Adrian Day of Adrian Day Asset Management reviews the current news and prospects at three resource companies, and comes up with at least one good buy.
Lack of News Sees Stock Slip Even as Project Progresses
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE, US$0.92) plans to deliver a bankable feasibility study by midyear—a delay on the previous Q1 schedule—with much of the technical work already done in the prefeasibility study. The company expects permitting to be complete by the end of next year, with the critical Environmental Impact Study (EIS) filed by the end of this year. There will be a community consultation on the EIS, probably some questions, with a decision within six to 12 months after filing. If all goes well, the project would be ready for a production decision by early 2019.
My expectation, however, is that once the full feas study has been published and permits received, Almaden’s Ixtaca would become a target for a midsize producer, and probably a silver one, given that 50% of Ixtaca’s production will be silver and given the paucity of good silver projects.
Why is the stock down?
The stock has fallen significantly, from trading above $1.20 most of the time in September and early October. (It hit a peak of $1.72 earlier in the year, briefly.) Why? First, most juniors have declined over the past several weeks. Second, this period in a mine’s life is often a boring one, with lots of detailed work but few exciting news releases. Third, the slippage in the anticipated publication of the feasibility study could be an added reason. And fourth, a U.S. expatriate, claiming to represent the indigenous peoples of the region, is trying to stir opposition to the mine. He lacks credibility, but some potential investors could stand back to see if anything develops.
This provides us with a great opportunity to buy into this quality deposit, run by a company with a solid balance sheet and technically strong and ethical management. Given the last week’s trading, you’ll likely pick it up at 0.93.
Is a Turnaround Finally Underway at Yamana?
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$2.68) just might be beginning its turnaround. Another good operating quarter saw, in particular, increased production from two of its major mines, Chapada and El Penon, with the company now on track to exceed its full-year production forecast. Malartic should see increased production ahead (as discussed when we reviewed Osisko recently). Yamana also said it would pay $75 million to Brazil under its tax amnesty program, with possible smaller payments for the next several years. This was not unexpected.
Yamana has been trading at a justified discount to its peers. If it can exceed its production target for the year; if Cerro Morro, commencing production in Q2/18, can have a smooth start up; and if the balance sheet improves (which it should as a capital spending phase comes to an end)—if we can see this without another negative surprise from the company—then the stock could start to narrow the discount. Investors remain somewhat cautious, in a “show-me” mood. We are holding.
Troubles Continue for Freeport, Even as Operations Solid
Freeport-McMoRan Inc. (FCX:NYSE, US$14.41) has reported strong operations, with costs down, as it continues to improve its balance sheet, redeeming two notes for $617 million. It is slowly bringing back some capacity cut earlier, and is even considering some development projects for bringing into production. With the sound news all round, and the copper price over $3/lb, Freeport would be trading in the mid-$20s but for one thing.
That one thing, of course, is Indonesia. As the company talks of progress in its “complex” talks with the government, and both parties saying a detailed, final agreement is possible by the end of the year, new issues arise.
What to do with Rio’s stake?
One complication is the stake held by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK). The agreement was struck in the 1990s at a very difficult time for Freeport. Rio has to contribute to the big capital spend—up to $850 million. What Rio owns is somewhat complicated—at least it complicates the talks between Freeport and government. It owns a 40% share of production over a certain level from the existing mine and a call over 40% on all production from certain trigger point, commencing in 2022. Rio has the right to approve any contract changes, but Freeport says the company will have to divest some of its interest, and says the government agrees.
I don’t think Rio will want to continue contributing capital for a small interest. It has more than hinted that it wants out. The CEO calls Grasberg “a world-class deposit but maybe not a world-class investment.” But it would surely want compensation for giving up its interest.
And beyond all this are the as-yet-not-agreed terms of the divestiture of an additional 42% to Indonesian interests. Reportedly, Indonesia has agreed that the sale can be done in stages over the next few years, as Freeport prefers, but the precise terms need to be set now and that is unclear. Meanwhile, the time for massive investment to expand the mine is fast approaching.
To add further difficulties, separatists have now occupied several villages near the mine, with an avowed aim of disrupting operations. Freeport shut the main road to the mine after a shooting incident, and the Indonesia army is preparing to storm the villages.
We are not buying until the future is clearer, and indeed, would look for a good opportunity exit and stand on the sidelines.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Almaden, Yamana and Freeport McMoRan.
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