It's Looking Up on All Fronts for Orogen
Orogen Royalties Inc. (OGN:TSX.V, 0.36) has seen several pieces of good news on both its properties and at the corporate level. A new global resource for First Majestic Silver Corp.'s (FR:TSX; AG:NYSE; FMV:FSE) Ermitaño project, on which Orogen holds a royalty, increased to over 1 million ounces of gold-equivalent ounces. Indicated ounces were up by 26%, while Inferred jumped 38%. However, this increase came with a decline in grade, though overall it is a net positive.
First Majestic also announced "a high probability" of new drilling to the east. Ermitaño is adjacent to First Majestic's Santa Elena mine, which is running out of ore.
Just how good is it? We don't know
Also on the project front, informed rumors indicated that the majority of AngloGold Ashanti Ltd.'s (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) 2021 global exploration budget (of around 430 million) will be directed to its Silicon project in Nevada, on which Orogen holds a 1% royalty. Anglo has been very close-lipped about results at Silicon, but the activity would suggest that they are pleased with what they have found. In addition, Coeur Mining Inc. (CDE:NYSE) wants to sell its land in the district to fund a mine expansion, so any deal on that front will be indicative of Anglo's interest.
In British Columbia, Orogen has sold its Axe project to a neighbor in return for shares valued at approximately $1.5 million and a royalty (2% of which 0.5% can be repurchased). This is a continuation of Orogen's policy of selling projects to partners who can spend money in return for royalties. In addition, three other projects have active drill programs, two in Sonora, Mexico, and one in Nevada.
Share overhang gone and a new director joins
There has also been positive news on the corporate and market fronts. First, Altius Minerals increased its ownership of Orogen to 15%, by buying almost 6 million shares in the market. This included 4 million shares one day, which is reasonable to assume is the block held by previous chairman Paul van Eeden. The removal of that block enabled the stock price to move up steadily.
Lastly, but by no means least, Orogen announced the appointment of a new director, Roland Butler, a founder of Altius with long and deep experience in the royalty business. Coincidentally, as CEO of Callinan in the early years of the last decade, Butler was responsible for generating the Silicon project, on which Orogen holds a royalty. This is a very positive addition to the board.
Orogen stock has jumped from under $0.30 to the current level over the past month. At the current level it remains good value, particularly if Ermitaño and Silicon continue to develop. There are many irons in the fire, several of which could generate market excitement, while near-term value is underpinned by the Ermitaño royalty and company cash. We are holding, given we already hold (two positions, in fact), but will look for opportunities to add to positions; new investors can buy here.
Franco Expands into Iron Ore
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$142.66) has expanded into iron ore, buying some of Vale S.A.'s (VALE:NYSE) outstanding participating debentures from the Brazilian government. The debentures provide holders with life-of-mine net sales royalties on Vale's low-cost iron ore systems in Brazil and some gold and copper operations. The weighted life of the iron ore mines is 30 years with potential for extension for many decades. Based on current economics, the debentures return a 10% yield. At the same time, Franco-Nevada announced it had acquired a 9.9% investment in Labrador Iron Ore Royalty Corp. (LIF.UN:TSX), purchased over "a number of years" for an average cost of $14.72; the units are trading today at $38 a share. These investments diversify the commodity exposure and provide "a base of low-risk, long-life cash flow," according to CEO Paul Brink.
At its recent "analyst day," Franco emphasized that its focus remains precious metals, but when gold assets become expensive or they see great opportunities in other commodities, they will look, based more on the individual ore body than the commodity per se. The pullback in the gold price this year, Brink believes, will provide "a great window" to add more precious metals assets, inferring that the next major transaction may be in gold.
Franco is a cornerstone holding for us: top management, diversified asset base and extensive pipeline, solid balance sheet all make it our go-to gold investment. Given the jump from $105 in the last two months, we are not chasing it. But if you do not own it, look for any opportunity to buy.
