Ares Income Falls, but Company Well Positioned
Contributed Opinion

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Ares Capital Corp. (ARCC:NASDAQ) fell sharply from record highs, by almost 5% in two days, after the company announced that long-time and popular CEO Kip deVeer was departing as CEO, and net income plunged 24% from the quarter a year ago.

If the market saw a connection between the events, it was mistaken.

There are offsetting factors for both circumstances; perhaps the algos are not able to see subtleties.

Departure of Highly Successful CEO

DeVeer had been CEO of Ares for over 10 years and has clearly done a superb job with consistent growth, successfully navigating Covid, and all the while maintaining or increasing the dividend, which is an industry-leading yield (currently, at stock highs, close to 8.5%). My initial thought on seeing the headline was very negative.

But DeVeer is taking on a new role at parent Ares Management and will remain on the board of Ares Capital. His replacement, Kort Schnabel, has been with Ares since 2001 and had been co-president, with deVeer, for the part two-and-a-half years. He was a founding member of Ares' direct lending strategy, and there is no indication that the company's strategy nor its execution will change under his leadership.

High Dividend Still Covered by Lower Income, With Cash in Reserve

The net income of 55 cents per share was down from 62 cents last quarter to 72 cents a year ago. The full year also fell 31 cents to $2.44, largely driven by declines in yields across the economy. Other larger BDCs that have already reported have reported similar earnings misses because of interest rate pressures.

However, even the fourth quarter remains well above the current dividend (48 cents), and the company has significant undistributed spill-over income, now $1.27 per share. There were expectations that the company might declare another special cash dividend — the last ones were in 2022 —but the company decided against that and is also maintaining the regular quarterly dividend at the same rate; the last increase was also in 2022, thus indicating a cautious outlook.

Although income fell, the Net Asset Value per share saw its eighth consecutive quarter of growth, moving to a record $19.89. The balance is very strong, with leverage just below one times net debt-to-equity. The company, which saw an active origination year, expects a good M&A market this coming year. It is certainly well positioned to take advantage of that, with $6.7 billion of available capital. Ares, the largest Business Development Company, is also the highest quality, certainly of the larger ones, with two ratings upgrades last year, making it the highest-rated BDC at all three major rating agencies.

It is broadly diversified with a solid balance sheet and a fully covered dividend payout. It has good credit among its portfolio, with non-accruals below its long-term average. We have called Ares "a hold" for some time now. It should be noted that even after the price decline, the stock is still at its higher level prior to this year.

However, given the strong attributes and the high yield, it can be bought by a new investor for high and consistent income, though I would wait for add-on positions.

Barrick Increases Reserves Again Through Organic Growth

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) increased gold and copper reserves in its year-end reserve update, with gold reserves up 23%, and copper reserves up 224% and at higher grades. Gold reserves increased 12 million ounces to 89 million as it added reserves from Reko Diq following a feasibility study, while the rest of the portfolio mostly saw replacement though once again at a higher grade. The only mine with a significant decline was Cortez in Nevada.

Gold resources (other than reserves), however, declined by 11 million ounces, against largely because of the conversion of ounces from resource to reserve at Reko Diq, though there were also some declines at Nevada mines. Copper reserves jumped from 5.6 mt to 18 mt, against largely because of the includes of Reko Diq lbs but also the expansion at Lumwana. Similarly, resource numbers fell by a comparable amount. Gold reserves were calculated at $1,400 an ounce, an increase from the prior $1,300, while the number for copper remained at $4 a pound. The gold (and silver, at $20) prices used for calculating reserves are well below spot prices, and following a rally this year, so too is the copper price used.

Track Record of Increasing Reserves at Higher Grades

The report was a positive one and demonstrates again one of Barrick's competitive advantages over most of the larger mining companies. Excluding Reko Diq, this is the fourth consecutive year in which Barrick has replaced its annual depletion at higher grades. Since the end of 2019, it has replaced more than 180% of depleted reserves, and done so through organic growth, exploration, and resource management.

The other major miners have not yet released their year-end reserves. Newmont is expected to have the largest reserves in absolute terms, following the acquisition of Newcrest, but not expected to demonstrate much organic growth. We expect that there could be some downward pressure after Barrick releases its fourthquarter and 2024 annual results on Wednesday, particularly if the company misses guidance again.

Any such downward move should be purchased: as we have written before, Barrick is the least expensive of the major miners on an asset basis, with major long-term potential from several projects. The balance sheet is very strong. The knocks on Barrick are both the high geopolitical risk that comes to the fore every so often (mostly recently in the still-unresolved dispute with Mali) as well as the continual misses, which come as much from overly optimistic guidance in my view as from anything else.

They are strong operators and energetic explorers.

Strong Profits at Hutchison but Softer Outlook

Hutchison Port Holdings Trust (HPHT:Singapore) reported that revenue for the year rose 8.8% even as total operating expenses fell. This comes as spending on major capital investment projects declined. Most of the profit was allocated to unitholders who saw their earnings per unit jump 178% over a weak 2023.

However, container throughput at its main Hong Kong port fell, offset by a large increase in traffic through its China ports. The company noted "an increasing expectation that the U.S. economy will slow down" while tariff duties will reduce demand for Chinese products and, therefore, hurt container throughput. The trust's final distribution fell slightly from 7.7 Hong Kong cents last March to 7.2 cents next month. This year's are expected to be lower than last year's.

At a better-than10% yield, we continue to hold as part of a diversified global income basket.

Exploration Success Points to Longer-Life Royalty Revenues for Orogen

Orogen Royalties Inc. (OGN:TSX.V) reported the expansion of the Navidad target located within its royalty ground at First Majestic's Ermitaño Mine. Discovered mid-last year, Navidad significantly expanded its gold and silver zones following aggressive drilling by the operator. An initial mineral resource is expected by the end of this quarter. Its proximity to the existing mine allows for easy access for further exploration.

The major catalyst for Orogen, of course, will the disposition of its royalty of AngloGold's Expanded Silicon Project, though the good news at Navidad, indicating further life for its paying Ermitaño royalty, will make the rump Orogen, assuming Silicon is sold, that much more valuable.

We continue to buy.

TOP BUYS this week, in addition to above, include Lara Exploration Ltd. (LRA:TSX.V), which we continue to buy. We are holding off buying much this week. In the gold space, though I remain very positive on the equities which remain fundamentally undervalued, particularly relative to their own history, we will stand back for a week or so to allow the market to settle down.