Almadex Minerals Ltd. (AMZ, Toronto, 1.20) on Tuesday reported probably the best hole yet in the drilling on its El Cobre project, with 534.9 metres grading 0.9 g/t gold and 0.3% copper. This was in the Norte zone where most of the earlier drilling had been focused, and follows a series of results that lacked the very high grades that had been seen earlier, leading some to conclude the zone appeared to be weakening. A high-grade core seems to be taking shape and the zone remains open at depth and horizontally. We need more ounces before we can call this a mine, but there is progress.
A second target, Encinal, saw drilling recently conclude and assays are awaited. Drilling has now started at the prospective Raya Tembrillo zone; some think this is the best target on the large property.
Until yesterday's news, Almadex had traded down on a lack of excitement in recent results as well as a soft junior market, but it moved from $1.00 last week to as high as $1.27 before settling back today. We like Almadex as a well-funded, technically strong exploration company, but wouldn't chase the price; buy on weakness.
Long-term strategy bears fruit
Altius Minerals Corp. (ALS, Toronto, 11.35) is having a good year, with revenue up, at $55 million, that's 79% higher than the prior year. This is mostly due to improved base metals prices. Copper now represents about 40% of revenues, with coal down to 27% of revenues.
Equally importantly, the project generator business is beginning to bear fruit, with 22 projects vended to third parties. One joint venture, with Midland in the James Bay area, reported a discovery of a new zinc-bearing belt last week, and the JV has increased its claims as a result. Today, they announced another discovery, of a nickel-copper-cobalt showing, and Midland—which is operating the program—announced a vice president of exploration specifically for this program, indicating its increased importance.
The balance sheet remains strong, with another $25 million in debt reduction, from cash flow and the sale of some equities in junior companies. Right now, Altius has $35 million in cash, $64 million in public equities; and $80 million debt.
Altius is a core holding for us, a great way to gain exposure to a broad range of resources as well as to some of the best management in the industry, which has shown itself to be astute at deploying capital at the right time and able to take advantage of the cycles inevitable in the resource sector. We would add to positions on any weakness (the stock has moved from $10.80 low a week ago).
Trouble at t'mill
Wheaton Precious Metals Corp. (WPM, NY, 18.88) reported broadly flat overall production, with higher earnings per share largely due to higher prices than a year ago. But silver production was down, the result of a production decline at the troubled San Dimas mine, which represents nearly 15% of Wheaton's NAV. San Dimas operator Primero is facing a potential default before the end of the year, and is unable to spend the necessary capital to maintain production. Other companies are looking at acquiring the mine, a reasonable enough project, though it is hampered by an unresolved tax dispute with the Mexican government. For Wheaton, any slowdown in production, or even suspension if Primero declares bankruptcy, would hurt.
Balance sheet rather strained
Wheaton has one of the weakest cash positions of the major royalty companies, with about $77 million cash and almost $1 billion in debt. It also has an obligation to make another payment of $230 million to Hudbay for a royalty acquisition.
Having said that, Wheaton generates over $100 million a quarter in cash flow and has $1 billion available on its revolving debt facility. Given the strained balance sheet, and the outstanding dispute with Canadian tax authorities, the company surprised the market by boosting its dividend, from 20% to 30% of cash flow. We are buyers of Wheaton, under $19, recognizing that both the San Dimas situation and tax dispute could see additional volatility and weakness in the months ahead, but recognizing the long-term value.
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Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Altius. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Almadex, Altius and Wheaton Precious Metals. I determined which companies would be included in this article based on my research and understanding of the sector.
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