Franco and Osisko Team up for High-Potential Stream

Source: Adrian Day 07/26/2024

After extensive travel, including two conferences in the last few weeks, Global Analyst Adrian Day updates us on the news from companies on his list.

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) have partnered to buy a gold stream on SolGold’s Cascabel copper project in Ecuador for $750 million in staged payments; the stream is split 70/30 respectively. Production is expected to commence in the early 2030s, with several regional exploration targets providing upside.

Buying a stream on an Ecuadorian project might be thought contrary to both companies’ goals of low political risk, particularly for Osisko, for whom the investment is more significant relative to its size. Osisko already has a small royalty on the mine. But the potential returns are very strong, accretive to both companies with an estimated 6% IRR for Franco and almost 14% IRR for Osisko based on the current Pre-Feasibility study which covers only 18% of the known mineral resources on the main deposit.

Osisko Reports Output in Line, Though Second Half Is Uncertain

Separately, Osisko accounts its second-quarter Gold-Equivalent Ounces deliveries, in line with expectations. Right at the end of the quarter, one of Osisko’s key assets, the Eagle Mine, suffered a rock slide and has been shuttered. Osisko’s royalty represents about 9% of the company’s income. While this would have had hardly any effect on the 2Q production, Osisko may reduce its annual target.

The mine’s future is unknown at present. Osisko has a good balance sheet, with CA$66 million in cash after paying down its credit facility by CA$44 million. It has about CA$670 million in available liquidity. Separately, the new Panamanian government said it would talk with First Quantum, owner of the shuttered Cobre Panama mine, a stream on which was Franco’s large single asset, “in due course.” Franco has already written off its stream.

Two Solid Companies, One Buy, One Hold

Osisko has a good pipeline of projects, strong management, and a solid balance sheet. Adding the high-potential Cascabel stream provides long-term upside, though the Eagle closure will hurt in the near term.

After an 18% rally in the stock price over the past month, outperforming the index, Osisko is no longer particularly undervalued relative to other large and intermediate royalty companies and we are holding.

Franco has strong management and a rock-solid balance sheet, with $1.4 billion in cash and no debt. It is the largest gold royalty company and extremely well diversified.

It belongs in every portfolio, and if you do not own it, it can be bought here after its modest pull-back from an earlier-month high above $131.

Royal’s Stream Sales Slightly Soft, but on Track for Year

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) reported its Q2 stream sales that came in on track for gold, though silver streams were slightly lower due to Barrick’s Pueblo Viejo mine, which is currently in the midst of an expansion ramp-up.

There were also some sales from inventory, suggesting that Q2 deliveries were lower. But the differences were modest and Royal is on track for its 2024 guidance. Stream sales represent about 70% of Royal’s total revenues; royalties are not pre-released. Along with company-wide costs, these will be released in early August.

Given the move in the stock over the past month, we are holding.

Barrick Misses Expectations but Sees Improvements and on Track for Year

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported Q2 production below expectations, though at 46% of their anticipated full-year production so far, the company is precisely on track with its guidance since the second half is expected to be stronger. Costs were likewise above analyst expectations and higher than Q1, without the higher royalty payments due to the higher gold price, costs were a little lower.

If production increases over the balance of the year, as expected, then unit costs should come down. However, given that production came in below analyst expectations — most notably at Pueblo Viejo and Lumwana (copper) — following Q1 and full-year 2023 misses, the market will want some reassurance when they release full results next month. Barrick did reiterate its full-year guidance. Overall, though not a particularly strong quarter, the company is on track and we are cautiously optimistic.

Hold.

Strong Quarter for Fortuna, With Exploration Upside

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) reported strong Q2 production, ahead of estimates, although both Lindero, in Argentina, and San Jose, in Mexico, were lower. At its largest mine, Séguéla, higher grades compensated for lower throughput (the result of power supply constraints). Fortuna is on track to meet its annual guidance. Separately, Fortuna announced strong drill results from its Diamba Sud project in Senegal with some very strong interceptions. Drilling is continuing to find mineralization beyond the historic pit, with numerous satellite prospects as well. An update is expected next quarter.

Fortuna, with solid management, a strong balance sheet, multiple projects, and exploration potential, is a Buy.

Altius’ Revenues Increase, With Major Asset on the Block

Altius Minerals Corp. (ALS:TSX.V) expects to report 2Q royalty revenues of over $21 million, up meaningfully from both the previous and the year-ago quarters. The largest gain was from the iron-ore segment, due to higher dividends from the Labrador Iron Ore Royalty Company, while copper deliveries from the Chapada Mine also increased. Renewal energy royalty revenue fell sharply quarter-on-quarter after an exceptional first quarter, and is still up over 60% from a year ago.

Altius also received $3.7 million as settlement of a loan made to Adventus. Without that one-off item, revenues are still up on the first quarter, though modestly down on the year-ago period. Separately, Altius reported that it had sold most of its shares in Churchill Resources, a junior exploration company, for proceeds of CA$500,000. Though not overly material, the sale, we believe, represents ongoing efforts to raise cash for share buybacks from holdings with minimal potential.

The number of holdings in the company’s prospect generation and equity portfolio has decreased over the past year.

