Adrian Day - Mon, Aug 14, 2017

Still Good Values Despite High Market

Adrian DayMoney manager Adrian Day updates developments at several companies in his portfolio.

Up chart

Gladstone Investment Corp. (GAIN, NASDAQ 9.65, 8%) had a mixed quarter, with total investment income up despite slow investment activity--$2.1 million into existing portfolio companies, but no new investments—but per-share metrics declines due to the recent share issuance. Given the shares were issued below net asset value, NAV per share fell. The company notes the difficult investing climate, with high competition pushing up prices. We prefer companies issuing shares below NAV unless there is a near-term and compelling use of the proceeds. Gladstone appears not to have such a use, and still has extensive availability on its credit line.

Credit quality remains stable, though loans on nonaccrual amount to almost 7% of the portfolio at cost. Some loans were written down, though most of the companies where loans were written down are still paying as agreed. Often, investments are written down simply because of variations in prices in the marketplace, rather than any concern about a particular loan.

Dividend boosted

Management's optimism was evidenced by an increase in the monthly dividend, as well as a special dividend paid in June. The company said it expects to pay a supplemental distribution semi-annually going forward, and would use capital gains and other income received on exits to fund such dividends. GAIN, recall, has about 20% of its total NAV in equity investments, unusual for a Business Development Company (BDC), with more opportunities for gains than most.

Selling very close to post-credit crisis highs—it hit $9.79 earlier in the month—and at long-term high valuations, more-or-less at book and yielding just under 8%—we are holding Gladstone Investment, but not buying at this time.

High yield while you wait

Ares Capital Corp. (ARCC, NASDAQ, 26.35, 9.3%) also saw income-per-share down, again because of a larger share count. In Ares' case, it follows the acquisition at the beginning of the year of American Capital, which owned lower-yielding assets as well as significant equity, thus diluting the income per share. The net income is also below the dividend, which is generally a matter of concern for BDCs.

In Ares' case, the external manager is waiving part of its fee following the ACAS merger; it has a supportive "parent"; and Ares itself has carry-over income that can help cushion the gap, so we are not too concerned about the dividend.

The digestion of the ACAS acquisition may take a little while, as Ares rotates out of low-yielding assets into higher-yielding loans on its own platform, and sells equity investments for the same purposes, though this can take time.

Strong record and low valuations

We are willing to be patient during this period—and a better-than-9% yield helps one maintain patience. Ares offers a stable dividend and a strong management, and at very attractive valuations. Historically, it has had among the top-level metrics, with high income-to-earnings conversion (over 100% compared with 80% for the BDC group); low credit losses; and consistent equity raises above NAV. Today's valuation is well below the stock's historical average valuations.

We don't think there is a rush, and you may need to be patient before we see a higher stock price of increased dividends, but at today's price, Ares is a very good long-term buy.

Still undervalued despite strong rally

Osisko Gold Royalties Ltd. (OR, NY, 12.53) reported on its latest quarter that largely updated the Orion acquisition we discussed recently. However, it also reported strong results at its legacy assets, particularly strong production at Canadian Malartic. Although production was down 15% at Eleonore, this largely was expected as the company focuses on additional development.

Following the closing of the Orion acquisition, Osisko's cash is down to around $100 million, with debt of around $200 million. However, the company also has a securities portfolio with a market value of around $425 million (on a purchase price of less than $300 million), so does have liquidity. In addition, it continues to have strong support of Quebec pension funds, who supported the Orion transaction, so access to capital is not a problem.

Discount only partially justified

There is concern that some of the most attractive royalties it just acquired (notably on Pretium's Brucejack mine) could be repurchased by the mine owners, removing the long-term upside. Nonetheless, Osisko continues to sell at a meaningful valuation discount to other large royalty companies, admittedly more diversified ones, and this continues to make Osisko a relatively attractive stock. On a price to NAV basis, Osisko trades at 1.1 times compared with the average for its peers of 1.8 x. Price to next year's EBITDA is only 14 x, compared with the peer average of 19 x. Given the volatility in gold and Osisko, we are not buying today, but would look to buy on any pullback.

All dressed up and ready to date!

Vista Gold Corp. (VGZ, NY, 0.74) announced it would undertake an updated Prefeasibility Study (PFS) on its Mt. Todd project, following completion of various metallurgical studies. Incorporating the results of the current studies as well as new economics since the last PFS in 2013, Vista expects the study, to be released by year-end, to show improved economics. The company has undertaken several studies since the last PFS, including a new flowsheet for improved recoveries at the end of last year.

Vista is in a strong position, owning the largest undeveloped gold deposit in Australia, a world-class asset in a top jurisdiction. With $23.6 million in working capital—most of it in cash—Vista has sufficient funds to bring Mt. Todd to a production decision without additional dilutive financing. The goal is to remove development and production risks, and have a deposit attractive to a potential suitor.

Some unusual trading activity last Monday took the stock down—the prior week, it traded in the mid-80s, itself down from earlier in the year and a very attractive price—making the current level a "strong buy."

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."

Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Gladstone Investment, Ares Capital, Osisko Gold Royalties, Vista Gold. 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: Gladstone Investment, Ares Capital, Osisko Gold Royalties, Vista Gold. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: Pretium Resources Inc. Streetwise Reports does not accept stock in exchange for its services. Click below for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article, until one week after the publication of the interview or article. As of the date of this interview, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Osisko Gold Royalties and Vista Gold, companies mentioned in this article.

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