Expert Adrian Day reviews the quarterly earnings reports from the remaining precious metals companies on his list, including Wheaton Precious Metals and Franco Nevada, among others.
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) saw production and revenue up, but lower than expected, while the major development was the company reducing its full-year guidance as well as its five and 10-year outlooks. Wheaton has been hit by several incidents at its major assets: a slower underground ramp-up at Voisey’s Bay, flooding and mine plan changes at Stillwater, and, most significantly, maintenance issues at Salobo, its largest asset.
Production from Salobo is down 39% from a year ago, while the Phase III expansion could be delayed.
Nonetheless, these three assets continue to be multi-decade assets for Wheaton.
The balance sheet is strong, with cash of $449 million, no debt, and $2 billion undrawn on its credit facility.
Wheaton also agreed to terminate a stream it has on a small Glencore mine for $150 million.
Glencore said it could complete a sale on the mine only if there was no stream. This is the second stream that Wheaton has monetized in recent weeks, but we do not believe this is the start of a trend; both were special situations.
Wheaton is a Buy.
Franco Hits New Records on Back of Oil
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) had a record quarter and half-year on many metrics, including revenue. It also achieved its highest margins since it added streams to its portfolio of royalties. (Because streams involve an ongoing per-ounce payment, margins are lower.)
These positive results were on the back of strong results from oil and gas, with revenue up over 20% quarter-on-quarter.
Nonetheless, the number of gold equivalent ounces (GEOs) sold remained relatively flat from last year, and the company’s guidance remained the same.
Its cash cost per GEO actually fell 3%, again demonstrating that the royalty companies are relatively immune to cost pressures.
Its largest asset, the gold stream on Cobre Panama, is doing well as the operator reached record production. However, there has been increased civil unrest in Panama, mostly focused on temporary road blockades.
Although so far, Cobre Panama has not been affected, the blockades could affect the company if they continue.
Franco said it was looking at several mid-sized deals on gold mines rather than on the gold by-product of other mines. Franco has no debt and $1.9 billion in available capital.
It remains a core holding, and if you do not own it, this is a good level to buy.
Fortuna Has Solid Operations but Loses Officer
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) had already released operating results. Its financial results were lower than expected due to higher operating costs. Operations are going well, and the company reiterated its full-year guidance on both production and costs, though indicated that two mines, in particular, Lindero and San Jose, would likely see costs at the upper end of guidance.
The company emphasized that it is focusing on operational efficiencies and cost optimization. Séguéla, the new mine under construction in Cȏte d’Ivoire, continues on schedule and on budget.
It is now 66% complete. Somewhat surprising then that Paul Criddle, who had spearheaded the mine construction, resigned as COO for West Africa. He came from Roxgold and had played a key role in integrating the two companies.
The current VP will replace him. Negotiations with the government on a new mining convention continue.
Fortuna, despite its name, saw 70% of production from silver last quarter and only 20% from silver.
The balance sheet is strong, with a debt of $110 million and another $20 million available credit. Fortuna is a Buy at this level.
Another Weak Quarter for Pan American on Mining Halt
Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) had another weak quarter, the sixth in a row, with a negative surprise at the Dolores mine hurting production, earnings, and the outlook.
Dolores is a short-lived mine, and the company said it had stopped underground mining, causing a $99 million impairment charge and a loss for the quarter. Although it is maintaining its guidance for the full year, it is now expected to be at the lower end while
costs are expected to be at the high end.
Other assets did reasonably well, with La Colorada, in particular, having a strong performance, with production up 50% on last year as the new ventilation shaft seems to be working well.
In Guatemala, the “pre-consultation” with the local people on the possible restart of the Escobal mine has now been concluded, while the “consultation” phase has started, with the first meeting yesterday.
The stock has fallen significantly after the earnings report and is certainly an overreaction based on the actual news. But the market is increasingly concerned about the consistently weak quarters.
Also, it is unclear why the company did not announce the stoppage at the Dolores underground early rather than announce it as a surprise in the quarterly earnings report.
Notwithstanding this, the stock is now undervalued and can be bought.
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