Strong Cash Flows but Higher Costs for Resource Companies
Contributed Opinion

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., Barrick Gold Corp., Pan American Silver Corp., Franco-Nevada Corp., Osisko Gold Royalties Ltd., Fortuna Mining Corp., Altius Minerals Corp., Metalla Royalty & Streaming, Midland Exploration Inc., Orogen Royalties Inc., 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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This past week saw most of the resource companies on our list report quarterly financials, with Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) having reported earlier and Metalla still to come). Broadly, results were good, though not spectacular, with continued struggles to contain costs. Margins, however, are very strong, and most reported good cash flow numbers.

For most companies, paying down debt was a priority, and this quarter saw some companies go to net cash-positive positions, often after taking on debt for acquisitions or expansions. Most companies also bought back some shares, but there were few dividend increases as companies waited to see if the higher cash flows would be long-lasting.

As always, however, mining remains a difficult enterprise, and any company with several mines will often have a problem at one or more, be it a voracious government, an equipment failure, or a delay in spare parts. This quarter was no different.

Most of the companies had pre-released production, and for most of those that had, there were few financial surprises.

Another Miss for Barrick, Though Strong Year-End Expected

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported financial results as expected after pre-releasing production. Gold output missed estimates for the 11th straight quarter. However, the company continues to maintain its full-year guidance, albeit with gold production at the lower end. Since the beginning of the year, Barrick has been saying that it expects a strong fourth quarter, and it will have to be very strong to meet guidance.

With both Pueblo Viejo and Nevada Gold Mines continuing to improve, Barrick could get there, and of course, higher production will mean lower costs per ounce. Costs were largely contained, and the company reported strong free cash flow. However, the issues that have affected gold production all year, including delays at Pueblo Viejo and problems at Carlin in Nevada, are expected to continue next year. Barrick reduced its debt by 27% during the quarter. It also repurchased $95 million of shares, a departure for Barrick; this underscores both the strong cash flow as well as CEO Mark Bristow's frustration with the low stock price.

The company expects to replace its reserves at year's end. Barrick has world-class assets and some very large assets in the pipeline, most of which have been generated organically. It is a strong operator, and CEO Mark Bristow is a dynamo.

However, many of the company's mines are in high-risk jurisdictions, and much energy at the top is devoted to putting out the constant fires. Right now, the Mali situation remains unresolved, for example. (The CEO and other executives of large Australian miner Resolute were jailed by the military junta this morning, another indication of the risk of operating in that country.)

Barrick's shares have barely moved this year, while the XAU index is up 25%. In addition to the high political risk, investors are punishing the company for its repeatedly optimistic guidance. (Rick Rule was quoted on Bloomberg as saying, "It would be useful if the quarterly performance matched guidance." Very understated!)

However, Barrick remains very undervalued on an asset basis, even accounting for the political risk — close to its lowest price-to-NAV in its history — and is a Good Buy here.

Pan American Sees Record Cash Flows in Strong Quarter

Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) had a strong financial quarter with record revenue, cash flow, and free cash flow. Gold output was up a little in the last quarter but below estimates, while silver production jumped 20% over the last quarter. Most mines ran well; a single mine, El Peñon, accounted for the lower-than-expected gold production.

The company reiterated its full-year operating guidance, though with silver production at the low end of the range. Costs were a little above expectations. Cash increased by over $100 million to $570 million as net debt decreased.

La Colorada mine operations are now improving following ventilation upgrades; the company continues to seek a partner for the huge Skarn deposit. The sale of La Arena (to a Chinese company) has been approved by the Canadian government (though with the requirement that Pan American has an offtake agreement for 60% of the copper supply for sale into North American markets). Lastly, there was no material update on Escobal in Guatemala, though the new government appointed a vice minister who is responsible for the consultation process; this position had been vacant since April.

The process is exceedingly slow but the movement is in the right direction. Pan American has strong management, and a balance sheet steadily improving after the Yamana acquisition. Obtaining a partner on La Colorada Skarn as well as approval to restart Escobal are two big catalysts that would see the stock price move meaningfully higher. I don't expect either of those this year, however.

We are holding, ready to buy on any addition correction.

Another Miss for Franco, as Guidance Lowered

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) had another miss, albeit a small one, but more importantly, lowered its full-year production guidance, though it said it expected its revenue to be higher. The new guidance, at the midpoint, is for 455,000 GEOs, down from 510,000. The high price of gold means that revenue from other metals, particularly oil and gas, is lower when converted to gold equivalent ounces; lower production is also expected at Candelaria, where gold grades have been lower than expected. GEOs in the quarter were flat in the second quarter, though meaningfully lower than in the year-ago quarter, even after excluding Cobre Panama (110K compared with 126K), while revenue was up because of the higher gold price.

