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Silver Company Releases Golden Results

Source: Adrian Day

May 25, 2023 ( Newswire) Two new acquisitions and a string of resignations, along with more quarterly results, have led global analyst Adrian Day to share his thoughts with us. It's been a busy week for some of the companies on his list.

Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) is acquiring a gold stream on Lumina's developmental Cangrejos gold-copper project in Ecuador. Wheaton will receive 6.6% of the gold production at 18% of the prevailing spot for US$300 million in staged payments. Once hurdles have been met, the stream will drop to 4.4% and 22% of the spot price.

The deal, at the high end of Wheaton's current transaction size, represents about 3% of Wheaton's net asset value. It adds another long-life asset to the portfolio and also, continues the recent trend for Wheaton, another development asset. The transaction has a return of a little under 10% based on the pre-feasibility study, but it is expected that the resource will grow with further exploration.

Production is not anticipated until around 2028. With US$800 million in cash plus US$2 billion available credit, Wheaton can readily pay for this. The return is good, particularly given the potential upside. Development assets such as this add to the longer-term growth but also add to the risk, both development and, in this case, jurisdictional. Down from over US$52 a share earlier in the month, Wheaton is now trading in the mid-range of its historical free-cash-flow multiple.

With top management, a rock-solid balance, and a strong pipeline for future growth, we like Wheaton and are holding and will look to add.

Fortuna Makes New Acquisition Just As Latest Mine Starts Production

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) performed well in the first quarter. Although production was down from a year-ago quarter and costs up, it was in line with guidance, and the company is on track to meet its annual guidance. Because of the stoppage at San Jose in Mexico, now ended, it expects higher costs this quarter but lower levels in the second half.

This will be largely attributed to its new Séguéla mine, expecting its first gold pour any day. The mine, built on time and on budget, will reduce the company's overall production costs.

Fortuna also announced the all-share acquisition of an Australian company, Chesser Resources, which holds a pre-feasibility stage project in adjacent Senagal, thus enhancing the company's presence in West Africa. Chesser will represent a little over 5% of the pro-forma combined company.

Plan To Build Ounces to Over One Million

Fortuna CEO Jorge Ganoza said that Chesser's Diamba Sud open-pit deposit could deliver robust rates of return even with its current sub-one million-ounce resource. But he believes the deposit, with multiple targets still to be tested, can get beyond one million ounces, "how much more remains to be seen."

He anticipates it can see similar growth to that of Séguéla. Fortuna said it had been watching the project for years. There are some Tier 1 mines operated by majors in the vicinity, giving the area good infrastructure. The company will prioritize expanding the deposit before it moves to development, so most of the upcoming work will be exploration.

It also plans to complete the Feasibility Study that is already underway, but that is not the priority. Ganoza noted that Fortuna likes to see at least 10- years of reserves and 120K-150K ounces of annual production in all its projects. Ganoza said the company was anchored in West Africa and Latin America, currently with producing mines in five countries. It emphasizes areas where it is already established to leverage facilities, expertise, and people. Senegal is a neighbor to the Ivory Coast and Burkina Faso.

Free Cash Flow Will Enable Debt Reduction

The company closed the quarter with US$128 million of liquidity, including US$45 million undrawn on its credit facility. Total debt is US$166 million. The new Séguéla mine is expected to see the company start to generate significant free cash, and barring any unexpected capital spending, it could be in a net cash position early next year.

With solid management, a history of building on time and on budget, diversification in assets, and a strong growth profile, Fortuna nonetheless trades at a discount to comparable gold and silver companies. (In the first quarter, 69% of its revenues came from gold, 19% from silver, with the rest by-product zinc, lead, and copper.

With Séguéla up and running, the proportion from gold will be even higher.) To some extent, this discount is a hangover from the series of incidents in Mexico, but it is too great to last, especially with all operations now running smoothly.

Fortuna is a Buy.

Nova Roiled by Departure of CEO

Nova Royalty Corp. (NOVR:TSX.V) experienced a tumultuous week with the sudden departure of its CEO, Alex Tsukernik, followed by the resignations of three board members. Mr. Tsukernik led the company before it went public at the end of 2020 and has been CEO throughout. The company's CFO has been appointed interim CEO.

The suddenness of the departures suggests some tension. We understand that there has been disagreement over the company's strategy, including over the need and wisdom for potentially dilutive financings to increase near-term cash-flowing assets.

Right now, Nova's cash flow meets about half the company's G&A, while its key copper assets do not start production until at least the end of the decade. The main issue facing the company is acquiring cash flow until its key assets start production but doing so in an accretive manner.

Nova To Explore Its Options

Following the departures, Nova announced it was hiring a Canadian firm to "explore, review and evaluate all options . . . to maximize shareholder value."

There are several alternatives the company could consider. Indeed, the company could cut expenses and do nothing, simply waiting for its key assets to start generating revenue. That alone, with no additional growth, would make Nova undervalued and a strong long-term investment. Another obvious alternative would be to sell the company to another royalty company which could be done at a meaningful premium, given the quality of the royalties and the undervalued share price.

For now, we are holding Nova. It jumped from US$1.42 to US$1.60 in the past two days. On a pullback, perhaps to the mid US$1.50s, we would be buyers again. We expect additional analysis as the market absorbs the developments, and we consider possible outcomes.

Gladstone Increases Income, Though Nav Slips

Gladstone Investment Corp. (GAIN: NASDAQ) reported a good quarter and year (its fiscal year ends March 31), with most metrics positive. For the year, Net Investment Income (the metric on which the distribution is based) was up 10% to US$1.10, although total investment income fell quarter-on-quarter, on a decrease in success fee income which is highly variable.

The increase in interest rates is seeing the company's interest income rise. The fair value of the portfolio increased US$40 million to US$754 million as the company made new investments, offset by two sales and a small net decline in valuations. The market for new deals continues to be very competitive, the company said, even as multiples have declined.

Deal flow is picking up again, and there is a backlog of opportunities, though the company continues to be selective and cautious. Its Net Asset Value, after distributions, declined moderately to US$13.09 from unrealized depreciation. Gladstone, one of the smaller and more conservative business development companies, focuses on smaller companies and typically takes equity in addition to debt.

Gains from its equity positions fund its variable special dividends. The regular monthly dividend gives it a 7.33% yield, but the frequent special dividends added another 3.5% in the last 12 months. The balance sheet is strong, with availability on its credit facility and asset coverage of 245%. We are holding; BDC stock prices tend to be volatile, and we will look for opportunities to buy (such as in last week's bulletin, at US$12.86, or Bulletin #852 from early March at US$12.48).

TOP BUYS this week include, in addition to the above, Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ),Hutchison Port Holdings Trust (HPHT:Singapore), Midland Exploration Inc. (MD:TSX.V)),and Lara Exploration Ltd. (LRA:TSX.V). If you do not own and are underweight gold socks, you can buy Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE),and Barrick Gold Corp. (ABX:TSX; GOLD:NYSE).

More Info: Newswire

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