Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) reported increased revenues, but more important it has acquired a major new asset, a silver stream on the Gibraltar copper mine for CA$44 million, and it has seen progress in its "accelerator model," whereby it acquires shares and royalties in early stage projects which it nurtures along.
CEO Sean Roosen advocates that "most wealth is created at the drill bit. . .the lowest cost place to get a royalty is at the very beginning of the project." This is a different and somewhat more risky approach than that pursued by most other royalty companies, but Osisko has experienced management and has been successful. The value of its equity portfolio is around CA$341 million, over $130 million above its cost. So, were Osisko to sell its equity, it would be building a portfolio of royalties and be paid to do so.
In all, some 870,000 meters of drilling are planned for this year on ground covered by Osisko's royalties, while 13%-owned Falco is moving toward a feasibility study on its Horne project.
Osisko arguably should trade at a discount to other large royalty companies given the higher risk in the model, but the discount is too wide right now. With strong, experience management, a solid balance sheet, a significant pipeline inside the company, Osisko is a strong buy at current levels. Some analysts believe that Osisko will be one of those companies reduced when the GDXJ index makes its portfolio adjustments mid month. Any sell off at that time, would be a time to buy.
Core holding with room to grow
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) continues to perform well, with "gold equivalent ounces" up 23% in the first quarter from a year ago. With about $1.5 billion in available capital, Franco is looking at opportunities in both gold and other metals as well as in oil and gas. Gold transactions this year are likely to be small deals rather than the mega deals of the last two or three years. And with the decline in the oil price, those transactions look for attractive, with the focus on the U.S., a large and fragmented market. Precious metals currently account for 92% of revenues, so there is room for some diversification. Franco continues to be a core holding for us. We are holding.
Midland continues to make progress on many fronts
Midland Exploration Inc. (MD:TSX.V) continues to be active. In the last two months, since our last review, it has signed a new option agreement with IAMGOLD Corp. (IMG:TSX; IAG:NYSE) on its Heva gold property; acquired (by map designation) a new property in the Labrador Trough with strong zinc-copper potential; identified new drill targets on its 100%-owned La Peltries gold property; and last, but by no means least, approved the nomination of Paul Archer as a new director of the company.
Mr. Archer was the highly regarded vice-president of exploration for Virginia, and a key component of the great success of that company. He is an important addition to the Midland board.
As for Heva, it is near the prolific Cadillack Break, five kilometers northwest of the Canadian Malartic mine. IAMGOLD can earn a 50% interest by making cash payments and exploration expenditures (of $4 million) over four-and-a-half years, with options to increase to 65% with additional expenditures.
We would add to positions in Midland on any weakness, say to the mid-90 cent level. But if you do not already own, it's a buy.
Strong balance sheets help these companies
Nestle SA (NESN:VX; NSRGY:OTC) reported a reasonably solid first quarter, though the U.S. continues to have a difficult consumer environment, with sluggish demand. The company's new CEO renewed a commitment to improving both growth and margins. Nestle remains our favorite big-cap staple and a top global blue chip. It has drivers for value creation—including its balance sheet, good brands, and savings potential—yet trades at a lower valuation than most companies in the same category. We hold as a core position, but would look for weakness to add.
Loews Corp. (L:NYSE) reported strong income growth over the past year, led by significant gains in its largest unit, CNA Insurance, with subsidiary Diamond Offshore, not surprisingly, the only negative performer. Its latest acquisition, Consolidated Container Company, is relatively recession-proof with stable earnings, thus offsetting some of the other businesses at Loews, with great cash-on-cash returns. It is in a fragmental industry, offering possibilities for bolt-on acquisitions, though there is nothing in the works at present. After this acquisition is completed, Loews will still have around $5 billion in cash and investments on the parent balance sheet. We are holding Loews, but would buy on weakness to the mid-to-low $40 range.
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."
Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Osisko Gold, Franco-Nevada, Nestle. 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 hold shares of the following companies mentioned in this article: Osisko Gold, Franco-Nevada, Midland Exploration, Nestle, Loews. I determined which companies would be included in this article based on my research and understanding of the sector.
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