Franco's Largest Asset Is at Risk

Source: Adrian Day   12/19/2022

Today, expert Adrian Day gives updates on developments affecting several of his favorite companies, mostly positive but with one potentially damaging piece of news.

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) shares were down sharply after the government of Panama effectively seized First Quantum’s Cobre Panama mine, on which Franco has its largest stream, representing about 15% of both Net Asset Value and revenues.

The government announced it had ordered the mine shut down and that it was taking over care and maintenance until another “partner” could be found. There has been a long-simmering dispute over payments due from the company to the government. The mine represents the country’s largest investment and a large tax contributor.

The move stunned the local business community as well as Canada’s mining industry. It may be a negotiating tactic by the government, but given the drastic action, it would seem that there is something else behind this. Perhaps the government simply wants to show that it is serious, though that would be a pretty high-stakes move.

We suspect, however, that there will be a resolution. The mine means too much to First Quantum and to the government, whose reputation would be severely damaged were the seizure to hold. In fact, the mine is continuing to operate since halting operations would require resolutions to rescind the contracts, thus allowing time for talks to continue. 

Franco Will Survive in Any Event

Franco has a gold stream on the copper mine that has only just achieved a full run rate. With over US$1 billion in cash, Franco can withstand the financial risk. It may yet reach its annual guidance, even with the shortfall from Cobre Panama. More important is whether First Quantum resumes ownership since streams are usually with the operator.

The shares fell from Wednesday’s close of US$144, where they were arguably ahead of themselves anyway. Franco has a rock-solid balance sheet, top management, and a well-diversified portfolio. It is still too early to jump back in — the shares are still well above where they were early last month — and the Panama issue may drag on for a while, but we shall certainly be looking for opportunities to buy shares in this blue chip.

Orogen Cash-flow Positive With Jump in Revenues

Orogen Royalties Inc. (OGN:TSX.V) reported a strong quarter, with royalty revenue from Ermitaño in Mexico up nearly 40% from previous quarters. The company also generated net income from its prospect generation business, involving gains on project sales and active option agreements. It has also been busy with transactions; so far this year, nine deals have been completed adding eight royalties. Overall, the company achieved positive cash flow from operations and ended the quarter with about CA$8.5 in cash and short-term investments.

The year ahead promises to be a very strong one. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) has indicated that all the ore feed for its mill in 2023 will come from Ermitaño (rather than a blend with the original lower-grade Santa Elena deposit), which should boost Orogen’s revenue.

This Could Be Huge and May Spur M&A

In addition, in February, AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) is expected to publish a pre-feasibility study on its central Silicon deposit as well as a conceptual study of the Merlin deposit, in southern Nevada. Orogen holds a 1% royalty on an area covering both deposits. Altius has a 1.5% royalty over the same area and also claims a royalty of a “larger area of interest,” but Anglo is disputing that, and the claim is currently in arbitration.

We have been looking for some transaction of some type involving Orogen and Altius’ Silicon royalties, but the arbitration may delay this. Anglo has been publicly excited about the Silicon district, indicating it expects a multidecade operation. Silicon itself, known to be mineralized to 625 meters, remains open at depth. The district is clearly large and Anglo is planning to take its time in methodically studying the entire area.

Orogen is one of our top holdings. After meandering around the CA$0,40 mark for the past six months, the stock suddenly jumped last week amid higher-than-normal volume. The company has been doing some investor meetings, and there is no other reason for stock strength that we can discern.

Although we like Orogen and believe it represents strong value even at the higher price, we will hold off on additional buying to see if there is an easing over the normally quiet holiday period. But we want to be building positions. 

More Activity and Success at Midland Means Shares Should Be Owned

Midland Exploration Inc. (MD:TSX.V) continues to achieve exploration success at various properties; it is in as good a position as any exploration company for discovery success, while its shares continue to languish, providing an excellent opportunity for investors to continue to accumulate.

First, Midland announced the discovery of a large copper-gold-silver-molybdenum mineralized system on its La Peltrie property in the Detour region of northern Quebec. The property is under the option to Probe Metals. The discovery was made from a single drill hole in the first drilling but suggests a larger system. The companies plan to follow up early next year.

Earlier, Midland had reported the discovery of at least two new gold-bearing structures during a recent prospecting program on the Laflamme joint-venture project in Abitibi, Quebec. This is an early stage, but the area is highly prospective for new discoveries.

Separately, the company announced it was beginning a 10,000-metre drilling program on its gold and nickel-copper projects in the Abitibi region, designed to test more than 40 of its targets developed over the past few years. The targets are on five separate projects, and drilling will continue until March.

Midland has a solid balance sheet and strong management. It has numerous projects, including 10 active joint ventures, across Quebec and is very active. With a market cap of only CA$28 million, it is very undervalued and trading around its all-time lows. It is a strong Buy at this level. 

Altius Ups Interest in Renewal Unit

Altius Minerals Corp. (ALS:TSX.V) invested a further US$21 million in Altius Renewal Royalties (ARR.NY), which in turn holds 50% of Great Bear Renewables. This brings Altius’ interest in ARR to 59%. Great Bear, which is already cash flow positive, also announced a US$46 million royalty investment in a California solar project. See also comments above regarding Altius’ Silicon royalty.

Altius is a core holding for us, with innovative management which has the discipline to act counter-cyclically — essential in a highly cyclical sector — and a diversified group of royalties. There are several potential growth opportunities in the next year or two.

We recommend buying back in July when the shares were around US$16. Given the volatility of the stock, we will wait for new buying opportunities.

Nestle Reaffirms Focus and Continues To Grow

Nestle SA (NESN:VX; NSRGY:OTC) confirmed an 8% organic sales growth target and upper single-digit earnings-per-share annual growth. At its investor seminar in Europe, it also confirmed that it would continue to focus on food and beverages, including Nestlé Health Science and nutritional health products, as an additional growth platform.

The company also said it aims to continue increasing its annual dividend each year. Analyst forecasts are for an April dividend of Sfr 3, up from 2.80 earlier this year. Next year’s dividend has not yet been announced. Nestlé also confirmed its ongoing program to repurchase CHF 20 billion of its shares over the period 2022 to 2024.

The company has already bought around CHF 9.7 billion of shares in 2022. Nestlé is a core global holding, and for those who do not already own it, it can be bought at this level.

TOP BUYS, in addition to above, include Ares Capital Corp. (ARCC:NASDAQ).

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Adrian Day 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. www.AdrianDayGlobalAnalyst.com. 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.

Disclosures:

1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: All. 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, which is unaffiliated with Adrian Day’s newsletter, hold shares of the following companies mentioned in this article: All. I determined which companies would be included in this article based on my research and understanding of the sector.

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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 the 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 decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company release. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of First Majestic Silver Corp., a company mentioned in this article.

( Companies Mentioned: ALS:TSX.V,
AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE,
FR:TSX; AG:NYSE; FMV:FSE,
FNV:TSX; FNV:NYSE,
MD:TSX.V,
NESN:VX; NSRGY:OTC,
OGN:TSX.V,
)

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gold
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copper
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first majestic silver corp
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midland-exploration-inc
midland exploration inc
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orogen royalties inc