Three large miners that are still inexpensive
Goldcorp Inc. (G:TSX; GG:NYSE 16.02) has had a tough year.
After reporting a year-end loss of $4.1 billion due to writing off and down various projects—a supposed clearing of the decks for the new CEO David Garofalo—the recent results were not so positive. Production was down year-on-year, due to shortfalls and problems at its two largest mines, Peñasquito and Cerro Negro.
There are some positives, however. Éléonore, which had had some early production setbacks, improved performance. And the pipeline remains strong, with numerous studies expected over the next 12 months; Goldcorp recently acquired Kaminak and its high-grade Coffee project. The company is forecasting flat production for the next three years, so the hurdle it has set itself is not so high, and we are likely to see the company focus on its existing projects rather than new acquisitions.
Hold off on new buys?
Costs have been cut, including major cuts at the head office. With $360 million in cash, and $2.8 billion in debt, a priority is to de-lever, another reason not to expect new acquisitions.
Overall, despite some recent mine problems, Goldcorp has good assets in good countries. It trades at a 4% premium to its peers on an NAV basis, though is inexpensive on other metrics. If it can get all its main operations to run smoothly for a few quarters, we could see Goldcorp recover nicely. Goldcorp is a buy at this level, the best buy among the major miners.
Problem solved, buy ahead?
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX 77.94) has finally resolved its major problem and erstwhile drag on its stock. Centerra Gold Inc. (CG:TSX; CADGF:OTCPK) has acquired troubled Thompson Creek, including the Mt. Milligan mine, a stream on which represents about 30% of RGLD's reserves. RGLD has agreed to restructure the stream, decreasing the gold and increasing exposure to the copper; the economics are essentially unchanged.
RGLD wants to reduce its reliance on Mt. Milligan, so we may see a major new stream (or royalty). Even if the economics are not overly attractive, the market would respond well (as it has with other companies buying major, long-life if low return streams), particularly since it would diversify RGLD's asset base and revenue sources.
Despite the strong recovery—a triple this year—RGLD is still trading at a 20% discount to its royalty peers. We are holding, and would look for opportunities to buy on price weakness.
Back from the brink
Freeport-McMoRan Inc. (FCX:NYSE 10.48) continues to make strides towards repairing its balance sheet, by cutting costs, reducing capex for its oil unit, with ongoing equity sales, and asset sales. Most recently it announced agreement to sell its interest in the giant Tenke Fungurume in the DRC for $2.65 billion.
With about $19 billion in debt, the company has a target of $10 billion. After one more equity raise and the completion of pending asset sales, if copper stays where it is, CEO Richard Adkerson says there is no need for more copper sales. Recent losses have been due to special items and carrying costs of its oil & gas assets; operational performance has generally been strong. If the company sells an interest in its Indonesia operations or its oil & gas unit, this would be "a strategic decision rather than a financial imperative," said CEO Adkerson. The fact that he brought this up suggests (to me) that such moves are under consideration. We think the market would respond well to either of these possibilities.
More major sales ahead?
It was the acquisition of two oil companies that brought Freeport to the situation where it is today. As for Grasberg, it is a fabulous, long-life mine, but operating conditions in Indonesia are worsening—Newmont Mining Corp. (NEM:NYSE) recently exited the country and is not alone—and there is major capex ahead. Freeport has obtained a short-term license allowing it to export ore. More importantly, it is currently operating without a long-term contract. Freeport is reluctant to keep making heavy capital expenditures without a contract, though stopping the capital spend would have major ramifications. A long-term solution would be to bring in a major partner (Rio?) who would assume much of the capital spend—saving Freeport's balance sheet—while Freeport kept a smaller part of the operation. This won't happen, however, before a new agreement with the country is in place.
Even after such a transaction or transactions, Freeport would remain a solid copper company with world-class operations. It is a great buy for patient long-term investors, particularly on weakness. This is a good price.
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."
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: Goldcorp Inc., Royal Gold Inc. and Freeport McMoRan Inc. I determined which companies would be included in this article based on my research and understanding of the sector.
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