In the wake of their latest quarterly earnings reports, Adrian Day — editor of Global Analyst — reiterates his buy recommendations for two leading royalty streaming firms.
Wheaton Precious Metals (WPM) saw production and revenue up, but lower than expected, while the major development was the company reducing its full-year guidance as well as its five- and 10-year outlooks.
Wheaton has been hit by several incidents at its major assets: a slower underground ramp up at Voisey’s Bay in Canada; flooding and mine plan changes at Colorado-based Stillwater; and most significantly, maintenance issues at Brazil's Salobo mine, its largest asset.
Production from Salobo is down 39% from a year ago, while the Phase III expansion could be delayed. Nonetheless, these three assets continue to be multi-decade assets for Wheaton. The balance sheet is strong, with cash of $449 million, no debt, and $2 billion undrawn on its credit facility.
Wheaton also agreed to terminate a stream it has on a small mine at Glencore (GLNCY) for $150 million. Glencore said it could complete a sale on the mine only if there was no stream. This is the second stream that Wheaton has monetized in recent weeks, but we do not believe this is the start of a trend; both were special situations. Wheaton is a buy.
Franco-Nevada (FNV) had a record quarter and half-year on many metrics, including revenue. It also achieved its highest margins since it added streams to its portfolio of royalties. (Because streams involve an ongoing per-ounce payment, margins are lower.)
These positive results were on the back of strong results from oil and gas, with revenue up over 20% quarter-on-quarter. Nonetheless, the number of Gold Equivalent Ounces (GEOs) sold remained relatively flat from last year, and the company’s guidance remained the same. Its cash cost per GEO actually fell, 3%, again demonstrating that the royalty companies are relatively immune to cost pressures.
Its largest asset, the gold stream on Cobre Panama, is doing well as the operator reached record production. However, there has been increased civil unrest in Panama, mostly focused on temporary road blockades. Although so far Cobre Panama has not been affected, the blockades could affect the company if they continue.
Franco said it was looking at several mid-sized deals on gold mines rather than on the gold by-product of other mines. Franco has no debt, and $1.9 billion in available capital. It remains a core holding, and if you do not own it, this is a good level to buy.