Most gold and other resource stocks had good run-ups last week, before dropping sharply at week-end. Many of the companies on our “Current Positions” list are at levels that represent good value but there is always the possibility of follow-through declines in the stocks in the metals open down. So our recommendations to “buy” or “hold” are in that context. Since we already hold these stocks, we are looking for lower prices to add. Please allow me an excursus on this matter.
No stock exemplifies this disparity between long-term value and possible lower prices more glaringly that Altius Minerals. The stock had performed very well over the past two months, from a few pennies over $15 to a high of $18.35 on Thursday’s close, before dropping sharply with other resource companies, closing under $17. At this level we think the company, one of our core resource holdings, represents good value, but we also recognize that for most of the last six months, the stock has traded below this levels, and we may well be able to buy at lower prices in the next week or two. Hence our “hold.”
Many factors go into when and at what price to buy
Any decision to buy must take into account your personal circumstances, of course, including the extent to which you are already exposed to a particular company and the sector. The price limit is a combination of factors: the value, the potential, and the probability of being able to buy at a lower price.
Moreover, in answer to the question, “Should you add now?” much depends on what we mean by “now.” If this were a quarterly report, or even a monthly, I would say that now is the time to load up. I believe strongly that we are on the cusp of a new gold bull market, as well as higher prices for many other resources. We do not want to be too clever and miss out of a large upside for the sake of a penny or two. At the same time, buying right is an essential component of successful investing, and one can afford to be more picky if one is adding to positions. Waiting a week or even a few days to buy at meaningfully lower prices, might make sense.
If you do not already own Altius, for example, and are building a portfolio of great companies–-and do not want to sit in front of a stock quote machine all day long–-you can buy Altius now. But if you are thinking of adding to a position, and you pay attention, then perhaps you can wait for lower prices over the next week or two.
Potash and metals strong, coal and iron ore less so at Altius
Altius Minerals Corp. (ALS:TSX.V) (ASLS, To., 16.92) reported revenue 13% above last quarter, driven, as expected, by potash; base metals were also strong. Coal was weak, based on an outage of one unit at the Genesee power plant (now back online), as were the dividends received from Labrador Iron Ore. For the year, royalty revenue was up 24% on the prior year to a new record.
The company also bought back 821,100 shares during the year at an average price of $15.76. There are just over 41 million shares out. As discussed above, the stock closed the week down. We would wait to see if there is follow through before adding to positions. Hold.
Another soft quarter for Pan American, but improvements ahead
Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) (PAAS, Nasdaq, 23.51) reported results above third quarter and the previous year, but still somewhat disappointing. Many of its operations are still affected by covid restrictions. In fact, because of this the company will not be issuing full-year guidance in January but hopes to next month. Several of its mines which have been weak should see improvements during the year, some because of the ongoing decline in covid severity, and others because of operational improvement. Notably, there is an ongoing ramp up in production at La Colorada following capital improvements.
The most significant trigger would be some advance on the consultation process in Guatemala between the government and the local communities over the re-opening of the Escobal mine. After running to $25 during the week, the stock fell along with most resource stocks, and at the current level is a buy.
Fortuna sees higher production as problems getting resolved
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (FSM.NY, 3.67) reported a good fourth quarter, with Lindero, the new gold mine in Argentina, in particular producing above expectations as long covid-aggravated teething problems are put behind it. The mine’s 36,000 ounces of gold production represents 47% of the annual total.
However, company guidance for the year ahead was somewhat conservative. Although gold output is expected to increase, by 20% or more as Lindero runs at steady-state, silver production is expected to fall as much as 17%. Overall gold-equivalent ounces is expected to increase by between 7 and 21% over 2021. Capex estimates (excluding the Séquéla mine in Cȏte d’Ivoire currently under construction) were significantly higher than expected. The company has a robust exploration program, with $29 million allocated for this year, of which almost $9 million is greenfields.
Fortuna has experienced a string of bad luck over the past couple of years, but with Lindero now up and running at planned rates and the San Jose extension permit in hand, and following the integration of the West Africa acquisition, Fortuna, with strong management and a solid balance sheet, is set for growth. With ongoing protests surrounding San Jose, and a mine under construction, there are still things that can go wrong. We may see some downside follow-through, and would look to buy additional Fortuna on any further weakness.
Barrick is best-in-class, notwithstanding lower production
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) (GOLD.NY, 19.34) reported a fourth quarter more-or-less in line with expectations, though copper production was somewhat higher. Also, Carlin operations were back up after Goldstrike mill repairs. Costs were down marginally on the last quarter. However, although production for the year met guidance, coming in at the lower end of the range, it was down from 2020, gold nearly 7%, copper by over 9%.
With net debt essentially zero and with $8 billion of liquidity, Barrick has the strongest balance sheet in the sector. Since 2015, Barrick has cut net debt by over $10 billion. Its current debt have far-out maturities. For management, balance sheet, and operations, we prefer Barrick to Newmont among the largest global gold companies, but we would wait for an additional pullback to add to positions.
Approaching decision time for Vista
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) (VGZ.NY, 0.699) is expecting to release its Definitive Feasibility Study on its Mt Todd gold project in Queensland, Australia, “in early 2022”; we expect this quarter. The revised mine plan will incorporate a higher gold price as well as increased reserves, though partially offset by higher costs. Management is considering various trade-offs to reduce capex while potentially extending mine life with lower annual production. Given that Vista has all its essential permits, the publication of its DFS is the last major step before a transaction of some type.
We anticipate that the new plan will spur some large companies to take a more-urgent look at Vista, which owns the largest undeveloped gold project in Australia. At the current share price, Vista is reluctant to entertain a sale of the company, which, even with a high premium, would still undervalue the asset. Mt Todd, however, is too large a project for a company the size of Vista realistically to finance and build internally. An earn-in, joint-venture or some other transaction is under consideration. Vista is a buy at this time, preferably under 70 cents, as we await the DFS.
BEST BUYS now, taking into account the discussion above, include, in addition to companies discussed above, Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) (OR.NY, 11.59); Midland Exploration Inc. (MD:TSX.V) (MD, To., 0.48); Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) (FNV.NY, 130.62); Lara Exploration Ltd. (LRA:TSX.V) (LRA, To., 0.48); and Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) (AEM.NY, 50.89).
Originally published on Jan. 22, 2022.
Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
Disclosures:
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Franco-Nevada, Altius Minerals, Fortuna Silver, Vista Gold, Lara Exploration and Midland Exploration. 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, which is unaffiliated with Adrian Day’s newsletter, 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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