You could do far worse that simply buy and hold these three royalty companies, each with diversified portfolios, each with a strong balance sheet, and each with top management which thinks counter-cyclically.
Record revenue for Franco, on higher key asset and oil
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) (FNV.NY, 158.05) reported a strong fourth quarter on the back of higher production at Cobre Panama, its largest stream, and record oil and gas revenue. Overall for the year, there was record revenue of $1.3 billion, up 27%, coming in at the high end of its guidance. There were records on several other metrics as well.
Franco expects a small decline in overall gold-equivalent ounces (GEOs) this year, though another record in oil. Lower GEOs comes from expected lower grades at two large streams, Antamina and Antapaccay, and lower production at Guadalupe. Based on forecast metals prices, precious metals account will for about 75% of 2022 revenue, while energy will contribute almost 20%, with iron ore the bulk of the remainder. Obviously this could change if any new producing assets are acquired or to the extent realized prices differ from Franco’s price assumptions.
After 2022, however, in its five-year guidance, Franco is forecasting between 765,000 and 825,000 GEOs by 2026, based on Cobre Panama expanding its throughput (by the end of next year), an expansion at Tasiast, and on several new mines commencing production. It has started including oil & gas in its “GEO” calculations.
Franco ended the quarter with $539 million in cash, no debt, and $1.1 billion available on its credit facilities. G&A is less than 3% of revenue. It increased its dividend again, by nearly 7%, for the 15th consecutive dividend increase.
Asset diversification separates Franco from other gold royalty companies
Franco has a lower percentage of gold and silver than other large royalty and streaming companies, which diversification it now calls a distinguishing advantage. It is probably a feature that makes the company attractive to generalist investors. The company is also well diversified in terms of its assets (with Cobre Panama the largest single asset at 18% of revenue, and no other asset over 10%); operators (again, First Quantum, owner of Cobre Panama, at 18% is the largest); and geographically. It has more exploration projects in its portfolio than other companies, some of which will eventually produce.
Franco sees the pipeline quite strong across a variety of financing needs. Its current focus for new investments continues to be on precious metals, but it is open to other resources. For these, it is driven by the quality of the asset rather than the commodity.
Franco-Nevada continues to be one of our core investments. Royalty and streaming companies have far lower exposure to operating cost inflation than miners, and also less exposure to potentially increasing taxes. So they remain attractive investments for the current environment. Because of the strong recent rally–-it was $127 at the end of January–-we are holding and looking for a pullback to buy.
Wheaton also sees $1 billion revenue
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) (WPM.NY, 48.10) reported record revenue and earnings for the fourth quarter, though it missed analyst forecasts by a small amount. For the year, revenue was $1.2 billion. Due to high cobalt prices, the company reversed a previous impairment on the Vale cobalt stream; it does not, however, seem to have an appetite for any additional such streams, focusing on gold and silver (currently 94% of revenues). The Salobo expansion (Salobo III), which is part of the project that represents Wheaton’s largest single asset, was delayed because of landslide; it had been 85% complete at year-end. Vale is conducting a thorough review of the project, which should be complete sometime in the second quarter. At present, the expansion is considered still on track for a year-end start up.
Wheaton has a solid balance sheet, with available liquidity now up to $2.2 billion. With cash, a strong credit facility and anticipate strong cash flows in coming years, CEO Randy Smallwood said he did not think the company would ever have to issue another share. Unlike his peers, he is not debt-averse, particularly when rates have been so low; “we are glad we haven’t diluted shareholders.” Wheaton focuses on assets with low costs, with 85% of its assets in the lower half of the cost curve, and reserves with over 30 years of life. Wheaton is forecasting an average of 20% growth over the next 10 years, with GEOs averaging 910,000 ounces per year over that period, up from 750K last year.
But he added that it was becoming “more and more difficult to find projects to put money into,” indicating that the dividend may increase further in coming years. Already, Wheaton (whose current yield is 1.3%) has been included in the S&P Canadian Dividend Aristocrats Index. Wheaton is a core holding for us, but given the 25% plus run up since the end of January, we are holding and looking for a pullback to buy.
Smaller Altius see several growth prospects
Altius Minerals Corp. (ALS:TSX.V) (ALS, To., 23.91) reported records on most financial metrics, with revenue for the year at $82 million, up from $60 million in 2020. With an 80% margin (including business development costs), earnings more than doubled from 36 cents per share to 77 cents. After a small paydown on debt, Altius currently has $117 million outstanding on its credit facility, and $37 million in cash (excluding the cash at Altius Renewables, which is consolidated on its balance sheet). In addition, it has $108 million in shares of Labrador Iron Ore Royalty Corp., about $56 million in its project generation and junior portfolio, and shares in Altius Renewables (59% ownership) valued at year end at $190 million. So the balance sheet is very strong.
A time to sow, a time to reap
During the weak years for commodities after 2012, Altius undertook several acquisitions and accumulated a large land bank. Now, Altius––among the top counter-cyclical investors in the sector––looks at this as a period of harvesting. Ten years of under-investment mean the sector is now seeking new assets. It is focusing on growth of its organic assets rather than new M&A opportunities, though “we are always looking.”
Thus Altius has cash flow available to return to shareholders. It paid almost $10 million in dividends in 2021, and hiked in the last quarter. It also continued to buy back shares, last year buying about 2% of its shares), seeing its own shares as better value than what else is available.
Altius has many potential growth opportunities
In our last article, we reviewed some of the growth opportunities inside Altius’ portfolio, so we won’t repeat now. Suffice to say that there is a lot of growth ahead in potash (shortage and higher prices leading to perhaps a 50% increase in revenues), expansion at Voisey’s Bay nickel-copper-cobalt, a new discovery at the copper-gold Chapada, and the Kami iron-ore deposit potentially moving towards production.
We discussed last time the emerging gold district near Beaty in Nevada, controlled by Anglo, over which Altius holds a 1.5% royalty, plus, through its 16% interest in Orogen, another 1% over a part of the district. The 3.4 million resource is just the beginning. Altius CEO Brian Dalton said that, given Altius is not a gold company, it could try to achieve more value for the royalties perhaps selling to a gold royalty company (or exchanging for non-gold royalties), or even spin out the royalty, which Dalton is clearly excited about. However, he commented that there was a lot of time before doing something as he wanted to let the area expand first.
In sum, Altius has been achieving strong results, has a solid balance sheet, and multiple high-growth potential ahead of it. It also has some of the smartest management in the business. I repeat what I wrote last time: if you do not own it, Altius is still a good buy for long-term investors.
TOP BUYS NOW, in addition to those discussed above, include Ares Capital Corp. (ARCC:NASDAQ) (ARCC, Nasdaq, 20.33), Midland Exploration Inc. (MD:TSX.V) (MD, To., 0.47), and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (FSM.NY 4.27). Some can be bought as long-term holdings if you do not already own, including those above and Nestle SA (NESN:VX; NSRGY:OTC) (NESN, Switzerland, 112.98).
Originally published on March 12, 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."
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1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Franco-Nevada, Ares, Midland Exploration, Fortuna Silver, Nestle, Orogen, and Altius Minerals. 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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