Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$21.18) continues to diversify away from silver with two new streams, a gold and palladium stream on the Stillwater Mine (a long-life mine in the U.S.) and a cobalt stream on Voisey's Bay nickel mine. Both streams are front-loaded; Wheaton will receive 4.5% of the palladium reducing on hurdles to 2.25% and 42% of the cobalt (expected to commence in 2021 after a mine expansion) down to 21% over time. The first has a 6.1% IRR, and second 11% (before tax), reasonably high in the current streaming environment.
However, Wheaton, already with a less than sterling balance sheet, funded both—$500 million and $390 million respectively—from its credit facility, adding to its debt.
Wheaton is undervalued relative to the other large royalty and streaming companies. The ongoing dispute with Canadian tax authorities is largely priced in, though a completely unfavorable outcome would hurt the stock, particularly given that the amount in dispute has not been reserved. We are holding Wheaton.
Not achieving goals yet
Goldcorp Inc. (G:TSX; GG:NYSE, US$12.34) saw a weak quarter, with lower gold production and higher-than-estimated costs. The company has advised the third quarter will also be soft, while forecasting a strong fourth quarter. The company's grand 20/20/20 goal (for 20% higher production, higher reserves, and lower costs) was restated, but the company does not appear to be making great strides towards the goals. Execution is the key. Two major new mines have been experiencing more difficult ramp-up periods than expected—that's Cerro Negro and Éléonore—though both are improving, and these two mines give the company potential to go some way towards their production and cost goals.
The balance sheet, with $2.4 billion of net debt, is not as strong as many of its peers, though its valuation is below its peers. We are holding, but not energetically buying more. However, the current price—down over two dollars from mid-June—is overdone, and probably a good price for a trade here.
Good quarters at Yamana and Osisko
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$3.10) had a good quarter, with better-than-expected production and lower costs. A new mine, Cerro Moro, just announced commercial production so will contribute in the second-half, which should be another good period for Yamana.
Net debt is a reasonable $1.58 billion, with liquidity of almost $900 million (most of which is a credit facility, not cash). It is valued below peers. We are holding for the time being, but given that Yamana has disappointed us time and time again, we are not buying.
Stock slammed by mine delay
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$9.16) reported good results, particularly a record production quarter at Canadian Malartic, its cornerstone asset. The bad news was the announcement of a blockade at Lydian's Amulsar project in Armenia, which pushes back production to the middle of next year (at the earliest). This was to have been Osisko's next major cash-flowing asset, and the news drove Osisko's share price down sharply ahead of its own results.
The balance sheet remains strong. Though cash is down to $189 million, after new investments of $108 million in the quarter (and two of which carry future payment commitments), debt is also down after a $52 million repayment to $450 million. Osisko also has a large portfolio of junior companies valued around $450 million, and it is expected that Pretium will buy back its royalty, giving Osisko US$119 million before year end, so the balance sheet remains, and will remain, strong.
Osisko trades at a meaningful discount on several metrics to other large royalty companies, only partly justified (smaller, and higher-risk in exploration), also now at a discount to NAV. Take advantage of the sharp price decline—from $9.68 at the end of July; Osisko is a strong buy here.
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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Disclosure:
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. 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: Wheaton Precious Metals, Goldcorp, Yamana Gold and Osisko Gold Royalties. I determined which companies would be included in this article based on my research and understanding of the sector.
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