Expert Says Royalties Have Advantage During Price Inflation

More resource companies released quarterly earnings, but since in all cases production and other items had been pre-released, there were few surprises for expert Adrian Day.

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) had pre-released in sales volumes, so its full results were not a surprise. The company maintained its full-year guidance with all major operations continuing to perform well. The ramp-up continues at Royal’s next major asset, Khoemacau in Botswana, a copper mine on which it holds a silver stream.

Full production is expected by the end of the year. Its margin was 78%, the same as a year ago, despite price inflation over that period, though G&A increased on higher ESG costs. More significant are two recent large acquisitions, Great Bear Royalties Corp. and the recent acquisition of a royalty on the ground that includes the Cortez mine and adjacent development land.

Royal paid $525 million in cash to Rio Tinto for the 3% royalty after operator Barrick declined to exercise its Right of First Offer. (Technically, the royalty is a sliding scale, but the 3% rate kicks in on any gold price above $900.) Other royalties on the land, including Royal’s existing Cortez mine NSR, are deducted from payments on this new royalty.

Costly Acquisitions but Resource Growth Expected


The company says these two acquisitions add duration, scale, and optionality to its portfolio, but they came at a price. Both royalties were acquired for prices considered “generous,” though Royal notes that it is not afraid to be aggressive with world-class opportunities and it expects resource growth.

Cash on hand and existing credit lines can fund the acquisitions; about $700 million will come from its credit line. After these two acquisitions have closed, Royal will have about $800 million in available liquidity for further transactions, which we expect.

Royal is making a dash to partially bridge the gap with the big two (Franco and Wheaton) as well as diversify its revenue sources. Royal is a buy at this price. 

Osisko Has Built-in Growth Ahead


Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) had a strong quarter, with revenues already released earlier, although the consolidation of Osisko Development continued to drag on headline earnings as well as confuse some analysts. Gold-equivalent ounces (“GEOs”) hit a record with a strong second half expected as Mantos continues its ramp up, with the Eagle Mine always having a strong second half due to cold weather hampering operations in the first.

The Renaud diamond mine is expected to continue to generate revenue for OR, as well as pay down its debt. A stronger 2023 is also expected as growth will come from the continued ramping up of existing operations. Beyond that, several projects are moving toward the late stages of feasibility work.

Osisko Gold now holds 44% of ODV and is hopeful that it can avoid the necessity of consolidating financials soon. ODV has heavy expenses since it is developing projects, but these costs do not affect OR in practice.

Osisko is slightly cash positive and, having paid off its credit facility, now has $863 million available liquidity. In addition, it holds shares valued at almost $400 million, with most of that ($250 million) in ODV and most of the rest in various other Osisko spin-offs. Given its disciplined approach and built-in growth, OR is a Buy.

Barrick Is Keeping Costs Controlled


Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported Q2 results as expected, not surprisingly given that it has pre-released production and provided guidance for costs and realized prices. It reiterated its full-year guidance, noting that costs could be at the top end of its guidance due to global inflationary pressures.

Some developments will now be delayed, the expansion at Pueblo Viejo by three months due to late deliveries of some key components, up to six months for the Goldrush project in Nevada due to hearings and permitting, and the restart of Porgera until after Papua New Guinea elections. The company repurchased $182 million worth of shares, a new tool for Barrick.

Barrick, up from under $15 a month ago, remains a Buy.

Altius Looking for Opportunities Amid Market Weakness


Altius Minerals Corp. (ALS:TSX.V) reported Q2 earnings a little short of analyst estimates, having pre-released its attributable royalty revenues, which were a quarterly record, mainly due to higher commodity prices.

As previously noted, coal and potash (a record, up 16% quarter on quarter) came in strong, while base metals were soft (down 16% from the prior quarter). Base metals were hurt by the expected closure of the 777 Mine as well as reduced output at Chapada due to unusually heavy rainfalls; these two factors will affect the second-half results as well. The stock dividend was increased again, up one penny to 8 cents, an increase of 60% over the past 12 months.

The company does not expect major corporate activity, given high prices for royalties, but instead sees organic growth from existing assets, although there could be some market activity, given current market weakness, including adding to existing positions.

Champion Iron Ore is now expecting the feasibility of the Kami project, on which Altius holds a royalty, to be delayed into next year. The balance sheet is strong, with about $28 million cash held directly at Altius as well as equity in its “Project Generation” unit valued at almost $50 million. It has a debt of $122 million after drawing down further on its revolver for investments.

This last weekend I was in beautiful St. Johns, Newfoundland, to help celebrate
Altius’s 25th anniversary. It started with a student named Brian Dalton with
nothing but a vision, enthusiasm, and dedication. Together with a friend and a
lawyer, he raised $300,000 in an IPO, and they built one of the most respected
companies in Canada, one whose daily revenues now exceed $300,000.
Congratulations to Brian, John, Lawrence, Chad, Flora, Wanda, and all the
others who played a role in building this fabulous company. Thanks also for the
enjoyable weekend amid glorious mid-80s temperatures.

Altius is a core holding for us, providing exposure to a broad range of commodities inside a dynamic company whose management thinks and acts counter-cyclically. Given the move from under $16 a month ago, we would look to increase positions on any weakness. If you do not own, it can be bought here.

TOP BUYS now, in addition to those above, include Midland Exploration (MD, To., 0.35); Hutchison Port Holdings (HPHT, Singapore, US$0.225); Fortuna Silver (FSM.NY, 2.92).

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Adrian Day’s Disclosures

Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2022. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.


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