Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) (3.65) has seen another quarter of improving operations, with earnings above expectations, mostly because of strength at El Penon. In the next quarter, expected improvement at Cerro Moro and Jacobina, should continue this trend. The company said it remains on track for its full-year guidance of just over 1 million ounces (gold equivalent). The doubling of the dividend—albeit to a yield still just barely over 1%—is nonetheless a sign of confidence from management.
However, cash costs were higher than expected. The balance sheet has improved with the sale of the Chapada mine, with net debt now at $891 million. Cash and available liquidity—mostly the latter—stands at $850 million.
The stock responded well to the latest quarterly results, up 8% on Friday. We see continued improvements ahead; we are holding for now.
Argentina victory may yet boost Fortuna
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (3.18) is trading at a significant discount to other silver companies, almost entirely because of the Argentina risk. Its third mine in that country will boost cash flow by 50% when fully operational, and is on track for its first pour in the first quarter of 2020.
Results at its existing two mines continue to be soft, emphasizing the importance of Lindero. . .and the Argentina risk. Production at San Jose in Mexico was down 12% on estimates, largely because of lower head grades, which pushed costs up. At Caylloma in Peru, lead and zinc production increased again, while silver output fell.
Election results in Argentina saw opposition candidate Alberto Fernandez, whose running mate is Christina Kirchner, the former—disastrous—president, win outright, avoiding the need for a run-off, even though his gap over incumbent Macri narrowed from the preliminary primary in August. The narrow win suggests a more balanced congress, which could prevent some of the more extreme measures of the previous Kirchner administration.
A Fernandez victory was almost universally expected, and so should be priced in to Fortuna's stock. The stock is cheap, trading at 0.8x book, against twice that for Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ), and an even greater discount against higher peers. There could be volatility, and if the stock falls, say to $3.11, we would add to positions. More likely, the stock will bounce, and the large short position could see continued recovery in the days and weeks ahead, absent any economic policy pronouncements that spook the market.
Discount too much for solid assets
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) (27.50) has also improved its balance sheet. With just $87 million in cash, it has liquidity of over $1 billion, just a tad more than its billion dollars of net debt. However, the company is projecting $700 million of free cash flow this year, so the debt is manageable.
Wheaton tends to have long-life, low-cost streams of mines run by major operators. Reserves and resources on its streams are over 65 years in life. There is growth ahead with the silver at Penasquito, the new operations at Stillwater, and the first cobalt from Voiseys Bay.
Wheaton continues to trade at a discount to the other large royalty companies, even after the Canadian tax dispute was settled. Indeed, the stock has fallen back to $27.50 per share from over $30 in early September. The balance sheet, particularly the high debt, and the asset concentration, certainly relative to Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), account for the discount. We would be buyers again on a pullback to $26/share.
Evrim gets cheaper even as assets get more valuable
Evrim Resources Corp. (EVM:TSX.V) (0.305) is seeing improvement at Ermitano, a property discovered by Evrim that was sold earlier this year to First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), whose nearby Santa Elena mine is running out of ore. Evrim retains a 2% royalty on the project.
First Majestic has been highlighting Ermitano in recent press releases, with first a doubling of drilling, followed by a projected doubling of throughput at the fully permitted project. The negative is that the expected start of the mine has slipped into 2021. A recent analyst tour by First Majestic emphasized Ermitano, with one analyst saying he had the "clear impression of its priority."
At today's prices, Ermitano could generate over US$20 million to Evrim over the mine's seven- or eight-year mine life. Tax credits can be used to offset royalty income, so the revenue in the early years will be sheltered. Evrim, at a CA$26 million market cap, is trading for less than its cash ($13 million) and the value of this single asset. All the other assets, the joint ventures and alliances, the properties, come free. Evrim is a top buy at this level.
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."
[NLINSERT]Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Evrim Resources. 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: Yamana Gold, Fortuna Silver Mines, Wheaton Precious Metals, Evrim Resources. I determined which companies would be included in this article based on my research and understanding of the sector.
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