Freeport-McMoRan Inc. (FCX:NYSE, 11.83) continues to struggle on various fronts in Indonesia. Just as it was ramping up to restart operations and resume exports under a temporary permit, the main union at its Grasberg mine went on strike. Separately, a little optimism has entered discussions with the government, reflected in its granting of the permit. The government wants Freeport to sell a majority stake in its Grasberg mine. It also wants to abrogate its long-term "contract of work" with Freeport, and the company is seeking legal and fiscal guarantees in exchange. Meanwhile, the government is sticking to its demand that Freeport build a second (unnecessary) local smelter.
Clearly, the stock is volatile and there is a risk while this dispute remains unresolved. Nonetheless, we think Freeport can be bought here (or sell under-the-market puts).
Gladstone raises payout
Gladstone Investment Corp. (GAIN:NASDAQ, 9.10, 8.4%) has increased its monthly dividend (from an annual 75 cents to 77 cents) and announced it would start paying supplemental distributions twice a year, with the first one, of 6 cents a share, in June. The expected extra distributions—subject to prevailing conditions—will be paid from undistributed capital gains. Thus, the company can avoid paying tax on the net gains in the portfolio, even though it will have to raise new equity (as it did earlier in the month) to make new investments. Net-net, though, at prevailing prices and rates, it's a win for shareholders.
The net asset value (NAV) also increased again, from $8.82 per share to $9.95 on the quarter, meaning the stock is trading again at a discount rather than previous unusual premium. With the NAV increase, the regular dividend covered by NII, and the new bonus distributions, GAIN is a strong hold, and we will look for opportunities to buy more.
New acquisition won't help in short term
Goldcorp Inc. (G:TSX; GG:NYSE, 14.05) has underperformed in recent months. Its quarterly results offered promise, beating expectations, on improved operations (including at the two major new mines, Cerro Negro and Eleonore); generally lower costs; and higher profits.
The major development however has been its pending entry into large but difficult undeveloped projects in the high Andes. In a series of somewhat complicated transactions, it is purchasing Exeter's Caspiche and Kinross' share of the Barrick-controlled, feasibility-level Cerro Casale, with both projects going into a single joint-venture with Barrick. Goldcorp is paying $260 million up front, with various deferred and contingency payments. No doubt the combination of the projects increases the potential to reduce cost, but these projects have been delineated and ready to proceed for years. Barrick paid $800 million for 50% of Cerro Casale in 2007, and another $474 million for another 25% in 2010, yet no progress has been made in developing the project nor any timeline announced.
In making the purchase, Goldcorp's CEO David Garofalo admitted "it (would) be a long time before we put a shovel in the ground on these properties." I question why they are getting into such a difficult project. We are holding, but not buying, GG.
New study indicates robust project
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE, 1.31) announced, as expected, its prefeasibility study for its Ixtac deposit in Mexico. The initial capex is estimated to be higher than projected in December 2015's preliminary economic assessment ($117 million up from $100 million). But otherwise, the new mine plan improves the economics considerably.
Payback of initial capital is shorter (2.2 years, down from 2.6 years), with a much higher after-tax internal rate of return of 41%, up from 30%. Average production for the first nine years will be about 88,000 ounces of gold, and nearly 5.5 million ounces of silver, for life-of-mine production of over 1 million ounces of gold and 70 million of silver (up from 714,000 and 49 million respectively).
The revised numbers still show a very low initial capex (Almaden has already purchased a used mill) and very robust project. The company is now developing the project with permitting underway, as well as continued drilling of portions of the deposit that remain open, and new targets, as it moves towards a full feasibility by Q1 2018.
Silver miner to buy?
We would not be surprised to see an offer for the company, perhaps once permitting is underway or the feasibility completed. With about equal contribution from gold and silver, the project is particularly attractive to silver mining companies, which are having difficulty finding primary silver deposits. (See below.) A new $15 million equity raise puts the company in a strong negotiating position. Almaden is a buy at the current level.
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, 21.34) is the new name for Silver Wheaton, a reflection of the fact that the majority of its revenues no longer come from silver. (Similarly, Silver Standard is changing its name to SSR Mining.)
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."