Source: Adrian Day for Streetwise Reports 12/27/2018
Money manager Adrian Day reviews recent developments at a number of resource companies in his portfolio.
Wheaton Precious Metals Corp. (WPM, NY, 18.91) settled its bitter dispute with the Canadian tax authorities over tax treatment of royalties purchased though its offshore subsidiaries. Wheaton won on the central question of Canadian taxation on foreign income, though certain minor adjustments in the income recorded by Wheaton in Canada will be made. Though the dispute covered the years from 2005 to 2010, the settlement also covers years to 2015, and future years are unlikely to be challenged. As a result of the positive settlement, Wheaton’s stock jumped from the low $16 range, but, with the tax dispute out of the way, remains good value here.
We can expect that the CRA action against Franco-Nevada will also be dropped. Franco would not have been affected much for prior years, though had the CRA position stood, would have been affected significantly going forward.
Osisko to buy back shares with royalty proceeds
Osisko Gold Royalties Ltd. (OR, NY, 8.40), after receiving $118 million (C$159 million) last week from Pretium’s exercise of its option to buy back a royalty of Pretium’s Brucejack mine, has repaid C$58 million outstanding on its revolving credit facility, and instituted a share repurchase program of up to C$100 million. Approximately C$30 million remains on the credit facility. Since the program was announced earlier in the month, the share price is up virtually $1. Osisko remains a buy.
More bad news for Evrim as partner backs out
Evrim Resources Corp. (EVM, Toronto, 0.295) received more bad news the past few days, following on the heels on disappointing drill results at its Caule property in Mexico. Now Antofagasta has withdrawn from two copper-gold projects in British Columbia into which it was earning.
Antofagasta, as a partner, tends to spend fairly aggressively, but exit quickly if it doesn’t find what it is looking for, all the more so when its global exploration budgets are being cut. So this does not signify that the properties are duds. The two projects, Axe and Ball Creek, are returned to 100% Evrim ownership, after Antofagasta spent over $2 million on the projects, which it optioned in May and December last year. Obviously, Evrim will now review the data from Antofagasta’s work and decide on future moves. Ball Creek in particular remains interesting. It is a large land package, and has never been drilled under Evrim ownership, despite some strong targets. So this property in particular should find another partner.
Lots of activity and very undervalued
Evrim has two drill programs underway (concluding current Cuale drilling and at the optioned-out Cerro Cascaron). Coeur is planning drilling next quarter at Sarape, which it has optioned, while First Majestic has extensive drilling underway at the Ermitano project on which Evrim has a royalty. So there is plenty of activity on various properties; Cuale is by no means dead, as I emphasized when the first results came out.
Evrim is selling for less than its cash (around $12 million) and even the most conservative value of its Ermitano royalty. On current resources alone, it is worth a minimum of $20 million, while current drilling will likely expand the resource to where the royalty could be worth double that. There is no suggestion that Evrim is planning on selling the royalty—it does not need the money now while a revenue stream in the years ahead could be very attractive for an exploration company—but it could sell it for a good price in a flash, were it so inclined.
In short, Evrim (at C$25 million market cap) is a bargain, with all the drilling, joint ventures and exploration coming free; the sell-off from Cuale drilling was well overdone, and coming in tax-loss selling season kept the stock depressed. Take advantage of this steal—with one of the best junior teams around—and buy more shares now.
Almaden spin-outs move ahead
Azucar Minerals Ltd. (AMZ, Toronto, 0.415), spun off from Almaden last year, reported strong gold and copper mineralization at the drilling at its Norte Zone on the El Cobre copper-gold project in Veracruz State, Mexico. Mineralization appears open to depth, and drilling is planned to test for deep high-grade mineralization. Drilling is also planned for step outs beyond current known mineralization. Azucar has been hit by tax-loss selling, but at the current level, can be accumulated.
Almadex Minerals Ltd. (DEX, Toronto, 0.27), spun off from Azucar earlier in the year, has been a bit of the Cinderella of the “Almaden group” recently, with both Almaden and Azucar focusing on relatively advanced projects. Now the feasibility on Ixtaca has been completed and Azucar has a major investor (Newcrest), and both companies have their own senior management, the father and son Poliquin team are likely to devote a little more time to the exploration spin-off this coming year. An update was published last week indicating that the company’s portfolio had been reviewed and various field work programs initiated. Of the projects, El Chato remains a focus, with drilling targets identified. The setting is believed to be similar to that of El Cobre. A small drill program was initiated at another project, Yago, in Nayarit State, as a proof of concept.
Looking ahead to 2019, the company expects further work, initial drill testing on “several” of its projects—Almadex owns its own drills, significantly reducing the cost of drilling—and continued regional exploration work. The current stock price just about covers the cash, bullion, shares and hard assets (the drills) that Almadex owns, giving
virtually no value to the royalties and exploration ground. Though nothing may be imminent, Almadex is a strong buy at the current level for patient investors.
Midland moves ahead of new discovery
Midland Exploration Inc. (MD, Toronto, 0.86) is busy at its new Mythril copper-gold-molybdenum discovery in James Bay, Quebec, with new land acquisitions, and an imminent helicopter magnetic survey. Other work will follow to gain an understanding of the property and possibly generate targets for drilling in the spring. High-grade surface showings were discovered during the initial look at the property, generating considerable excitement. Over the winter, we would look to buy on any weakness.
Altius slammed on base metal weakness
Altius Minerals Corp. (ALS, Toronto, 10.68) has seen the share price slammed on overall weakness in base metals and other resources on recessionary feats. In addition, the company has filed suit against the governments of Alberta and Canada for $190 million in compensation for a change in policy ending coal-fired electrical generation (and payment of coal royalties) by 2030. The company has hoped to receive compensation with other affected parties, but the filing of the suit suggests these discussions are not proceeding well. Altius’ diversified portfolio of revenue-generating royalties, its deep portfolio of projects both advanced and early state, its innovative management and strong balance sheet all make this a great buy right now.
Lara continues to be active, keeping spend rate low
Lara Exploration Ltd. (LRA, Toronto, 0.44) has optioned its Planalto Copper project in Northern Brazil to Capstone Mining. Capstone will make two payments to Lara, US$150,000 now and another $200,000 following receipt of a drill permit. There are various spending and time hurdles for Capstone to earn into the project. To earn an initial 49%, it must spend $5 million over three years. Other payments to Lara and project hurdles can get Capstone to 70%. It’s a good deal for Lara, which gets some cash early on and relatively aggressive spending commitments.
Lara continues work on other projects, announcing potential for nickel-copper-cobalt sulphide mineralization at another property in Brazil. Lara typically generates projects through intensive but low-cost work, and then options the properties in return for payments and work commitments. Based on a record of active generation, two high-potential projects as well as participation in a potentially company maker lawsuit, aa balance sheet that with low-spend and payments coming in will preclude the need for another raise at these levels, Lara is a strong buy here.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Osisko Gold Royalties, Evrim Resources, Lara Exploration, Altius Minerals, Midland Exploration. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Wheaton Precious Metals, Franco-Nevada, Osisko Gold Royalties, Almaden Minerals, Azucar Minerals, Almadex Minerals, Altius Minerals, Lara Exploration, Evrim Resources and Midland Exploration. 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: DEX:TSX.V,
ALS:TSX.V,
AMZ:TSX.V; AXDDF:OTXQX,
EVM:TSX.V,
LRA:TSX.V,
MD:TSX.V,
OR:TSX; OR:NYSE,
WPM:TSX; WPM:NYSE,
)