Royalty Trio in Gold and Silver

12/19/2016 10:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

The royalty and streaming companies represent the lowest risk way to gain exposure to the gold and silver sector; some of our favorites are now at good prices, explains Adrian Day, editor of Global Analyst.

Silver Wheaton (SLW) is a streaming company, with approximately 55% of its revenues from silver, 45% from gold. The stock has been extremely weak since it reported good quarterly results.

Depreciation hurt the bottom line, but quarterly “production” rose 17%, up over 50% from a year ago. Most mines on which it holds streams performed well.

The problem is looking ahead. Production is essentially flat through 2020 after years of steady growth, though there is optionality on several non-producing projects.

A Canadian tax issue also hangs over the company; however, this is priced into the stock for the most part. Silver Wheaton is my favorite way to gain exposure to silver. It is a solid buy under $19.

Osisko Gold (OR) is also undervalued relative to other royalty companies. All of its producing royalty mines are performing well.

The company has indicated it is looking for a major, producing royalty, but it could also undertake two or three smaller transactions if the “big one” was not available.

Osisko is significantly undervalued relative to other large royalty companies, only partly justified by its “newness” and thus its smaller number of assets, and the higher risk from its more active investment approach. Osisko is a strong buy at this level.

Franco-Nevada (FNV) is the premier company in the sector. It continues to deliver, with a record quarter (on ounces, revenue and earnings).

With about $200 million in cash, no debt, and $1 billion available on its credit line, the balance sheet is strong. Franco is the cream of the crop.

Though on a valuation basis it remains the most expensive of the major royalty companies, it has a very diversified production base, a strong pipeline of currently non-producing assets, and a solid balance sheet.

It is selling at its lowest valuations in over a year, when gold was at a far different price. Franco is a strong buy at the current level.

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