Gold Company Earnings Mostly Positive
Contributed Opinion

Pan American Gets To Work After Yamana Purchase

Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) missed its earnings estimates for the second quarter, but production came in at the high end of guidance, while costs for both gold and silver were lower than estimates.

This bodes well for a strong close to the year as the additional costs of the Yamana acquisition fall off. The company had guided that the second half of the year would be stronger than the first, with sequential production growth and lower costs, and the company maintained its guidance. The significant development this past quarter is that Pan American has consummated several asset sales, as promised when it acquired Yamana, with proceeds of $593 million.

Most notable was its interest in Mara, which sold for $475 million (see Bulletin #874); it also sold its shares in junior companies. Pan American has always emphasized a strong balance sheet, and these sales are intended to improve its financial position following the Yamana acquisition. The sales of non-core assets also streamline the company's asset portfolio.

Most of the mine interests sold were in smaller mines or ones approaching the end of their lives. The company kept royalty interests in the projects it sold in order to maintain upside in the projects. The sale of several mines and mine interests only months after the closing of the Yamana acquisition is quite an accomplishment.

More Sales Are To Come

CEO Michael Steinmann said the company had not finished its asset sales yet, noting that (unlike most gold miners these days) it was not interested in copper. It may sell some copper assets and keep a royalty to maintain the upside in projects. It has not decided what to do with its growing portfolio of royalties but noted its previous successful spin-off of prior royalties into Maverix, subsequently acquired by Triple Flag.

The cash raised will eliminate over half of the debt acquired in connection with the Yamana purchase, putting Pan American on track to be, once again, cash positive on its balance sheet next year. At the end of Q2, Pan American had $409 million in cash and $1.1 billion in debt. The company also announced its annual reserve and resource update.

Resources at the legacy Pan American assets declined by about 10% through depletion, emphasizing again the importance of the Yamana acquisition.

Guatemala Silver Mines Gets Closer To Restart

Steinmann also noted that the consultation period on the possible restart of the Escobal mine in Guatemala was proceeding, with three meetings held in recent months. Although the court-ordered consultation is between the government and local communities, Pan American has become more involved recently, with a presentation to the community on dry stack tailings (which mitigates the risk of tailing damn bursts).

The government expects Phase 2 of the consultation process to end by early November, to be followed by the last phase which is court verification. So, it seems that the potential restart of this world-class silver mine is now within sight; the new government in Guatemala should have no impact on this process. Pan American is valued significantly below the valuation of other silver miners (though the market increasingly looks at it as a gold and silver miner) and below other gold miners.

With the strong balance sheet, deep portfolio, and upside from Escobal, Pan American is a Buy.

Royal Gold Has Slight Miss

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) fell a little short of expectations in its Gold Equivalent Ounces (GEOs) but maintained its full-year guidance. Two royalties, at Andacollo and Cortez, were lower than expected, partly offset from the stream on Mt. Milligan. Royal had pre-announced its streaming ounces (excluding royalties). Earnings actually improved, largely because of lower taxes.

The company ended the quarter with $106 million in cash, and, after paying down $100 million on its credit line, $600 million available on its credit line. It has subsequently used as much as $200 million on this for new royalty acquisitions.

The balance sheet is solid, and the growth profile — in the near term, from the ramp-up at Khoemacau and the new Cortez royalty — is strong. However, the completion of the purchase of two royalties on Brazilian mines, announced in June, is now in doubt since the deadline for the underlying mine acquisitions (on which Royal's purchase of royalties was contingent) has passed, and the transaction can be canceled by either party.

We are holding for now.

Franco Back on Track, With Upcoming Growth

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) saw higher GEOs and revenue, partly helped by a one-time oil and gas "catch-up" payment, as well as both Cobre Panama and Antapaccay returning to full production levels following the earlier production halts. Earnings rose on lower-then-expected taxes and G&A. Overall, the quarter was broadly in line with expectations, while Franco is now saying it expects to come in at the lower end of its full-year GEO guidance due to operational problems at several mines throughout the year, particularly the halts at Cobre Panama and Antapaccay earlier in the year, as well as lower oil and gas, and iron ore prices relative to last year.

Two major projects, Salares Norte (now 90% complete) and Tocantinzinho (30% complete), will boost Franco's GEOs and revenues next year. Franco, however, will be affected by Canada's planned implementation of the global minimum tax next year, with Franco estimating 3-4% of its NAV will be affected.

New investments during the quarter were mostly small, with the largest a $75 million royalty on the Chilean side of Barrick's Pascua-Lama project, which, given the lack of development plans at present, Franco views as a long-dated optionality investment. It noted that given its size, balance sheet, and the duration of its portfolio, it can afford such investments.