Orogen Continues Its Generation Business With New Buy

Orogen Royalties Inc. (OGN:TSX.V) has acquired the TCS volcanic-hosted massivesulphide project in British Columbia. Though undrilled, it lies in a prolific district that hosts, among others, the Red Dog and Brucejack mines, with several anomalies and identified targets. There was a low $25,000 initial payment, a minimum exploration requirement, and future payments.

Orogen will seek to find a partner for the project, continuing its successful program of generating royalties and payments by selling projects. The acquisition also underscores that there is a life for Orogen after Silicon.

The End Draws Nigh for the Silicon Royalty

For both companies, Altius and Orogen, the main near-term driver is their royalties on the large and growing Silicon-Merlin discovery of AngloGold in the Beatty District in southern Nevada. Altius is known to have solicited indications of interest from potential buyers of its royalty.

The next news is expected to be the result of the arbitration proceedings on the extent of Altius’ royalty. Undisputed, however, is its 1.5% on the key Silicon-Merlin deposits. Orogen has a 1% royalty just on the Silicon-Merlin area. Next will be an update from AngloGold in early August, with observers keen for additional information on the drilling to the west of these deposits (and still on the royalty ground).

Altius Prefers to Swap Its Gold Royalty

As we have previously indicated, Altius’ preferred option is to find a way to swap its royalty for other base metal royalties. The difficulty, however, is in finding sufficiently large and attractive royalties that others want to exchange, and in any event at least some of the purchase price would have to be cash or shares of the acquiring company. That has tax implications.

Assuming however that a reasonable offer is made, we would expect Altius to move reasonably quickly after the arbitration decision. The gold royalty is not receiving much value inside of Altius, and the company is known to want cash to buy back its own shares which it believes are undervalued. Once Altius transacts, that would put a firm value on Orogen’s royalty. We believe that Orogen’s could be worth more, pro-rata, since the losers of the Altius royalty might be willing to pay up to ensure some exposure to the discovery.

The most likely transaction would involve direct payments to shareholders, in cash or shares of the acquiring company, on a tax-deferred basis, with the rest of Orogen (the cash, the cash-flowing Ermitaño royalty, and the other royalties and properties) retained by existing shareholders. We suspect that once Altius has transacted, a sale of Orogen’s royalty would follow in short order. Altius holds about 20% of Orogen. This is all speculation, of course, and depends upon other companies putting a value on the royalty that Altius and Orogen believe is a good price. Both companies believe there is significant upside from the known resources, which currently stand (on Silicon-Merlin) at 13.2 million ounces, with perhaps another 5 million known on the surrounding land subject to Altius’ broader royalty.

Both companies remain buys. Altius is a core holding for its broad exposure to commodities and a sale of the Silicon royalty will simply unlock hidden value.

One More Cash-Flowing Asset for Metalla, as Value Unlocked

Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American) announced the first gold pour at the Tocantinzinho mine in Brazil, on which it holds a 0.75% Gross Value Royalty. Production is expected to ramp up during the second half of the year, and the mine has a 10-year plus life.

This is one of three, perhaps four, royalties that will start generating cash for Metalla over the next 12 months adding to the existing six cash-flow generating assets. In all, Metalla now has over 100 royalty and streaming assets. Metalla is undervalued, selling at only 50% of its net asset value. As more of its assets start generating cash, the value will be unlocked.

Metalla is a buy.

Multiple Programs Underway at Midland

Midland Exploration Inc. (MD:TSX.V) and its partners have begun three new exploration programs, including drilling now underway at the Patris gold property, into which Barrick is earning through expenditures and payments. Other new programs are at the polymetallic La Peltrie project into which Probe Gold is earning; and under its alliance with BHP, looking for nickel and copper in Nunavik.

This is in addition to other work programs underway, including by Rio Tinto in its lithium exploration. Midland has a strong management and technical team, has a very strong balance sheet, and numerous exploration programs underway, sole and in partnerships. It is well set up for stock price appreciation on any exploration success.

Buy.

Resource Estimate Delayed for Lara

Lara Exploration Ltd. (LRA:TSX.V) is currently preparing its resource estimate on its 100% Planalto Copper project in northern Brazil in conjunction with a local independent consulting firm. The resource estimate was expected to be published at the end of the second quarter, but it has been pushed back and may not be released until near the end of summer. I do not read any negative inference into the delay. It simply allows us more time to build positions at reasonable prices.

Lara remains a buy.

TOP BUYS this week, in addition to above, include Hutchison Port Holdings Trust (HPHT:Singapore) and Fox River Resources Corp. (FOX:CNSX).

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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 Franco-Nevada Corp., Osisko Gold Royalties Ltd., Barrick Gold Corp., Fortuna Mining Corp., Altius Minerals Corp., Orogen Royalties Inc., Metalla Royalty & Streaming, Midland Exploration Inc., Lara Exploration Ltd., and Fox Riv Res Corp.
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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Adrian Day Disclosures

Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. www.AdrianDayGlobalAnalyst.com. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2023. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.

( Companies Mentioned: ALS:TSX.V, ABX:TSX; GOLD:NYSE, FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, FNV:TSX; FNV:NYSE, LRA:TSX.V, MTA:TSX.V; MTA:NYSE American, MD:TSX.V, OGN:TSX.V, OR:TSX; OR:NYSE, RGLD:NASDAQ; RGL:TSX, )