Franco-Nevada Stock Down in Overreaction to Weak Results

Source: Adrian Day 08/23/2024

One up, two down in the latest earnings reports from gold companies, though all three are looking for growth in the rest of the year.

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) reported meaningfully lower operating and financial results than expected. Though up on the first quarter, primarily because of higher gold prices, results were lower than the same quarter a year ago (even excluding Cobre Panama). The miss was only partly expected. Two of Franco’s main revenue generators were significantly down: Candelaria had been previously reported, but the decline at Antapaccay was new. Franco reiterated its annual guidance for 480K to 520K Gold Equivalent Ounces, though now at the lower end, with recoveries at both Candelaria and Antapaccay, as well as the ramp up of revenues from three new mines, Tocantinzinho, Greenstone, and Salares Norte. Also, taxes were higher, due to the implementation by Canada of the global minimum tax.

With US$1.4 billion in cash and another US$1 billion in available credit, Franco is extremely well positioned for future acquisitions. It just acquired a 1.8% royalty on a Newmont Corp.’s (NEM:NYSE) Yanacocha mine in Peru for US$210 million. The returns are low at a 4% internal rate of return, particularly given the uncertainty over the timing of development of the sulphide deposit, but the mine is expected to last for decades, adding more long-term cash flow for Franco, with significant brownfield potential.

Upon the results, the stock saw its largest percentage decrease since March 2020, which is a gross overreaction, and a reflection of how skittish gold investors are right now rather than the specifics of the quarter. Particularly for those who do not own it or are underweight, Franco is a buy.

Market Rewards Barrick’s Improvements and Prospects

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) released financials more-or-less as expected since it had already pre-released its production and preliminary cost estimates. Barrick also maintained its full-year guidance, expecting higher production in the second half, as is usually the case for the company and has it indicated at the beginning of the year. It also expects costs to decline. In the quarter just past gold costs were essentially flat at US$1,059 per ounce cash costs (with the small increase due to higher royalty payments), while copper costs declined. For the period ahead, both Porgera in Papua New Guinea and Pueblo Viejo in the Dominican Republic will continue to ramp up production, and an ongoing improvement in Nevada is underway. In its analyst call, CEO Mark Bristow made a strong case for Barrick. He emphasized some major long-life projects in the development stage, including two new Nevada mines, the 100% Barrick owned Fourmile, which he said was turning into “the largest undeveloped gold project in the world” and Gold Rush. “You’ve got to believe there are more opportunities to make discoveries” in Nevada. He also highlighted feasibility studies on track for year-end on two large copper projects, the Lumwana expansion in Zambia and Reko Diq in Pakistan. Barrick expects to double its copper production by 2029. Bristow emphasized that its growth is organic or from projects acquired five or more years ago, not from projects acquired recently at high premiums.

The stock undervalues the company’s assets Bristow also made the case that Barrick was significantly undervalued relative to other large mining companies on an asset basis. He asserted, looking at parallels, that its share in the Nevada Gold Mines joint venture (with Newmont) and its copper business account for the company’s entire market cap, meaning that the rest of the business is free. After a modest repurchase of shares in the quarter (CA$49 million), the company ended the quarter with CA$4 billion in cash against CA$4.7 billion in debt, with CA$3 billion available on its credit facility, giving it a strong balance sheet and plenty of available firepower.

Depending on share buybacks and any other use of capital, the company could end the year cash positive.

The stock price responded very well to the earnings and presentation, moving to its higher price since early last year. Recall, it traded just over CA$14 in February this year.

Although the company remains inexpensive on an asset basis and has plenty of organic growth ahead, we are holding for now.

Metalla Reports Lower Revenue, But Growth Lies Ahead

Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American) reported revenues lower than expected, leading to an earnings loss, though the annual guidance was reiterated as new assets begin contributing.

As discussed previously (Bulletin #920), three mines Tocantinzinho, La Guitarra, and Cȏté have commenced production, and more royalties are expected to begin generating revenues for Metalla over the next 12 months.

The company has cash of just over US$9 million plus a convertible loan facility of US$12.5 million. The company also introduced a minimum share ownership policy for directors and officers in order to “further align the financial interest of the company’s leadership.”

As new assets come into production, Metalla’s valuation on cashflow metrics will improve, while it remains undervalued on an asset basis. That, as well as new strategic initiatives (such as splitting the roles play by founder Brett Heath with the hiring of a company president) should see the stock price recover meaningfully. Metalla is a buy.

TOP BUYS this week, in addition to above, include Kingsmen Creatives Ltd. (KMEN:SI); Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE); Lara Exploration Ltd. (LRA:TSX.V); and Fox River Resources Corp. (FOX:CNSX).

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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., Barrick Gold Corp., and Metalla Royalty & Streaming 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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( Companies Mentioned: ABX:TSX; GOLD:NYSE, FNV:TSX; FNV:NYSE, MTA:TSX.V; MTA:NYSE American, )

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