The quarter saw revenues from the new Tocantinzinho mine and increased revenue from the new Greenstone mine. Both of these should generate increased revenue in the fourth quarter as the mines ramp up. Offsetting the new revenue is lower revenue from Candelaria. The balance sheet is rock solid, with cash of $1.3 billion, down a little, reflecting some new investments.

CEO Paul Brink noted that Franco continues to be interested in commodities other than gold but is strategic looking for large, long-life assets that it can buy during downturns. It recently invested $1 million in an off-take in potash. Franco has strong management skills and a rock-solid balance sheet. It is methodical in its execution. Franco remains a core holding for us, notwithstanding the recent hic-coughs at some mines.

With a 7.5% stock price decline after the earnings, it is a Buy.

Wheaton Has Strong Quarter Without Surprises

Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) reported record quarterly cash flow, in line with expectations, and it reiterated its annual guidance, which it is tracking well. There is near-term growth, with the Salobo III expansion on track for completion by the end of the year and the first revenue from the new Blackwater mine.

Other projects on which Wheaton holds streams are advancing. Wheaton has a rock-solid balance sheet, with cash of $694 million, no debt, and an unused line of credit of $2 billion. Wheaton discussed it would be willing to lend to companies as well as buy equity if it helped get a good stream deal, but emphasized that it does not want a share in operations.

It also poured cold water on the idea of buying smaller royalty companies, saying it can generate new streams more-or-less at NAV without paying the premiums required in buying a company. Wheaton has strong management with a very disciplined approach to buying assets. It has a solid balance sheet and a good pipeline.

It is a long-term holding for us, but we are holding here.

Royal Exceeds Expectations With New Mines

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) had a strong quarter with revenue, a record, up 5% on the previous quarter and higher than expected, as two new mines start generating revenue (Iamgold's Cȏté in Ontario and Kinross' Manh Choh in Alaksa). The company maintained its full-year GEO guidance, though silver sales are expected to be lower than previously guided.

The company emphasized its high gold (76%) and high low-risk revenue (60% from the U.S., Canada and Australia). Royal, as expected, repaid the last of its debt and now has $128 million cash plus a full $1 billion available on its credit facility. Separately, Royal stated that because of new SEC regulations, it is no longer permitted to provide statements on reserves and resources at many of the mines on which it has royalties (essentially mines owned by non-U.S. companies) in its filings.

Investors will now have to track down that information from individual companies. (Thanks, SEC, for once again helping the little guy. Ed. note: sarcasm.) Royal is a solid royalty company with arguably more leverage than some.

It's a long-term position for us, but it's a Hold right now.

Osisko Had Good Quarter and Sees Growth Next Year

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) had a good quarter, with revenue above revised estimates, following the disastrous second quarter, which saw the closure of the Eagle Mine in the Yukon after a rockfall. Two new projects are expected to generate revenue for Osisko by year-end (Tocantinzinho and Namdini), while others, including CSA copper, are expected to see increased output. Looking into next year, these mines will continue their ramp-up and full contributions to Osisko, but the company's second-largest revenue contributor, Capstone's Mantos Blancos, has fixed its plant issues and a ramp up to full capacity into next year is underway.

Osisko's position in Osisko Development was reduced meaningfully from about 39% to 24% after OD undertook a large financing for its Cariboo project, of which OR did not participate. OR had said it would aim to reduce its holding by not participating in financings rather than by selling shares. Osisko has a cash margin of 97%, the leader among its peers; it is also a leader ranked in revenue from top tier jurisdictions.

It currently generates 26% of its revenues from silver and expects that to increase to around 30% over the next two years as Mantos Blanco ramps up. The balance sheet has improved tremendously. Net debt is at $22 million, down from $250 million a year ago, after an additional $27 million repayment on its credit facility; the company should be net cash positive in early 2025. CEO Jason Attew has done a great job since he took over a year ago. The balance sheet is strong and the pipeline deep.

We are holding for now.

Fortuna Has Strong Quarter With Operations on Track

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) reported a strong quarter, with record sales and cash flow some 20% above expectations and earnings 50% above, while the company further cut debt to now be net cash positive. Costs are under control, albeit at the upper end of guidance. The company maintained its full-year guidance on production and costs. All operations performed well. The company has decided to undertake a progressive mine closure at San Jose in Mexico over an eight-year period.

