Gold stocks have been on their not-untypical first-quarter ride, rallying 33% from the mid-December lows before giving back most of that move. The decline in mining circles is known as the "PDAC curse," since it occurs right before the world's largest mining conference in Toronto. This year's show, which attracted over 24,000 attendees, up a little from last year though still down some 20% from 2012's record, had an air of growing optimism, among both companies and attendees, though far from mania. One good sign: many exploration companies noted that the senior companies seemed more interested in doing deals than they had been the last few years.
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, 10.64) remains the most undervalued and prospective of the royalty companies on our list. Of course, the valuation gap to its large royalty peers is partly justified, since Osisko is the newest of the "Big Four," with fewer assets and less diversification. Its assets, however, particularly its cash-flowing assets, are high-quality in a safe jurisdiction (Canada), and it is working hard to add more royalties and close the gap.
New silver revenue
At the end of February, Osisko acquired a cash-flowing stream, on the long-life Gibraltar mine. A copper mine in British Columbia, Gibraltar has a 23-year plus life. With a US$33 million upfront payment, Osisko has the right to buy 75%-owner Taseko's share of silver production, for future payments of $2.75 per ounce. The contract is backdated to January 1.
This is Osisko's first silver stream. It maintains the company's precious metals profile (with approximately 94% of revenue from gold) and politically safe profile (100% of cash-flowing assets are in Canada). Mildly accretive on an asset basis, the stream will boost cash flow by almost 10% through 2019. We believe the stream was acquired at a very good price.
After this transaction, the company has about CA$450 million in cash, which with its undrawn line of credit, gives it about CA$650 million in funding capacity. (This also follows the sale of its nearly 10% interest in Labrador Iron Ore Royalty, for CA$113 million.) This gives it more cash than any other royalty company, though less available credit than Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE).
There is no secret that Osisko is looking for a large cash-flowing stream. Such streams, however, are subject to intense competition, and the returns—given the long lives—tend to be relatively modest, certainly at the prevailing commodity price. But such an acquisition, in my view, would give the company a greater profile, moving it clearer to the "big boys' league," and help close the valuation gap.
In the meantime, Osisko is building its strong pipeline with high optionality from its unique business model investing in smaller exploration companies, both directly and through Osisko Mines. Osisko is a buy, currently up to $10.75.
Goldcorp's ambitious plan
Goldcorp Inc. (G:TSX; GG:NYSE, 14.82) has laid out five-year guidance, with 20%/20%/20% forecasts: production to increase by 20% to 3 million ounces by 2020; resources to increase by 20% to 50 million ounces; and all-in sustaining costs (AISC) costs to drop by 20%, to $700 by 2021.
A grand plan, and the ramp-up of two newer mines—Eleonore and Cerro Negro—lend some credibility to the targets. But the company lowered its 2017 production guidance, an inauspicious start. The company also said it expects ongoing capex to be higher than expected.
Goldcorp has a solid balance sheet, a good cost profile, a growth pipeline, including several quality exploration projects that, along with a couple of higher-cost developments projects, provide it with good optionality to higher gold prices. One analyst (Tony Lesiak at Canaccord) summed it up, "still rebuilding trust." Under $15, Goldcorp is a good buy, particularly if one expects a stronger gold market.
Yamana disappoints again
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, 2.62) concluded the listing of its Brio Gold unit, and now has sold an additional 6 million shares, reducing its ownership to 79%. The near-term outlook is not looking particularly bright: guidance for this year indicates production will decline (even omitting the reduction in Brio and the sale of the Mercedes mine), as will reserves, while costs are expected to increase. The reserve reduction is particularly notable at its cornerstone El Penon mine in Chile, which also accounts for much of the production decline.
With the sale of part of the Brio unit and the Mercedes mine, Yamana's balance sheet is improving, but bigger problems are the lack of near-term growth and the continuing management credibility problem. Yamana, as shown in the rally earlier this year, has strong sensitivity to higher gold prices. For more aggressive investors, it is a buy at this level, but we regard it more as a trading stock than one to hold for any period of time.
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: Osisko Gold Royalties and Goldcorp. 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: Osisko Gold Royalties, Goldcorp and Yamana. I determined which companies would be included in this article based on my research and understanding of the sector.
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