Lots of Activity Ahead for Midland
Midland Exploration Inc. (MD:TSX.V, 0.76) will be busy in the field in coming months. It has begun a new exploration program in Nunavik, northern Canada, part of its extensive strategic alliance with BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), following up on the nickel-copper-cobalt occurrences discovered last year. The program will consist of helicopter-borne and ground-based electromagnetic surveys, as well as a prospecting campaign to start mid-year.
It will also follow up on its wholly owned Samson gold project, covering 60 square miles. Following discovery of a new zone named Golden Delilah last year, and a biogeochemical survey over the winter, a new drilling program is planned to test extensions on Golden Delilah, as well as test other targets. Nearby, in the Detour Project joint venture with Probe Metals Inc. (PRB:TSX.V), targets have been designated for an upcoming drill program to last 12 to 18 months.
Midland stock has inexplicably dropped over the past month, from $0.90 to the current level, where it is a strong buy.
Altius Revenue Back on Track
Altius Minerals Corp. (ALS:TSX.V, 16.77) reported royalty revenue down for the year over 2019, from CA$1.83 per share to $1.62, partly because of lower prices for some commodities and also because of COVID-related production cutbacks. Toward the end of the year, however, prices saw a strong rebound. (Click here for a full discussion of the annual and quarterly results.)
The company has announced revenue for the first quarter, expecting to receive royalty revenue of nearly $18 million of $0.43 per share, up from $0.39 a share in the first quarter 2020. Most assets were back up to full operations (though Chapada, on which Altius holds a copper royalty, experienced a production interruption). For the most part, prices were higher, including copper and potash, Altius' two largest royalty earners. The company also reported the value of its junior equities portfolio moved up, by $2 million, nearly 4%, as of the end of the first quarter, but in addition there were sales proceeds in excess of new investments of another $2.5 million.
Altius is a core holding for us, providing exposure to a broad range of commodities, with a perceptive management with the insight and discipline to act in a counter-cyclical manner, and strong balance sheet. The stock has been strong of late, up from essentially $14 a month ago, and we are holding. If you do not own, look for any pullback to buy.
Lara Quietly Advancing Projects as Revenues Start
Lara Exploration Ltd. (LRA:TSX.V, 0.70 x 0.77) has announced some positive developments. First, it has acquired an exploration claim adjacent to its Planalto copper project, in northern Brazil, which is subject to an earn-in from Capstone Mining Corp. (CS:TSX), under which Capstone can earn up to 70% of the project by funding exploration and electing to build a mine. There have been some good exploration results on the project, though Capstone probably wants a larger resource to make it worthwhile for them, which is why the addition of land is important. A new survey and other exploration work has been completed with a new drill program planned to start this quarter.
Lara also announced a reappraisal of its 100%-owned Itaituba vanadium project, also in northern Brazil, leading it to plan more work and follow-up drilling later in the year. We should learn more in the summer.
Lara is a top junior exploration company, with several projects, and partners, existing cash flow, strong management, and a low spend rate. It is a buy.
Loews Recovery, but Hardly Compelling
Loews Corp. (L:NYSE, 55.20) not unexpectedly reported a full-year loss, of $931 million or $3.32 a share. The losses from Diamond Offshore, which Loews put in bankruptcy and exited a year ago, are included in the full-year results, as are losses from Loews Hotels. Even excluding losses from Diamond and the hotels, however, Loews still had a full-year loss due to higher catastrophe losses at CNA earlier in the year.
The last quarter, however, saw an improvement, with a jump in net income to $397 million, up from $217 million a year ago. CNA was the primary driver of profits in the fourth quarter, helped by Boardwalk, while the absence of losses from Diamond also helped.
Largest subsidiary CNA Insurance continues with strong performance, with good growth in new business and higher rates. It emphasizes underwriting discipline over growth. It paid a special dividend equivalent to two full quarters of regular (increased) dividend, in all paying about 90% of its earnings. Boardwalk Pipelines benefits from long-term fixed-fee contracts. During last year, it added about $1.3 billion in new contracts.
