Royalty and streaming companies are the low-risk way to invest in the gold mining sector. But you don't give up much upside by doing this, suggests Adrian Day, commodity sector expert and editor of Global Analyst.
Essentially, a royalty company will make an upfront payment to a mining company in exchange for a small percentage of the gold that is mined. A stream is similar, except the company pays a modest per-ounce cost when received in addition to an upfront payment.
The miner wants the upfront money to continue exploration, to help build a miner, or perhaps to repair a broken balance sheet. The royalty and streaming company has two huge advantages over the miner: first, it is not responsible for additional costs that come from things going wrong, whether a pit wall collapse or an increase in local taxes; and second, by making relatively small investments it is able to diversify more.
Franco-Nevada (FNV) reported a strong fourth quarter on the back of higher production at Cobre Panama, its largest stream, and record oil and gas revenue. Overall for the year, there was record revenue of $1.3 billion, up 27%, coming in at the high end of its guidance. There were records on several other metrics as well.
Franco expects a small decline in overall gold-equivalent ounces (GEOs) this year, though another record in oil. Lower GEOs comes from expected lower grades at two large streams, Antamina and Antapaccay, and lower production at Guadalupe.
Based on forecast metals prices, precious metals account will for about 75% of 2022 revenue, while energy will contribute almost 20%, with iron ore the bulk of the remainder. Obviously this could change if any new producing assets are acquired or to the extent realized prices differ from Franco’s price assumptions.
After 2022, however, in its five-year guidance, Franco is forecasting between 765,000 and 825,000 GEOs by 2026, based on Cobre Panama expanding its throughput (by the end of next year), an expansion at Tasiast, and on several new mines commencing production. It has started including oil & gas in its “GEO” calculations.
Franco ended the quarter with $539 million in cash, no debt, and $1.1 billion available on its credit facilities. G&A is less than 3% of revenue. It increased its dividend again, by nearly 7%, for the 15th consecutive dividend increase.
Asset diversification separates Franco from other gold royalty companies. Franco has a lower percentage of gold and silver than other large royalty and streaming companies, which diversification it now calls a distinguishing advantage. It is probably a feature that makes the company attractive to generalist investors.
The company is also well diversified in terms of its assets (with Cobre Panama the largest single asset at 18% of revenue, and no other asset over 10%); operators (again, First Quantum, owner of Cobre Panama, at 18% is the largest); and geographically. It has more exploration projects in its portfolio than other companies, some of which will eventually produce.
Franco sees the pipeline quite strong across a variety of financing needs. Its current focus for new investments continues to be on precious metals, but it is open to other resources. For these, it is driven by the quality of the asset rather than the commodity.
Franco-Nevada continues to be one of our core investments. Royalty and streaming companies have far lower exposure to operating cost inflation than miners, and also less exposure to potentially increasing taxes. So they remain attractive investments for the current environment. Because of the strong recent rally –- it was $127 at the end of January –- we are holding and looking for a pullback to buy.
Wheaton Precious Metals (WPM) reported record revenue and earnings for the fourth quarter, though it missed analyst forecasts by a small amount. For the year, revenue was $1.2 billion. Due to high cobalt prices, the company reversed a previous impairment on the Vale cobalt stream; it does not, however, seem to have an appetite for any additional such streams, focusing on gold and silver (currently 94% of revenues).
The Salobo expansion (Salobo III), which is part of the project that represents Wheaton’s largest single asset, was delayed because of landslide; it had been 85% complete at year end. Vale is conducting a thorough review of the project, which should be complete sometime in the second quarter. At present, the expansion is considered still on track for a year-end start up.
Wheaton has a solid balance sheet, with available liquidity now up to $2.2 billion. With cash, a strong credit facility and anticipate strong cash flows in coming years, CEO Randy Smallwood said he did not think the company would ever have to issue another share. Unlike his peers, he is not debt-averse, particularly when rates have been so low; “we are glad we haven’t diluted shareholders.”
Wheaton focuses on assets with low costs, with 85% of its assets in the lower half of the cost curve, and reserves with over 30 years of life. Wheaton is forecasting an average of 20% growth over the next 10 years, with GEOs averaging 910,000 ounces per year over that period, up from 750K last year.
But he added that it was becoming “more and more difficult to find projects to put money into”, indicating that the dividend may increase further in coming years. Already, Wheaton (whose current yield is 1.3%) has been included in the S&P Canadian Dividend Aristocrats Index. Wheaton is a core holding for us, but given the 25% plus run up since the end of January, we are holding and looking for a pullback to buy.