Silver Wheaton Corp. (SLW:NYSE; SLW:TSX US$18.69) is a streaming company with approximately 55% of its revenues from silver, 45% from gold. The stock has been extremely weak since it reported good quarterly results. Depreciation hurt the bottom line, but quarterly "production" rose 17%, up over 50% from a year ago. Most mines on which it holds streams performed well.
The problem is looking ahead. Production is essentially flat through 2020 after years of steady growth, though there is optionality on several nonproducing projects. The balance sheet, while reasonable, is a bit of a constraint on a major acquisition, with just $126 million in cash, and $1.35 billion drawn down on its line of credit. It could utilize the unused credit line for an acquisition, but a smaller transaction is more likely than a major producing one. The Canadian tax issue also hangs over the company.
Nonetheless, we like Silver Wheaton, and it is my favorite way to gain exposure to silver. The tax issue is priced into the stock for the most part, while there is good optionality on any gold or silver price increase. The stock is now undervalued relative to other major royalties and streamers (though part of that is justified given the differences in balance sheets). Silver Wheaton is a solid buy, under US$19.
Osisko pursues a different path
Osisko Gold Royalties Ltd. (OR:TSX US$9.99) is also undervalued relative to other royalty companies. All of its producing royalty mines are performing well. It has a very strong balance sheet, with $393 million in cash and no debt, though its costs are higher than the others due mostly to its "hybrid" model. Last quarter, $46 million was spent on investments in various companies. So far, these investments have performed reasonably well, but it is a departure from the pure royalty model and adds a layer of risk not found in the others.
Osisko has a strong growth profile, with attributable production going from about 35,000 ounces to about 45,000 by 2018. But the market is looking for Osisko to make a major new acquisition of a producing asset. It certainly has the firepower, including over $100 million in Labrador Iron Ore (LIF.UN:TSX) stock, which it indicated could be sold for a precious metal royalty. Osisko also has strong support from various Quebec government funds.
The company has indicated it is looking for a major producing royalty, and earlier indicated it expected a deal to take place this year. But it could also undertake two or three smaller transactions if the "big one" was not available.
Osisko is significantly undervalued relative to other large royalty companies, only partly justified by its "newness" and thus its smaller number of assets, and the higher risk from its more active investment approach. Osisko is a strong buy at this level.
The cream of the crop is a good buy again
Franco-Nevada Corp. (FNV:NYSE; FNV:TSX US$58.35) is the premier company in the sector. It continues to deliver, with a record quarter (on ounces, revenue and earnings), though revenue from its existing royalties in aggregate was down year-on-year. It has new assets, particularly from Antamina, that produced the record growth. Costs remain under control, with corporate costs stable at under 4% of revenue. With about $200 million in cash, no debt, and $1 billion available on its credit line, the balance sheet is strong.
Franco is the most diversified of the royalty companies. Some 94% of its revenue comes from precious metals (of which 66% is gold). It recently purchased an additional oil & gas royalty, in the Oklahoma shale play, its first in the U.S., for $100 million. The asset is already generating revenue, though that's expected to grow significantly.
Recent stock weakness has brought Franco into a good buying level again. Though on a valuation basis it remains the most expensive of the major royalty and streaming companies, it has a very diversified production base, a strong pipeline of currently nonproducing assets, and a solid balance sheet. It is selling at its lowest valuations in over a year, when gold was at a far different price. Franco is a strong buy at the current level, particularly for investors who do not already own it.
Royal on path to its goals
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX US$70.71) also continues to do well. Mt. Milligan now accounts for less than one-third of both NAV and revenue, diminishing the single-asset risk it posed only a year or so ago. Ideally, the company wants to bring it under 20%, and will do this by adding other assets over time. Royal recently added a "tuck-in" acquisition in the Cortez area of Nevada, where it got its start.
Royal has about half a billion in available liquidity (of which $133 million is cash), so we should expect another transaction (or two) in the near term, likely producing assets to further reduce dependency on Mt. Milligan.
Although Royal's stock has appreciated from the $65 level less than a month ago, it remains a solid long-term buy at the current level. There's no need to chase, however.
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."
