Those of you who’ve been following Stock Gumshoe for more than a few months may have noticed that I love royalty companies — firms that don’t have to do a lot of work or incur a lot of costs, but just get to make an up-front investment and participate in the top line for their partner companies.
It works great in gold mining — you help pay for the mine, you get 3% of the net gold produced, you don’t have to deal with labor strikes or cost overruns or permitting, you just sit back and take your gold. Sure, you’re in trouble if the mine stops producing… but it’s a simple business, and there’s upside for the patient investor if the mine produces for longer than expected, or gold prices are higher than you calculated.
Likewise, it has worked pretty well in pharmaceuticals — solid drug pricing (despite recent regulatory backlash against some companies) has meant that owning a piece of an in-demand drug’s revenue stream is valuable.
So far, it’s not working so good for small businesses… at least, not in the form that I invested in, shares of Grenville Strategic Royalty (GRC.V, GRVFF). I knew this would be a risky investment, of course, it’s a small company that’s financing even smaller companies, but it has really pretty emphatically crashed now, and I’m selling the remainder of my position in the interests of capital preservation.
I don’t do that lightly — I did sell half of my position when it hit my pretty side stop loss (close to 40%) earlier this year, and my assessment had been that the selloff might even be a bit overdone given the company’s intimations that they seemed to be past the worst of the writedowns, particularly after they then scared most of their remaining investors off by cutting the dividend.
But, it turns out, things could indeed get substantially worse than there. Is this the bottom, somewhere around thirty cents? (Canadian$) I don’t really know — but I know that the filings they posted last night indicate either a “kitchen sink” quarter where they’ve thrown every possible writedown at their portfolio, or a continuing decline in value and cash flow that is going to require a substantial capital raise in the near future. Either way, this will make the company a very different kind of beast than I ...