Gold Holds Steady, Analyst Says You Should Too
Contributed Opinion

In today’s Bulletin, we update recent developments at several companies on our list. The pullback last week in the gold price is giving us more opportunities to buy gold stocks than we have had for the past few weeks.

Cashed-Up, Altius Has Growth Opportunities Ahead 

Altius Minerals Corp. (ALS:TSX.V) reported first-quarter revenue of over $25 million, a record, primarily due to very strong revenue from potash, which exceeded even high expectations. Potash benefited from higher prices, higher volume, and the lag in deliveries from the prior quarter, all combining for a formidable quarter. Thermal coal also came in above expectations, while copper, though strong on the back of high prices, was slightly below expectations.

If you do not own Altius, you can buy now, after a slide in the stock price from $25.59 in the last week.

Separately, Fairfax, a Canadian financial holding company, exercised 6.7 million warrants at a price of $15 a share, thereby surrendering its $100 million in preferred securities for cancellation. Fairfax now owns virtually 14% of Altius equity.

Fairfax originally invested in Altius five years ago, providing funding for several attractive investments near the lows in the market. Altius will continue to benefit from strong commodity prices but particularly from potash and copper in the year or two ahead. The benefit of a diversified portfolio is that while some sectors will often come in below expectations, others will exceed.

The cash received from Fairfax improves the balance sheet, but more, it cements the relationship, suggesting that capital will be available if needed. CEO Prem Watsa said it had transitioned to “a supportive long-term shareholder.” If you do not own Altius, you can buy now, after a slide in the stock price from $25.59 in the last week; current holders can look for additional weaknesses to add to positions.

Nestle Has Strong Growth as It Passes Along Cost Increases

Nestle SA (NESN:VX; NSRGY:OTC) reported organic growth of 7.6% in the first quarter, with growth in most segments and geographical areas, exceeding its annual target of 5%. Pet food and veterinary supplies were once again the largest contributors to growth. Europe saw a small decline in sales, North America saw mid-single-digit growth, but most areas achieved double-digit growth. Cost pressures caused price increases across the board, but with no noticeable impact on consumer demand. The company continues to expect organic growth of 5% this year, with margins around 17%. 

Nestle is very broadly diversified in both supplies and sales, geographically as well as by product, so there are also some strengths offsetting any weaknesses. It has a rock-solid balance sheet; in addition to a large share buyback program, it continues to make incremental investments in high-growth niche areas.

We expect the company will be able to sustain further price increases as a result of higher costs, at least for the time being. The company is a global blue-chip, but now trading near the top-end of its historical valuation range.

Long-term investors should hold.

Royal Gold Overcomes Difficulties, with a Solid Balance Sheet and Growth Ahead

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) held an “investor day” which, while providing little new, gave a good review of its projects and processes. It noted that gold was at the core of its portfolio, representing 73% of revenues. Although it is open to other metals and minerals, they have a higher hurdle before the company would invest. It expects more streams than royalties going forward, mostly because operators prefer them — they are more tax efficient — and because they can be larger.

The company has 43 cash flowing assets, with the largest three representing just over 50% of revenue.

Royal has been disciplined with its share count, not issuing new equity since 2012. It used almost 60% of its cash flow last year to pay off its debt, ending the year debt-free, with $144 million in cash and a $1 billion undrawn credit facility. 

Royal used to have two significant risks: high debt and a high concentration on a single asset, and a problematic one at that (Mt Milligan). It has completely dealt with the first, and made significant strides on the second; it and the operator have reduced the property risk, while it now represents 26% of revenues (down from over 30%). As Khoemacau continues to ramp up, and other projects come on stream, the concentration will be further diminished. Royal is a long-time holding. The stock price is up almost 40% since mid-February; we are holding and will look for a good opportunity to add. 

Costs Up for Barrick and Other Miners

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) is guiding for higher costs for its first quarter, due partly to lower production, which we discussed last Bulletin, as well as cost inflation. Other miners (including Newmont, which shares many mines with Barrick), have also reported higher unit costs, which will hit the sector’s margins until the gold price moves up again.

We are holding Barrick. 

Midland Commences Another Large-scale Exploration Program

Midland Exploration Inc. (MD:TSX.V) continues its program of exploration on multiple properties with a new program under its alliance with BHP, looking for nickel in Nunavik. The program, lasting until the end of summer, will include both helicopterborne and ground surveys and mapping, and following up on geological targets generated in last year’s program. This is at an early stage, with no drilling envisioned for this year.

The alliance is looking for geology similar to that hosting Voisey’s Bay; although the Nunavik area has received less exploration, there have been some encouraging occurrences. The CA$2 million budget reflects the seriousness of the program, with a strong partner; targets will doubtless be pursued.

With multiple projects receiving exploration at various stages, Midland is well-placed for success and is a buy.

Cartier Acquires Valuable Land, but at a Cost

Cartier Resources Inc. (ECR:TSX.V) purchased the East Cadillac property contiguous with its Chimo property, in the Val-D’Or region. The ground, purchased from O3 Mining, for 46 million shares, is covered by a third-party 3% royalty. As a result, O3 owns 17.5% of the shares of Cartier.

Consolidating the property is a positive move, but the royalty will diminish the economics of any mine, and shares outstanding have more than tripled since 2015 to 264 million.

Hold. 

BEST BUYS this week in addition to any above include Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE); Pan American (PAAS, Nasdaq, 26.44); and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE). All three could slip further on any additional pullback in the gold price, but they are at good levels for long-term buying for those who do not already own.

JAMES DINES, RIP: The editor of the long-time The Dines Letter and a fixture at gold conferences for decades, has died. An avid market technician and student of investor psychology, he called himself “the original gold bug”, and liked to recount the story of how he was fired from Wall Street for recommending gold at $35 an ounce. He was a showman, famous for his dress, his humor, and for the “Dinettes,” attractive young ladies who would grace his booth, guaranteeing a large gathering! I shared many a panel, and many a dinner, with Dines and he was always good company. 

YOU CAN’T BUY THIS…buy our stuff instead: Another brokerage firm is telling its customers what they can and can’t buy. Vanguard Securities has sent a letter saying that the firm would no longer accept purchases or transfers in of most over-the-counter securities. As we have discussed, most non-U.S. companies trade OTC in the U.S. and Vanguard is cutting its brokerage clients off from most of them. The firm told clients that “this change allows us to better support a targeted, enduring suite of products,” which translated means “we will force our mediocre branded products down your throats.” The letter ends somewhat ironically, “thank you for investing with Vanguard.”

UPCOMING APPEARANCES: I’ll be speaking at two conferences next month: the Money Show, Las Vegas, May 9th to 11th; and the Vancouver Resource Investment Conference, May 17th to 18th. Additional information can be found on our website. NEXT BULLETIN we shall take more questions from readers. Send them along!

QUESTIONS? I welcome your investment or economic questions, which I shall attempt to answer here. Please write to [email protected]. 

Originally published on April 24, 2022.

Adrian Day, London-born and a graduate of the London School of Economics, is the 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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