Good Buys Among Resource Companies

Altius Minerals Corp. (ALS:TSX.V, Toronto, 10.71) generated $78 million in royalty revenue last year, following a soft last quarter, with 37% of it from copper. Coal royalties, which dominated after the acquisition of a package of royalties from Sherritt in 2013, are now down to 14% of the total.

Altius has filed a takings suit against the Alberta government, which arbitrarily banned coal-fired power generation; the mine on which Altius has a royalty had a multi-decade contract to supply coal to a local plant. Both the plan and the mine were compensated by the provincial government, but Altius has not been. It took a C$70 million write-off on its investment. We do not expect to see compensation in that amount, but an award, and a substantial one, is certainly possible, though the case may take years to drag through the courts.

New renewable energy venture grows rapidly

Given the limited time frame on its coal royalties and the poor image associated with them, Altius has been using the revenue from coal royalties to launch a new clean energy unit. At present, this comprises two wind projects, though other clean energy project, and other partners, are likely to be included over time. Altius expects this business to become self-sustaining "very soon" as it is growing faster than expected.

Buying royalties a competitive business with lower returns

Acquiring royalties, including those on base metals and other resources, has become more competitive and expensive, as not only new companies enter the space, but also private equity and other players who do seem concerned with realistic rates of return. Altius is expecting going forward more royalty generation from deals on its extensive land package of early-stage resource properties, though these will take longer that purchased royalties before they generate revenue. Altius has proven itself over the years, however, at being able to generate revenue from these deals long before royalty income begins, such as by selling equity interests in new companies formed to advance particular projects.

Hidden value in balance sheet

New debt stands at $82 million, down slightly from the previous quarter. Although the cash balance—at C$22 million—is relatively low, it ignores the value of a junior portfolio of just over $54 million, as well as the value of its holding in Labrador Iron Ore, at $93 million.

The value of the junior portfolio is more-or-less where it stood a year ago, despite Altius having pulled out $19 million. It has also streamlined the portfolio, from 27 to 18 companies, limiting holdings to companies with which Altius has some strategic royalty interest. In addition, Altius has access to capital through its line-of-credit, its relationship with Fairfax Financial, and other partners. It has been aggressively buying back stock.

We have high confidence in Altius's management, disciplined, patient and imaginative. Together with its solid balance sheet; strong, diverse, cash flow; and vast land package; this makes Altius a long-term holding for exposure to non-gold resources. At the current price, it is a strong buy.

Vista monetizes assets while it guards value at Mt Todd

Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, NY, US$0.68) continues to pursue optimization at its Mt Todd project in Northern Territories, Australia. At the same time, it continues to seek non-dilutive ways of boosting its cash balance to pay costs as it waits for the opportune time to do a deal on the property. Vista is seeking a partner who will finance and develop the project, while Vista's interest will be funded by the proceeds of the sale. If this works, it would be a very nice conclusion, though the company is also open to a complete sale at the right price.

Now it is monetizing a royalty it holds on the Awak Mas property in Indonesia. Vista originally had a working interest in the property, which it later converted to a royalty. Now it will receive shares in the Australian company that owns the property plus $100,000, and the owner continues to have the right to convert 50% of the royalty for $2.4 million by April, and now the other half for $2.5 million a year later. This is a good deal for Vista, since the money will come sooner than would any royalty revenue. These payments along with the further $1.5 million option payment in October 2021 on the de los Reyes property in Mexico cover another year's expenses. With the reduced spend at Mt Todd, overall expenses are upwards for $6 million a year now.

Can it avoid an equity raise?

Vista still owns shares in Midas Gold, currently worth around US$3.5 million; these shares are eligible to be sold in the market at any time. And it owns a used mill which it is offering for sale; that could raise $7 million or possibly more. As of last quarter, Vista had $7.2 million in working capital, with cash just over $4 million; that will be lower at end year. It is possible that the cash, the two Awak Mas payments, followed by the de los Reyes option (perhaps with Midas share sales) could take the company through to the end of next year. It is likely, however, that without a sale of the mill or meaningful movement on a Mt Todd transaction, the company will look to raise some equity funds in the coming year.

Given the attractiveness of Mt Todd—its size and location—and the huge discount at which Vista is trading, patient investors should continue to accumulate Vista at the current level. This is a particularly good time, since, despite the recent advances in both the gold price and at the company, the stock price—which has had a range of 70 cents to $1.35 over the past year—has hardly moved.

Osisko is loudly proclaiming its mission

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, NY, US$9.98), following confusion and opposition after its September acquisition of all of the Barkerville shares it did not already own—which saw the stock drop 24% in one week—plus several high-profile exits from the company, has been making clear that it is not becoming a mining company, and that the core business remains royalties. The new messaging has been a little slow, and the stock has only very slowly begun to recover.

The company has said that its contribution to Barkerville is mostly done, and that it does not intend any additional exploration expenditures. It will look for financing sources and seek to monetize its investment. The company concedes that there is a possibility it would build the mine—the company certainly has the expertise since it built Malartic, one of Canada's largest recent mines—but would do so with financing from others, and seek to monetize it.

Was it the deal or the way it was presented?

In short, Osisko feels that the biggest mistake it made was not in buying Barkerville, which it said represents tremendous value, but in not clearly stating that it was not turning into a mining company. Barkerville is an extension off Osisko's accelerator model, which has been a financial success. Given the discount at which Osisko trades relative to other mid-sized and large royalty companies—only some of which is justified, given the higher-risk "hybrid" model—Osisko is a good buy at these levels.

Murphy's at work at Fortuna Silver

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, NY, US$3.92) had more bad news when a Mexican government department served notice it would cancel one of the major concessions at Fortuna's San Jose Mine if it did not pay $30 million by March due to disputed royalties. The concession represents about 27% of San Jose, which itself represents about one-third on Fortuna's Net Asset Value, but currently most of its cash flow. San Jose still has a five-year life ahead of it, though the potential for further resources is still there. However, the ore mined has been lower grade of late.

The royalty was allegedly given to the government by the property's previous owner. Fortuna challenged this in court, but no definitive ruling has yet been made. Fortuna has asked the court for a stay on the latest directive threatening to cancel the concession. Given that the dispute was not widely known in the market, the response has been somewhat muted.

At Fortuna's other existing mine, Caylloma, in Peru, lead and zinc have become far more dominant, while their prices are down even as treatment charges are up; there has been less silver mined even as the price of silver has appreciated. This combination means that cash flow of $10 million 2019 could drop to $2 million or so at current prices.

Nearly there at Lindero

The development at Lindero, including positive grade reconciliation, perhaps offset the bad news elsewhere. Reports of a dispute with its main contractor at the last minute are also worrying, though that should not cause further delays in the countdown to first gold pour by March. It is important to note that under Argentina's capital controls, money can be taken out of the country to repay debt, so Fortuna has about 18 months of revenue before capital controls would be an issue.

Fortuna stock has been volatile over the past year, after it was hurt by the Argentina vote favoring the opposition, trending back up more recently on the countdown to first gold pour at Lindero. We would hold here.

Best Buys

Best buys at current prices, in addition to above, include Kingsmen Creatives Ltd. (KMEN:SI, Singapore, 0.375); Lara Exploration Ltd. (LRA:TSX.V, Toronto, 0.57); and Evrim Resources Corp. (EVM:TSX.V, Toronto, 0.32).

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: Evrim Resources, Altius Minerals and Lara Exploration. 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 Royalties, Kingsmen Creatives, Lara Exploration, Evrim Resources, Altius Minerals, Vista Gold and Fortuna Silver. I determined which companies would be included in this article based on my research and understanding of the sector.
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