Pullbacks are Overdone at Goldcorp and Osisko

08/10/2018 5:00 am EST

Focus: COMMODITIES

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Adrian Day is a long-standing expert in the precious metals and resources sectors; here, the editor of The Global Analyst looks at a leading gold miner and a favorite mining sector royalty streamer.

Goldcorp (GG) saw a weak quarter, with lower gold production and higher-than-estimated costs. The company has advised the third quarter will also be soft, while forecasting a strong fourth quarter.

The company’s grand 20/20/20 goal (for 20% higher production, 20% higher reserves, and 20% lower costs) was restated, but the company does not appear to be making great strides towards the goals.

Execution is the key. Two major new mines have been experiencing more difficult ramp-up periods than expected—that’s Cerro Negro and Eleonore—though both are improving, and these two mines give the company potential to go some way towards their production and cost goals.

The balance sheet, with $2.4 billion of net debt—is not as strong as many of its peers, though its valuation is below its peers. We are holding, but not energetically buying more. However, the current price—down over two dollars from mid-June—is overdone, and probably a good price for a trade here.

Osisko Gold Royalties (OR) reported good results, particularly a record production quarter at Canadian Malartic, its cornerstone asset. The bad news was the announcement of a blockade at Lydian’s Amulsar project in Armenia which pushes back production to the middle of next year (at the earliest).

This was to have been Osisko’s next major cash-flowing asset, and the news drove Osisko’s share price down sharply ahead of its own results.

The balance sheet remains strong. Though cash is down to $189 million, after new investments of $108 million in the quarter (and two of which carry future payment commitments), debt is also down after a $52 million repayment to $450 million.

Osisko also has a large portfolio of junior companies valued around $450 million, and it is expected that Pretium will buy back its royalty, giving Osisko US$119 million before year end, so the balance sheet remains, and will remain, strong.

Osisko trades at a meaningful discount on several metrics to other large royalty companies, only partly justified (smaller, and higher-risk in exploration), also now at a discount to NAV. Take advantage of the sharp price decline; Osisko is a strong buy here.

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