Although all businesses had challenges and changes as a result of the COVID-restrictions, of all subsidiaries, Loews Hotels was hardest hit. Occupancy plunged from around 80% in February last year to just 9% by April, when only three of its hotels were operational. The company aggressively cut expenses. By the end of the year, 22 of 27 hotels were open and occupancy was up to nearly 40%.
It's not buying other than own shares
Loews also continued to long history of buying back its own shares, seeing that as the most attractive use of cash in the present market environment. In the last quarter, it purchased almost six million shares for about $244 million; over the course of the year, it bought 22 million shares at just below $42 a share average. Partially offsetting the reduction in share count from buybacks, however, were the large options grants to top management, usually at lower prices than the shares are bought back. It ended the year with $3.5 billion in cash.
Once again, James Tisch, CEO, reiterated that they do not see opportunities for new acquisitions now. He noted that regardless of how much due diligence they might do, they will also know their existing businesses better than a new one. Moreover, "valuations are still too damn high."
Despite discount, it is not inexpensive
The stock has outperformed over recent months, largely in anticipation of an economic opening in America and recovery of the Loews Hotels. To a large degree, this is already discounted, I believe. On the other hand, more subtle disadvantages—such as increased environmental controls from the new administration negatively affecting Boardwalk—have not been priced in to the stock. It remains inexpensive on a sum-of-the-parts basis, trading at around a 17% discount to book, though this is less than its longer-term average discount. On other valuation metrics—price/earning of33 times; yield of 0.5%, and negative returns on assets, equity and capital—Loews is hardly unattractive. We are holding for now, given the overall positive market environment for a defensive stock and ongoing recovery in hotels, but not buying.
Hutchison Recovering with Global Trade and Improved Balance Sheet
Hutchison Port Holdings Trust (HPHT:Singapore, 0.23) posted a net profit up over 50% from 2019, despite a modest slip in revenue. Outbound cargoes to both the U.S. and Europe were strong, particularly in the second half, with a recovery in household and hospital demand as well as airline freight capacity cuts. Because of this, it paid a larger-than-expected second-half dividend to boost its full-year distribution to $0.12 (HK) from $0.11 in 2019, equivalent to a yield of 6.7%. The balance sheet is strong, with HK$7.8 billion in cash, and the units are currently trading at a massive 40% discount to book. Following years of reducing debt, the company now has its lowest leverage ratio in a decade, putting it in a good position to increase the distribution further. As the economies in North America and Europe continue to open, shipping volumes should continue to be strong. We are holding for a strong yield and leverage of global economic recovery.
Top Buys at this time, apart from those mentioned above, include Barrick Gold Corp. (ABX:TSX; GOLD:NYSE, US$22.21). For those with no exposure to the gold and silver sector, in addition to those listed above, we would look to buy Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$42.77) and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$7.71). After the run-up over the last couple of months, we would prefer to wait for pullbacks before getting aggressive in this sector.
Most global equities are expensive, in my mind.
Upcoming Seminars
With the U.S. slowly reopening, there are two in-person conferences scheduled in the months ahead. First is The Money Show, Orlando, Fla., June 10–12, where I shall be presenting a two-hour gold investing course; as well as join a panel on top global picks. Speakers include Steve Forbes and Stephen Moore. FreedomFest, Mark Skousen's ever-popular jamboree, this year will be held near Mount Rushmore, S.D., July 21–24. Speakers including popular returnees such as Whole Foods' John Mackey and radio host Larry Elder, and new speakers include Ayaan Hirsi Ali, whose talks on women's rights, Islam and European immigration have seen her come under attack. The special "mock trial" will put the government's COVID response in the dock.
In addition, don't forget the annual Sprott Natural Resources Symposium, which will be virtual this year, July 15¬17. More details are on our website.
Originally posted on April 25, 2021.
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 securities of the following companies mentioned in this article: Lara Exploration, Orogen Royalties, Franco-Nevada, Midland Exploration, Altius Minerals, Wheaton Precious Metals. 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: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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