Gold Royalty Companies Continue to Progress

Commodities / Gold and Silver Stocks 2016 Mar 31, 2016 - 07:56 AM GMT

The large gold royalty companies remain among our top holdings, notwithstanding the high valuations and our comments on the overall gold market and short-term concern on the gold stocks.

Osisko Gold Royalties Ltd. (OR:TSX, $12.90) is all cashed up, as its two core royalties proceed well. It has about CA$650 million available for investments (of which CA$260 million is cash), after spending about CA$220 million in the last year on several royalties.

In addition to the cash and credit, Osisko now has 53 royalties. Its two core royalties are performing well. Canadian Malarctic offers a high 5% royalty on one of Canada's premier mines, with a long-life, low-cost profile, and continues to meet guidance. The new Éléonore, another long-life, low-cost mine, is overcoming ramp-up hurdles as the advance royalty is now fully paid.

Cashed up and ready to pounce
With the cash, Osisko is on the hunt for new assets, preferably a large, cash-flowing asset. With its strong core assets, growing royalty investments, innovative royalty growth model, and strong balance sheet, Osisko remains a strong holding. As a newer company with less diversified revenue sources, the stock is trading at a discount to the group (1.2 times book versus over 3 for Franco), and the stock has underperformed the last six months. At the current depressed price—the stock is down from over $13.50 three days ago—Osisko is a buy.

An unusual loss and impairment for Franco
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, $60.82) continues to perform well, meeting guidance for last year, despite lower commodity prices generally. It saw an unusual loss for the quarter, because of impairments, both on oil and gas assets and also, unusually, on a mineral property (Rubicon's Phoenix mine).

Last quarter, Franco drew down on its line of credit, adding debt for the first time ever. This was to acquire the Antapaccay stream from Glencore. By year-end, it had paid half of the $460 million it drew, and, following a financing, "intends to repay it all" by the end of this month, becoming debt free again. Currently, Franco has $1.2 billion available credit for new deals, so is certainly in a strong position to acquire more royalties or streams. As can be seen from recent transactions involving not only Franco but also Osisko, Royal Gold, and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), there is potential for more streams from the base metal producers who continue to struggle with low prices and high debt levels.

Strong growth just from existing assets
The year ahead promises growth from existing assets, including a full-year from Antamina as well as the start of revenue from Antapaccay (and a smaller royalty, Karma). There is substantial growth over the next five years even without adding another asset. Despite high valuations, Franco remains a core holding, for the top management, rock-solid balance sheet, broad diversity of assets and strong political profile, and the ability to grow into its valuations. Given that we already hold Franco, we will wait for any correction to add to positions.

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, $49.50) has seen its stock double from the depressed levels of mid-January. There is nothing to report now, but would hold, and await a pullback before buying more. It remains good value, but is due for a pause.

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 own, or my family owns, shares of the following companies mentioned in this interview: Osisko Gold Royalties Ltd., Franco-Nevada Corp. and Royal Gold Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. Clients of Adrian Day Asset Management hold shares of the following companies mentioned in this interview: Osisko Gold Royalties Ltd., Franco-Nevada Corp. and Royal Gold Inc.
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