Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) released its first-quarter earnings, in line with expectations and with no negative surprises. Full-year guidance was also reiterated, notwithstanding inflationary pressures on costs. In the first quarter, inflation was estimated to add less than 5% to total costs, with its largest single item, diesel at Lindero, more than half of which is hedged. Significantly, the new mine Séguéla is now 48% complete as of the end of March, on track for the mid-2023 first gold pour.
The balance sheet is strong, with $110 million cash after drawing down another $40 million on its credit revolver; it drew down an additional $20 million since quarter-end. This should be sufficient for the completion of the Séguéla mine build. Fortuna also initiated a share repurchase program at the beginning of the month which it says it “intends to use” this year.
The drama-free quarter saw a modest bounce in the stock, but Fortuna, with a strong balance sheet, conservative management, and a diversified asset base, remains very inexpensive, essentially at its lowest price before the last couple of weeks.
It is a buy.
Counter-cyclical Altius Invests in Project Generators
Altius Minerals Corp. (ALS:TSX.V) released financials for the quarter after already announcing royalty revenue. Earnings were slightly lower than expected, with no major surprises. Thermal coal and potash were the strongest units. Because of the lag effect in receipt of royalties, Altius expects higher potash revenues this quarter and next. The major news was that the company’s litigation for compensation over its coal assets was dismissed; the company is appealing the Alberta Court's decision.
Generally, the company—always counter-cyclical—sees this as a period for organic growth rather than for acquisitions. It continues to invest actively in early-stage prospects within its project generation division, recently increasing its ownership in Orogen as well as making a new investment in another of our favorite juniors. The balance sheet is reasonably strong with $35 million in cash at the corporate level (and another $87 million held by Altius Renewables), with shares in juniors valued at $67 million.
Altius is our favorite company for broad exposure to resources other than gold, with top, forward-thinking management, a strong balance sheet, and both long-life producing royalty assets and a deep pipeline of early projects.
The pullback in the stock price from almost $26 a month ago, gives us an opportunity to buy.
Three Potential Triggers for Pan American
Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) reported another quarter with lower earnings than estimated, this on the back of both gold and silver production being lower than expected, largely due to COVID-related workforce issues. The company said that the workforce deployment was now back to normal and it reiterated guidance for the full year, expected to be weighted towards the second half.
The company continues aggressive drilling at La Colorada Skarn. The balance sheet is strong with $326 million in cash, net cash of $225 million, plus a $500 million line of credit, which will be used for the CAPEX on La Colorada.
With strong management and balance sheet, diversified assets, and three major assets that could provide significant upside—La Colorada, Escobal in Guatemala, and Navidad in Argentina—Pan American is a solid buy here.
A Flurry of Positive News Ahead of Equity Raise for Lara
Lara Exploration Ltd. (LRA:TSX.V) reported a string of positive news ahead of an insider private placement. Earlier in the month, it increased its interest in a stalled phosphate project in Peru from 33% to 70% for a commitment to invest $500,000 by the end of 2025. The absence of any upfront payment is positive. Lara needs to convince the local community of the benefits of the project, given the poor community relations of the previous owners.
Separately, the company released initial results on the newly optioned ground adjacent to its main deposit at the Planalto joint-venture project with Capstone in Brazil. The main
Homestead deposit has returned positive results but was thought to be too small for Capstone and Lara’s option of the adjacent ground potentially changes the outlook.
While the grades are short of spectacular, the mineralization suggests the potential to increase the overall size of the Planalto deposit.
Settlement of Lawsuit Ahead?
Lastly, Lara and its partner Codelco received a favorable court ruling upholding its Liberdade exploration license; the rule is being appealed by the Brazilian Mining Agency. Lara originally obtained the license in 2010 and brought in Codelco as a partner in early 2011. It has been tied up in court since 2015, with exploration activity suspended, after Vale claimed its 1986 permit remained valid. We expect an appeal, but also expect that Vale, Codelco, and Lara will seek an agreement that would be to the benefit of Lara.
Immediately following the release of this news, Lara announced a private placement to raise CA$4 million from insiders and a new corporate investor. The placement was priced at a nice discount with an attractive warrant.
Lara is a hold for now.
Value Disconnect for Vista
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX)is in the transaction phase, actively seeking a partner for its Mt Todd gold project in the Northern Territories of Australia. In a one-on-one conversation, CEO Fred Earnest said that multiple companies have visited the data room while a couple so far have conducted site visits.
