive some cash now and retain exposure to the long-term upside. That looks like a win-win to me. The stock moved sharply after the company made its announcement to its high in August. We await details of the company’s plan soon and will hold here.
Pan American Gets Support, While Fortuna Is Chased
Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) has received support from the two leading proxy advisory firms in their proposed purchase of Yamana. We are holding.
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) is now being pursued by well-known ambulance chasers, the Pomerantz Firm.
The Firm was founded by Abraham Pomerantz, “known as the dean of the class action bar” (I would keep that quiet). It is investigating Fortuna for securities fraud.
What not investigate SERMANAT? I guess Fortuna is an easier target.
Hold, and buy on pullbacks.
Almadex Extends Agreement
Almadex Minerals Ltd. (DEX:TSX.V) has amended an option agreement with Abacus Mining on a Nevada property. Abacus failed to spend the required exploration dollars to earn 60% of the project under a 2017 agreement.
Almadex has now agreed to extend the deadline to year-end 2025. The required expenditures have been increased, and Almadex will receive an additional 2 million shares in Abacus. Almadex has a history of making agreements with small companies that are often unable to meet their spending requirements.
Sometimes it can make sense to extend the agreement with a company that already knows the project.
We are holding Almadex.
Orogen Continues To Pursue Its Strategy
Orogen Royalties Inc. (OGN:TSX.V) has acquired thorough staking the Celts epithermal gold-silver project in the Walker Lane, Nevada. The company says the surface
expression is similar to that of AngloGold’s Silicon deposit further down the Walker Lane, over which Orogen holds a 1% royalty.
The property is undrilled. The company will likely look for a partner to buy the project on earn-in terms, with Orogen retaining a royalty, and this is another example of the hectic activity pace being pursued by the company.
Orogen is one of my favorite juniors and is a buy at this level. But there is no need to chase it. There are almost 16 million warrants, which are in the money, due to expire in mid-May. That represents nearly 10% dilution. I suspect that many of the warrant holders already hold shares and may not want to double their position, so there will be some selling as warrants are exercised.
After however, a meaningful overhang will be removed, and Orogen could move higher. It’s a Buy.
Gladstone To Make Juicy Payout to Shareholders
Gladstone Investment Corp. (GAIN: NASDAQ) said its next three monthly dividends would be maintained at US$0.08 per share, with a special supplemental distribution of US$0.24 in March, its highest such bonus distribution. Gladstone pays the monthly dividend from income and bonus distributions from net capital gains.
HAVE YOU BOUGHT YET? Two months ago, I strongly urged you to buy Lara Exploration Ltd. (LRA:TSX.V), then at US$0.71. The last trade on Friday was at US$085, and it has traded as high as US$0.94.
BEST BUYS THIS WEEK As per comments in the last Bulletin, we are buying very little now, given the overvaluation in the broad market and the sharp rallies in gold stocks in recent months.
There are several we would buy on pullbacks, including Midland Exploration Inc. (MD:TSX.V). As always, these comments do not imply that many of the stocks on our list are not worth their current valuations, simply that I believe with patience we can pick them up a little lower.
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. © 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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