Adrian Day - Mon, Nov 13, 2017

Two 'Low-Risk' Gold Companies Present Opportunities to Buy and Hold

Adrian DayIn his latest dispatch, Adrian Day of Adrian Day Asset Management reflects on the prospects and performance of a pair of gold companies.

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Advancing the Next Major Project for Franco

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$83.99) had another outstanding quarter, and has outperformed its peers handily this year. Significant development: It has invested for an additional 10% interest in Cobre Panama, the large copper deposit under construction by First Quantum, with commissioning scheduled for the second half of next year. The financing was in syndication with a unit of CK Hutchison of Hong Kong. Although the syndication was small, Franco used the deal to work through the details of such financing so it is prepared for a larger deal.

Cobre now represents nearly 15% of Franco's NAV, its largest single asset. The next two represent around 10% each; oil & gas in total is nearly 17% after the addition of two more relatively small assets. It has a total of 47 producing royalties and streams.

Franco also said it was confident in the structure it uses for offshore transactions, commenting (without names) on the dispute Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) has with the Canadian tax authorities. Assuming the same fact pattern, it would owe $10 million to $15 million for existing deals, an insignificant amount for Franco, though any negative ruling going forward would hit future revenues meaningfully. The company has $630 million in working capital, with available capital of $1.6 billion and no debt.

This is the one to own

We repeat what we have said many times: If you are to own only one gold company and hold it for a while, Franco is that company without question. While clearly demonstrating growth potential, it also has one of the lowest risk profiles of any gold stock. One analyst headed its recent report on the company "Commanding the safe-haven bid". While we would not see today's price—up from under $70 in early July—as a particularly bargain price to add to positions, nor for a trade, if you do not own, it's as good as any.

Mixed Results at Osisko

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$12.13) is the fourth largest of the "big four" royalty and streaming companies. It had mixed results in its latest quarter. Malartic (its largest royalty) was up, and will increase in the medium term following a successful expansion. Eleonore, however, will decline longer term on a reduction in its reserve estimate, though there will be a major increase in Q3/18 as the ramp-up continues. The newly acquired Renard Diamond mine had a rough first quarter for Osisko, on lower production.

The company is achieving exploration success at several of the companies in its "accelerator program," including Osisko Mining (in which it acquired an additional royalty). Under the program, Osisko funds exploration companies in return for shares and a royalty; the current investment portfolio is worth around $420 million.

Well Financed with Upside

Following a $300 million convertible debenture financing, Osisko will end the year with around $405 million in cash, plus access to credit, so has a solid balance sheet even after the large Orion acquisition.

Osisko also announced that its dividend reinvestment plan is now available to U.S. residents. Shares are either bought in the market, or—as this month—issued from treasury at a discount and without any commission.

Osisko remains the most "speculative" of the big four, but that is very much a relative assessment. A solid balance sheet, entrepreneurial management, aggressive exploration, and two large, long-life gold royalties as the foundation of the company, it's a relatively low-risk gold stock with plenty of upside. If you do not own, buy now.

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: Franco-Nevada and Osisko Mining. 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: Franco-Nevada and Osisko Mining.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: Wheaton Precious Metals. 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 Franco Nevada, Osisko Mining and Wheaton Precious Metals, companies mentioned in this article.

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