The level of interest is more or less what was expected, but because of the current state of Sino-Australian relations, no Chinese companies are expected to bid. The company is seeking offers and there will not be any news on the deal front until the company announces a transaction.
The deadline for offers to be submitted has not been announced publicly. Should no acceptable offer be received, Earnest mooted building a smaller project, with lower CAPEX. All permits are renewable so there is no time pressure to commence construction.
The company is well-financed, ending the quarter with almost $13 million in cash.
With exploration and other intensive work on-site concluded—final exploration results will be released over the coming weeks—the cash spend will decline significantly. After final bills
are paid, the cash spend is expected to run at about $1.5 million a quarter, approximately 50/50 G&A and local site expenditures.
Terms of a deal are critical, but there is room for maneuver. Clearly, the terms of any transaction will be critical for shareholders, but with the market cap at only $93 million, and the net present value of Mt Todd at $1 billion, there is plenty of cushion for shareholders to win even with a less-than-perfect transaction.
Obviously, the lack of an acceptable offer and a decision to go alone would be disappointing. It is surprising that the stock did not move further, nor sustain its gains, following the release of the definitive feasibility study in early February, but that gives us more opportunity to accumulate.
At this level, Vista is a strong buy.
Top Buys
This week in addition to those above include Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE); Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX); Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE); Barrick Gold Corp. (ABX:TSX; GOLD:NYSE); Orogen Gold Ltd. (ORE:LSE); Gladstone Investment Corp. (GAIN: NASDAQ); Ares Capital Corp. (ARCC:NASDAQ); and Hutchison Port Holdings Trust (HPHT:Singapore). If you do not yet own it, Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) can be bought.
Which Assets Perform Best in Difference Economic and Market Environments?
Little surprise that during inflationary periods, gold and “inflation-indexed bonds” perform best of seven asset categories, followed by developed market real estate. The study, by the World Gold Council, looked at consistency and other factors as well as purely at returns.
In fact, as we have discussed many times, though gold performs well in nominal terms during inflations, in real terms, and on a relative basis, gold does better during deflationary periods, particularly where accompanied by monetary turmoil.
Bear Markets and Stagflations Also Good for Gold
During equity bear markets, if accompanied by inflation, gold is again a top performer, number one this time, followed by “safe-haven” currencies Swiss franc and Japanese yen. Bonds are the worst performer. In a bear market without inflation, all returns—except for bonds—are lower, and gold slips below foreign currencies.
During stagflation, energy followed by gold is one of the two standouts (up an average of 26% and 21%) followed by emerging market stocks and bonds and other commodities. U.S. stocks and bonds were the worst performers. Gold stocks sometimes follow the stock market more than they follow gold, but in the 1970s, they rose (basis the Barron’s Gold Stock Index) by 1,322%, while in the period from 1876 to 1980, they were up over 1,000%.
In the period from the end of 2008 to the end of 2010, they (basis XAU Index) almost quadrupled.
Note: each of these different studies looked at a different group of asset classes (though all included U.S. stocks, U.S. bonds, and gold). Gold and gold stocks set to outperform in likely scenario ahead A stagflation is our default outlook for the economy, while a bear market for equities is long overdue.
Such augers well for gold. There are always other factors apart from the primary condition being studied (inflation, bear market, etc.) that can affect the returns of one or other assets. In the stagflation of the 1970s, for example, the Arab oil embargo propelled the oil price to its top spot.
The overall conclusions hold true, however, given the different time periods looked at.
Quotes of the Day
HSBC’s “head of responsible investment” appeared to dismiss the importance of climate change, saying “there’s always some nut job telling me about the end of the world,” adding that he is concerned about the amount of regulation coming down the line.
He noted that “human beings have been fantastic at adapting to change.”
He took specific aim at former Bank of England Governor Mark Carney, commenting “I completely get that at the end of your central bank career, there are still many, many years to fill. You’ve got to say something, you’ve got to fly around the world to conferences, you’ve got to out-hyperbole the next guy.”
But, he added, “it is getting a little bit out of hand.”
The bank was not amused.
ESG Mania
On two recent “investor days” held by major gold royalty companies, each led with discussions, not of their assets, their financial conditions, or their business plans, but on burnishing their ESG credentials, each consuming over one-quarter of the total time on this topic.
Cart and horse come to mind.
In answer to the question (asked by your humble scribe) of how much time senior management was spending on formulating ESG policies and completing numerous surveys submitted by various “green” organizations, one company’s General Counsel, said 30-40% of his time was devoted to the topic, while across management is was “north of 20%.” And this is before the SEC’s new regulations on the topic.
Originally published on May 21st, 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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