Developments Overshadow Results for Resource Companies
Contributed Opinion

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) saw results slightly lower than expected on lower sales, but the results were overshadowed by the ongoing circus in Panama over the Cobre Panama copper mine, a stream on which is Franco's largest asset. Immediately after our last report on the situation (which reported a government ban on future mining projects), the government announced that a binding referendum would be held on December 17 on whether to uphold the contract with miner First Quantum following violent demonstrations (which saw two protestors blocking the highway shot dead last week by an impatient motorist).

This was immediately followed by the Electoral Court saying conditions for a referendum had not been met. Without going into all the day-by-day contradictory changes, with multiple government bodies all having their say, suffice to say that a referendum may be held while the Supreme Court will rule later this month on two legal challenges to the mine.

In the meantime, the Congress voted to void the contract. This all follows, remember, the official ratification by Congress and official proclamation of a renegotiated mining contract after the government said it would no longer honor the earlier contract still in force.

There Is a Binary Outcome for Franco, but Not a Total Loss

This fiasco puts First Quantum's ownership of the mine and Franco's stream thereon in some doubt, as well as calling into question Panama's reputation as a sound destination for foreign investment; it can no longer be thought of as a serious country for investors. Further revisions to the terms of the contract — though it is unclear what the protestors and those opposed in Congress and the government actually want — would, for Franco, have a relatively modest impact, though there is the risk of another temporary shutdown in the mine, and a longer-term reluctance of First Quantum to put in additional capital.

In the worst-case scenario, a nationalization, the case would most likely go to international arbitration, which the miner would probably win. Franco would then receive a pro-rata share of any settlement (the NAV of its stream relative to the NAV of the mine). Such a settlement would almost certainly repay Franco for the cost of its stream, though probably not to the full extent of the value of the stream.

Franco's third-quarter results saw revenue and net income both up quarter-on-quarter, though production (Gold Equivalent Ounces or "GEOs") was moderately down and moderately lower than expected, largely to Antapaccay and the Vale iron ore royalty (though both were up from last year). Energy revenues fell 37% year-on-year. Cost of sales rose by 6%. The company said it was on track for annual results to be within its guidance, albeit at the lower end of the range.

Major New Projects Moving Ahead

Looking ahead, Franco has several important assets moving towards production, including the Tocantinzinho project in Brazil, now over 50% completed, as well as Equinox's Greenstone mine in Ontario. Franco ended the quarter with cash of $1.3 billion with another $1 billion available on its credit facility; it has no debt.

The stock is down significantly on the Panama fiasco, more or less wiping the value of that stream off its market cap.

Though further volatility could well be expected on additional bad news out of Panama, Franco is a good Buy now, particularly for those who do not already own.

Osisko Names New CEO and Replaces Chairman

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) reported full third-quarter results as expected after pre-releasing its GEOs and costs. But the results were overshadowed by changes at the top, including the appointment of a new CEO and a new chairman. Sean Roosen is moving to "Chair Emeritus" and will continue as a director, perhaps pointing to the company's intention of continuing the move to a more traditional royalty model.

Replacing him is Norman MacDonald, who has been a director of Osisko only since June this year. The new President and CEO, following the stark firing of popular Sandeep Singh in July, is Jason Attew, a former investment banker and, more recently CEO of Liberty Gold. He will assume the role no later than January 2.

The appointment was well-received by analysts. We have yet to hear from him — he was not on the company's analyst call — so I am reserving judgment. On results, the company said it expected to come in at the lower end of its full-year production guidance. The company has a strong pipeline and added two projects during the past quarter.

The stock sharply underperformed since Mr. Sing's unceremonious departure, so has some catching up to do. Although it jumped the day after the announcement of the new CEO, it gave back most of that on Friday. It would appear many are unsure.

Hold.

Pan American's Results Bad, but Not That Bad

Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) had poor results, various described by analysts as "horrible" and "brutal," and the stock was down sharply, but they weren't that bad. Production was about 3% below expectations, though cash costs were about 10% higher. As a result, cash flow per share came in at 32 cents per share against an analyst consensus of 46 cents.

Silver production came in at the low end of guidance, though gold output was below guidance, mainly due to a poor quarter at El Pe on, while silver output continued to be affected by ventilation constraints at La Colorada. (The company expects this to continue until the new ventilation infrastructure is complete around mid-2024.) Management expects to meet its full-year guidance, though at the low end.

Costs up but Balance Sheet Strengthened

Costs were affected by a few factors. First, at Cerro Moro, costs rose significantly, but there were special factors related to that, including higher costs to reaching very high-grade parts of the deposit. Second, more generally, silver costs are affected by base-metal byproduct credits, which were lower in the past quarter because of lower prices.

