Ares Capital Corp. (ARCC:NASDAQ) reported another strong quarter, with an increase in core earnings, for a record year of $2.37 per share. Strong credit performance, as well as increased revenue from higher interest rates, helped. The net asset value was up 5% year-on-year to $19.24. Credit metrics remain strong; last year, it collected 99% of contractual interest.
The company has low leverage and ended 2023 with a spillover income of $1.09 per share, more than twice the amount of the regular quarterly dividend, putting it in a strong position to continue the dividend even in a period of temporary revenue declines (as occurred during COVID-19). The dividend in 2023 was increased by 10% over 2022 and is holding steady for now at 48 cents per share of the quarterly dividend.
Ares, Best in Class, Is Also at Attractive Valuations
Ares says it is reviewing a "huge" number of opportunities as Ares and other large BDCs grab business from banks and traditional lenders. The attraction is their flexibility and speed of approval rather than the actual rates on offer. Last year, 75% of investments were in existing companies, and Ares now has 505 different companies to which it has loans, with no single investment of more than 2%, which is very broad diversification.
Ares, trading just a little above NAV, has a yield of 9.6%, excluding occasional additional distributions. Although the stock is up over the past few months — it was under $19 at the end of October — it remains a buy for long-term income-oriented investors.
Remember, BDC stocks tend to be volatile, but the current yield is very attractive, so if you hold for a long period, the volatility in the share price should not be a great concern.
Gladstone Had a Busy Quarter, With Low Leverage and Strong Credit
Gladstone Investment Corp. (GAIN: NASDAQ), a far smaller BDC, had an active quarter, investing $65 million, and one investment exited with a gain of $43.5 million. Investment income was up 15% year-on-year, primarily due to increased interest income. Gladstone also has low leverage, with liquidity from its recent long-term note issuance as well as availability on its credit facility.
Gladstone also noted that deal flow was picking up, though the environment remains competitive. Gladstone, like Ares, has a strong credit profile, with just three companies on nonaccrual. The major negative is the increased use of its ATM, selling $21 million of stock in the last quarter, with an additional $7.7 million in the last month. This is up from $4 million in the prior quarter and just $2 million a year ago.
Given that the recent average daily trading volume is only $2.6 million, these ATM sales are significant. Although Gladstone noted that all ATM sales were at prices above NAV, the rapid acceleration in the use of the program and the amount of the program serves to depress the stock price. The company said it "anticipates (s) continuing to be active in the ATM program."
ATM Use Warrants Caution in Buying Stock Here
The NAV declined in the last quarter by little more than one dollar, down to $13.01, due to net unrealized depreciation on investments as well as distributions made, yet remains above NAV (1.07x). Although that level is about average for the last five years, it is close to its high — other than the last few weeks — for the past 12 months.
The yield from regular monthly dividends is 7%, though including special distributions from capital gains, its 12-month yield is nearly 10%. Gladstone has solid management, low leverage, and an attractive yield, but the threat of ongoing ATM sales above NAV makes me want to look for better opportunities to buy.
Hold.
Hutchison Stabilizing at Lower Level, for Attractive Yield
Hutchison Port Holdings Trust (HPHT:Singapore) reported annail results with throughput down 6% over the prior year, mostly due to a drop in outbound cargoes to the U.S. Interest expense increased significantly.
The combination of lower revenue and higher expenses saw profits attributable to unitholders plunge nearly 80% year on year. The distribution, which fell in 2023, appears to have stabilized. Based on today's stock price, the 12-month yield was almost 12%.
That, and a very low price-to-book of only 0.39x, make Hutchison a Buy for long-term income investors.
Barrick Increases Gold Reserves Again
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported its year-end reserve and resource update, with an increase in gold reserves, net of depletion, for the third consecutive year, and a decline in resources. Copper reserves also increased slightly, using a $3/lb price assumption. Barrick used a $1,300 price assumption to calculate reserves and $1,700 for resources.
The decline in resources was driven by a 6% reduction at the Nevada Gold Mines joint venture with Newmont, including some of its key Nevada mines, such as Carlin and Cortez, and at the new Reko Diq copper project. It is worth noting that about 40% of the company's 77 million ounces of attributable resources are in large-scale projects that do not currently have timelines for production, including Donlin and Pascua-Lama, and which are not included in the company's 10-year plans.
The important point is that the company's reserves increased again, and while resources declined, they are very large, with multiple opportunities for long-term growth. Barrick has been in the penalty box since it missed its guidance (though that should not have been a shock to anyone following the company).
From a year-end price of $18.09, Barrick has fallen sharply over the past month and is again a Buy.
More Boardroom Changes at Osisko
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) saw more changes on the board. No sooner had founder Sean Roosen stepped down as chairman and Jason Attew taken the reins as CEO at Osisko than there was another shakeup of the board. First, David Smith, recently retired CFO at Agnico Eagle, joined the board, which is a positive addition.
This was followed a week later by the resignation of John Baird, chairman of the governance committee. One might wonder what exactly the "independent" chairman of the governance committee had been doing for the past four years, but that is history now. The stock has performed very well against the gold stock trend since the announcement of Mr. Attew's appointment and particularly since he took the reins at the beginning of the year, along with the other recent moves to more clearly separate Osisko Gold Royalties from the rest of the Osisko stable.
We are holding for now, given the stock action.
Altius's Iron Ore Royalty in No Rush, as Partner Search Underway
Altius Minerals Corp. (ALS:TSX.V) received an update on the Kami iron ore deposit it discovered and over which it holds a valuable royalty when Champion Iron Ltd, the project owner, delivered a long-awaited feasibility study. The economics of the project were less than exciting, while the lack of a timeline to build the project was disappointing.
However, Champion has a reputation for underpromising and over-delivering. The lack of a timeline is linked with Champion looking for an off-take partner to help with the $3 billion capex. Now that there is a feasibility, Champion said it will continue discussions with groups that have expressed an interest in partnering; "once we have a potential partnership (we will) come back to the market and . . . explain the next steps."
The Kami deposit, like others in Newfoundland and Labrador, has a high-grade (67.5% iron) clean ore, for which there is a growing premium on global markets. Champion said Kami, which it called a "significant resource," is a leader in terms of CO2 intensity and highlighted the mining-friendly jurisdiction.
Mine Will Get Built, With Significant Revenue to Altius
So while the feasibility study economics might be a disappointment and certainly do not suggest a rush to build, this is a project, given its premium clean ore, that will get built, and the results for Altius could be very meaningful — in the tens of millions of dollars in revenue per year — depending on the size of a project that eventually gets built. Meanwhile, Altius' stock price, already soft, has slid dramatically since its fourth-quarter results when it stood at $18.69.
For its very strong management and technical team, its breadth of revenue-generating assets, and its pipeline of potential new earnings, Altius is a Very Strong Buy.
TOP BUYS this week, in addition to the above, include Nestle SA (NESN:VX; NSRGY:OTC), Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ), Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), Midland Exploration Inc. (MD:TSX.V), Lara Exploration Ltd. (LRA:TSX.V), and Orogen Royalties Inc. (OGN:TSX.V).
Most of these stocks are close to their 52-week lows, presenting an opportunity to add to positions.
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Important Disclosures:
- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Barrick Gold Corp., Osisko Gold Royalties Ltd., Altius Minerals Corp., Franco-Nevada Corp., Agnico Eagle Mines Ltd., Pan American Silver Corp., Fortuna Silver Mines Inc., Metalla Royalty & Streaming, Midland Exploration Inc., Lara Exploration Ltd., and Orogen Royalties Inc..
- 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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