Mining and processing will continue for about 18 months but at a reduced rate. A closure plan will be updated over the next quarter. With strong cash flow, Fortuna continued to pay down its debt and is now net cash positive. The cash flow also allowed the company to increase its exploration budget, with the Kingfisher deposit at Séguéla the prime focus.

The Diamba Sud project in Senegal is the largest greenfield project with a budget of $13 million. The company also sees opportunities at its Lindero Mine in Argentina. The company, having exhausted its rights to repatriate cash surpluses under its intercompany financing, now must keep surpluses in country in pesos, though CEO Jorge Ganoza noted that the government has indicated that it wants to lift the exchange control restrictions. Fortuna has solid, conservative management, with a strong balance sheet, and strong building and operating skills. It has experienced a series of blips at several of its mines over the past couple of years, many completely outside its control, but operations are now running on track. Fortuna is a top intermediate miner, with considerable potential at its existing projects.

The stock is undervalued and a Buy.

Altius' Revenue Soft While It Awaits Silicon Arbitration

Altius Minerals Corp. (ALS:TSX.V) had already reported its preliminary royalty revenue, as well as its PG portfolio, and there were no surprises in the quarterly financials. Royalty revenue was slightly down, from $18.2 million in Q2 to $16.6, on lower potash prices and lower dividends from Labrador Iron Ore (due to forest fires).

The Genesee coal mine is now closed. Higher base metal prices and growth in renewables helped to offset those declines. G&A was higher than expected. Looking ahead, continued revenue growth is anticipated from Altius Renewable Royalties, which is expected to complete its go-private transaction by year-end. Altius noted that it is not required to put more money into any new deals, though did take up its rights when ARR raised equity. There are also three mines in the base metals and battery metals segment currently in construction.

The potash price, after spiking in 2022 on the Russian invasion of Ukraine, is returning to its long-term trend, so we are not looking at any meaningful price declines going forward. Overall, the company is expecting more organic growth than M&A in the period ahead.

What To Do with Silicon?

There is no update on the Silicon royalty arbitration. CEO Brian Dalton repeated that initial indications of interest in acquiring the royalty have been received and that once the arbitration has been decided, it will seek firm offers. As before, he indicated that options remain open, either selling it outright, swapping for base metals royalties as part of the sale; or keeping it in their portfolio.

He indicated that although Altius had not been interested in competing to buy precious metals royalties because others have lower costs of capital, that does not mean that they would not want to keep a good gold royalty. Altius has CA$26 million in cash with $109 drawn on credit facility. It made a small repayment on its debt and did not buy back any shares during the quarter.

Altius is a core holding for broad exposure to commodities. It has several assets in its portfolio with considerable potential but with uncertain timing (such as the Kami iron ore deposit). It may not achieve the kind of value for the Silicon royalty that it wants, but if it decided to keep it, that value would simply increase over time as the mine is developed and then generate significant cash flow thereafter. The arbitration decision is the next catalyst for this royalty and for the company.

We are holding and will add to positions on any pullback.

Gladstone Lower After Major Distribution

Gladstone Investment Corp. (GAIN: NASDAQ) had a good quarter, though both net investment income and net asset value were lower after a successful exit with a gain of $42 million in the prior quarter, which was distributed to shareholders in a special dividend (of 70 cents per share), thus reducing the NAV (though not by the full extent of distributions).

Though four of Gladstone's 22 existing portfolio companies are on nonaccrual currently, the company said there were no portfolio-wide issues, and expects one of these, which is now profitable again, to come back on accrual status over the next year. The company said it is "an extremely active investment period" with several potential new investments in the works. The balance sheet is strong, with low leverage and positive liquidity for new investments.

The stock has a current yield of 7.2% on its fully covered monthly distributions, but as we have commented before many times, Gladstone has a higher allocation to equity than other Business Development Companies, and since it uses net capital gains to fund special distributions, the actual yield is higher. For the last 12 months, that amounts to over 13%, though there is no guarantee that the special distributions will continue at that level. It is trading just a tad above NAV.

For income investors with a long-term view, Gladstone can be bought here, though for others, or to add to positions, we would like a little further pullback.

TOP BUYS this week, in addition to above, include Nestle SA (NESN:VX; NSRGY:OTC), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), Midland Exploration Inc. (MD:TSX.V), Orogen Royalties Inc. (OGN:TSX.V), and Fox River Resources Corp. (FOX:CNSX). We shall shortly be sending an updated table on our "Current Positions" with revised buy recommendations.