In addition, the higher oil price in the 3rd quarter affected the cost of diesel, which has a major impact on the company's operations, perhaps more than for some other companies. As discussed in Bulletin 879, the company has taken steps to restore the balance sheet after the Yamana acquisition. It repaid $280 million on its revolving credit facility last quarter and now has the full $750 million available, along with $348 million in cash at quarter end; the sale of Agua de la Falda in Chile closed this month, adding another $45.6 million.

Total debt of $809 million was largely inherited from Yamana and included a $500 million note with a low 2.63% coupon. On its last conference call, CEO Michael Steinmann said four of Yamana's operations have been integrated into Pan American, while regional offices have been streamlined, and is on track for annual synergy savings of $40 million to $60 million annually. Steinmann also reiterated that additional sales of non-core assets are expected.

Two Major Mines in Future

There are two major growth catalysts ahead. First, the Preliminary Economic Assessment (PEA) on the La Colorada skarn is on track for year-end. And progress continues to be made on working towards authorization for the restart of the Escobal mine in Guatemala (see also Bulletin 879). Three visits to the mine site were conducted with representatives of the native Xinka, as well as several other meetings with the Xinka and the government in which Pan American is now participating.

No date for the end of this process has been given (though the government earlier had said it expected it to be completed by the end of last month.) A disputed presidential election complicates the situation somewhat. Pan American has been deliberately low-key on this process, but the prize is worth waiting for.

Escobal would nearly double the company's silver production. Pan American has a strong balance sheet, potential for operational improvement at its new assets, and high potential from the LC skarn and Escobal.

At today's price — a low since the COVID dip in March 2020 — it's a Strong Buy.

Altius Down on Year Ago, as Expected

Altius Minerals Corp. (ALS:TSX.V) reported earnings lower than last year and lower than analyst expectations.

This year's earnings were always going to be lower than last year's, as repeatedly telegraphed by the company due to lower potash prices after the 2022 spike following the invasion of Ukraine and by the closure of the 777 copper mine.

Although CEO Brian Dalton said that revenues came in "pretty much as expected," they were below the analyst consensus. G&A per ounce was higher than last year because of lower revenue, while amortization was also higher.

Royalty revenue had been pre-released (see Bulletin 823), so there were no major surprises.

Equity Holdings Boost Balance Sheet

Altius repaid $2 million on its debt, as scheduled, leaving $115 million in debt. Altius has $16 million in cash (excluding the $51 million at Altius Renewables — ARR — which is consolidated on the balance sheet). It holds about $159 million in ARR, $120 million in shares of Labrador Iron Ore, $50 million in Lithium Royalty shares, and $45 million in publicly traded shares in the Project Generation equity portfolio.

Although the debt is perhaps higher than it has been historically, its equity positions support the balance sheet, and Altius wants to take the opportunity now to buy back its shares, which it sees as the best allocation of its capital. During the quarter, it bought back nearly $6 million in shares. Looking ahead, there are several potential catalysts.

Champion Iron is working towards the completion of an updated feasibility study for the Kami project, expected by year-end or early next; Altius has a royalty on the project. AngloGold expects to publish an initial inferred resource estimate for Merlin and a pre-feasibility study for the Expanded Silicon Project by year-end. Arbitration on the extent of Altius' royalty is expected in April 2024.

And an appeal was heard last week on Altius' takings lawsuit against Alberta over the forced stoppage of the coal mines on which Altius held royalties. Revenue from that source is expected to fully end by year-end.

With very strong, contrarian management, a solid diversified base of assets, and multiple upcoming catalysts, Altius, very close to its annual low, is a Strong Buy here.

Midland Finds More Lithium

Midland Exploration Inc. (MD:TSX.V) reported that assay results confirmed high-grade lithium at its Galinée property in partnership with Rio Tinto. Additional spodumene-bearing pegmatite dykes and outcrops were identified.

Although this is early days, and the assays from small samples, the discoveries are encouraging, given Rio's intense interest in lithium exploration.

Buy

Nova Distributes Proxies for Acquisition

Nova Royalty Corp. (NOVR:TSX.V) mailed its proxies over a week ago. If you own the stock and have not received the proxy, you might contact your broker and ask them to vote. We recommend voting in favor of the acquisition by Metalla Royalty.

NEXT BULLETIN, we shall look at results from Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE), Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX), Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), andVista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX), which have all reported.

TOP BUYS THIS WEEK in addition to above include Nestle SA (NESN:VX; NSRGY:OTC), Hutchison Port Holdings Trust (HPHT:Singapore), Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX), Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), Lara Exploration Ltd. (LRA:TSX.V), and Orogen Royalties Inc. (OGN:TSX.V).

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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 Agnico Eagle Mines Ltd., Franco-Nevada Corp., Osisko Gold Royalties Ltd., Orogen Royalties Inc., Nova Rty Corp., Pan American Silver Corp., Fortuna Silver Mines Inc., Altius Minerals Corp., Midland Exploration Inc.,Barrick Gold Corp., and Lara Exploration Ltd.
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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