Competition Strong, but Franco Has the Cash

Interest in streams has increased because of the high cost of both debt and equity financing right now, though pricing is not good given the high competition among royalty companies. Larger transactions are less competitive since they are limited to the big three and sometimes a private player; however, they are few and far between.

Franco's emphasize is now on transactions in the $100 million to $300 million range, particularly for gold development projects. However, CEO Paul Brink noted that Franco continues to like smaller royalties where available. It continues to target at least 80% of revenues from precious metals.

Franco has a rock-solid balance sheet, with $1.3 billion in cash and no debt. It notes that, given the highly cyclical nature of the sector, it wants to maintain a strong cash level for future asset transactions, its highest priority use of cash; it certainly does not want to lower its investment criteria.

Franco remains a core holding for us.

Barrick Looks for Strong Second Half

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported 2Q results in line with expectations after preannouncing production and preliminary costs. Both gold and copper output increased sequentially, and the company expects to meet its full-year guidance, though this implies a strong second half.

Currently, all operations have produced less than half of their fullyear guidance, but the company indicated at the beginning of the year that it expected 55% of full-year production in the second half.

A recovery at the Nevada operations as well as higher production from Pueblo Viejo on the back of the plant expansion will help boost year-end results. An expected restart of Porgera by year end could also help this year's numbers (though Barrick has not included in its guidance). First-half costs at $974 an ounce are well above the company's $820-$880 guidance range; copper costs are similarly above guidance.

Several Large Projects Offer Long-Term Leverage

Barrick has significant potential in a handful of large undeveloped projects, including Pascua-Lama and Donlin, but without any timelines or clear path to production. Since the Randgold merger, Barrick has emphasized organic growth rather than M&A and has seen significant improvement by fixing assets it already owned. CEO Mark Bristow confirmed that the company would be open to an investment from Saudi Arabia in its large Reko Diq copper project in Pakistan, after press reports that talks had been held, though denied it had agreed to sell part of its interest.

However, if Saudi Arabia were to invest by buying some part of the interests of other local interests, it would be viewed as a positive given Saudi's closer ties to the region; a validation on the project; and a lower risk of any future confiscation. The high political risk of a large investment in Pakistan has weighed on Barrick's stock price.

Given Barrick's undervaluation relative to other miners, particularly on an asset basis, though some discount might be justified given its high political risk profile, it is a Buy.

New Drilling, Exploration at Lara and Midland

Lara Exploration Ltd. (LRA:TSX.V) announced the start of drilling in the Gap Zone at its Planalto project in Brazil, following the receipt of drill permits.

The drill program will focus on the area between two discoveries, at Homestead and Cupuzeiro to test if the mineralization is continuous. Results from initial holes are expected next month. Planalto is under option earn-in by Capstone.

This round of drilling is potentially significant since if the two deposits are linked, that would mean not only a larger project but also lower costs.

Lara is a Buy.

Midland Exploration Inc. (MD:TSX.V) announced the start of the first exploration program under the recently announced lithium-focused alliance with Rio Tinto.

This is in the James Bay region, close to Patriot Battery Metals' Corvette discovery.

The exploration is very early stage but potentially prospective.

Midland is a Buy.

TOP BUYS this week, in addition to those above, include Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE), Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE), Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), Orogen Royalties Inc. (OGN:TSX.V), Gladstone Investment Corp. (GAIN: NASDAQ), and Hutchison Port Holdings Trust (HPHT:Singapore).

NEXT BULLETIN, we'll have a longer look at another company that just reported earnings, Altius Minerals, following a visit to St. Johns, Newfoundland.

UPCOMING APPEARANCES September 9 is the annual Capitalism & Morality Conference in Vancouver, hosted by Jayant Bhandari. Not an investment conference, I'll be presenting on "Individualism, Land Rights and Liberty in Mediaeval England." Other speakers include Dr. Amy Wax on cancel culture, Walter Bloch, and Rick Rule.

Then, November 1-4 is the annual New Orleans Investment Conference. Always educational, challenging and fun, it is a must event on my annual calendar. Speakers, too many to list, include Peter Boockvar, a walking almanac of all things economic, and controversial Prof. Dave Collum. Details can be found here.

Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Pan American Silver Corp., Franco-Nevada Corp., Barrick Gold Corp., Lara Exploration Ltd., Midland Exploration Inc., Agnico Eagle Mines Ltd., Osisko Gold Royalties Ltd., Wheaton Precious Metals Corp., Fortuna Silver Mines Inc., and Orogen Royalties Inc..
2. Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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