This article was originally published in August of 2021, when Bill Shaw’s pitch for the “$4 Nickel Royalty Stock” was first circulating… but it seems to have new life now, we’ve gotten a bunch of questions about the same spiel recently. The ad now circulating is unchanged and still carries a July 2021 date, and what follows has not been updated or revised since last Summer… though the stock in question has dropped by about 50%. I’ll add a brief update at the bottom as well.

OK, OK, so the problem here is that I’m kind of a sucker for royalty companies… so when I see a new one teased, that often percolates up to the top of the coffee pot that morning.

And it’s really just my inner laziness that drives that fascination, of course — I love the idea of buying something once, or building it once, and earning some share of the cash flow from the business forever, without ever having to invest another dollar or do any more work. Royalties are the perfect investment for the patient investor with low initiative.

What they usually aren’t is super exciting, or super-growthy in any particular business — whether it’s song royalties or mining royalties or book royalties or pharmaceutical royalties, it’s pretty rare for there to be huge growth years. The tendency is for those businesses to grow slowly, and to be winners over the very long term in large part because their down years are not as bad as the down years of high-cost operators in those businesses… but a royalty stock will rarely be the funnest stock in your portfolio or the one you daydream about, or even the one you brag to your brother-in-law about after a few beers in the back yard.

But the pitchmen do sure love to sell us on the excitement of royalties, which they do mostly by using the long-term price charts of some of the massive winners, like Royal Gold (RGLD) and Franco-Nevada (FNV), and every once in a while there’s also a pitch for a royalty company that’s got a connection to something more lustworthy and topical… and whaddya know, that’s what we have today — Bill Shaw at Stansberry is selling his Commodity Supercycles entry-level newsletter ($49/yr) with a pitch about a special report, and he manages to work Tesla into the story… the title of that report is: Super-Charged Battery Royalties: How to 10x Your Money Investing in the Critical Resources Tesla Needs for Electric Vehicle Batteries

So might this be the one? The super-exciting electric vehicle story that’s also a lazy man’s royalty story? Has my dream come true?

Well, let’s see how he sells it, check out those clues to find you a name, and think about it for ourselves, shall we? I’m sure there’s a catch somewhere…

Here’s how the ad starts:

“Elon Musk’s BIG PROBLEM

“Each Tesla Model 3 requires 121 lbs. of one rare resource, and supply is drying up. One analyst found a $4 stock
he believes will be the biggest winner of a $30 TRILLION market opportunity…”

That “rare resource,” it turns out, is nickel, which is not all that rare, but which is currently in pretty short supply, with that deficit expected to get worse — at least for the higher-purity nickel that’s seeing growing demand for battery cathodes in lithium-ion batteries.

It’s a little tricky to have any certainty about the nickel market, at least when it comes to batteries, because there’s more than one kind of nickel — about 2/3 of nickel production is used to make alloys, mostly stainless steel, and that’s a very industrial and consumer-goods driven business, dominated by China, and it uses a lot of lower-grade nickel, typically called ferronickel or Nickel Pig Iron, not the higher-grade nickel, typically nickel sulfate, that is used in batteries and other high-end uses (and can also be used for stainless steel).

And producers, especially in Brazil, Indonesia and China, see those rising prices for battery-grade nickel, and that has led to some projects to refine Nickel Pig Iron into nickel sulfate for the battery markets… which could shift the pricing around further in the future, even if it takes some imagination to get to that point (after all, right now batteries consume only about 2% of the nickel supply… so even if they’re mostly taking the higher quality nickel, and even if demand doubles and triples, the overall impact on the nickel market might not be so dramatic).

When we’re talking about royalties what usually matters the most is the commodity price five and ten years into the future, which is usually very unpredictable, though we do, at least, know that yes, battery demand for nickel is probably going to keep growing… and might grow dramatically enough to impact pricing.

So with that backdrop, what clues do we get about this nickel royalty company? Shaw says it’s a young firm, but has quickly built up a portfolio…

“This company with first mover advantage owns the rights to 18 nickel and copper mines around the world, resources which will explode in demand in the coming years, thanks to the worldwide shift to electric vehicles and renewable energy.

“Currently trading around $4 per share, this stock has as much upside as any stock I’ve seen in my 20 years in the resource business….

“I’ve found a way for you to set yourself up to potentially profit on the major nickel production ramp up we’re about to see.

“Like always, where Elon looks, money follows.”

And Elon is looking for nickel, which has been rising in price over the past year or so, getting close to $20,000 a tonne again, but which still remains well below the China-driven price spikes of 2006-2012 (it maxed out over $50,000/tonne in 2007), when stainless steel demand was dramatic and when most of the industrial metals peaked in price. Lots of people sat up and paid attention when he shared a “Please mine more nickel” plea on a Tesla conference call last year, and the pricing has recovered a bit since then.

More from Shaw:

“This year alone several mines in Indonesia, Siberia, and Canada have ramped up nickel production.

“As more automakers get serious about developing electric cars, nickel production will continue soaring.

“And for just $4 you can invest in a little-known company that is exclusively focused on ‘dominating the nickel market’ in a unique way…

“By using a little-known, but incredibly powerful, wealth building tool called ‘royalties.'”

That’s when your friendly neighborhood Gumshoe perked up his ears, of course. He explains mining royalties, in case the concept is new to you:

“… in the mining industry, there are a couple of ways you can obtain a royalty…

“Most royalty companies obtain them by simply providing upfront cash to the miner for development costs.

“Prospectors, on the other hand, will keep a royalty on their discovery after selling it to a miner…

“In this case, my favorite $4 stock is currently purchasing existing royalties from prospectors who hold the rights to the top nickel mines in the world…

“In the last 12 months, they’ve been on a frenzy of new acquisitions.

“They recently purchased the rights to one nickel mine that is fully permitted and “shovel ready” right now… Over the next 30 years, it’s expected to produce 50,000 metric tons of nickel every single year.

“The little-known stock that I’ve found supplied the upfront investment to obtain the ‘royalty’ on this mine.

“In this case, the mine operator is obligated to pay them 2% of whatever they produce from an agreed-upon portion of the mine, per their royalty agreement.

“My favorite stock doesn’t need to contribute any further capital to this project and will reap benefits from whatever resources are found on the property for years to come.”

What other clues do we get about this one?

“In two years, they’ve already assembled a portfolio of 18 royalties in the most resource-rich regions of the world…

“So, there is a chance they’ll stand to profit from whoever Musk partners with…

“And they’re likely to make money with all the other electric vehicle companies doing huge multi billion dollar deals with these mines too…

“They don’t have to worry about the costs of labor, insurance, permits, storage, and the hundreds of other pieces of super-expensive equipment you need to operate a mine.

“This $4 stock’s unique business model avoids ALL that kind of risk.”

That last part is true of pretty much all mining royalties — a royalty is a share of output, with no real consideration of operating costs. A 2% NSR royalty means you get two percent of whatever metal of value comes out of the smelter (“net smelter return”), sometimes a royalty is for everything in a mine and sometime’s it’s for one or more specific commodity. The payoff for the buyer of a royalty comes over time, as the royalty benefits from both the mine expanding to be larger than initially planned, and the rising price (if it rises) of the commodity.

There are a lot of royalties on the books for properties that have never become mines and never generated any income, of course, early-stage exploration projects are often financed in part by royalty sales (or drilling rights acquired by offering a royalty to the landowner), and most early-stage exploration projects fail. The business has matured a lot over the past 40 years, so we’ll also often see very high-priced royalty and “streaming” deals made for mines that are much closer to production, but some of the best stories come from the early royalties that turned into amazing paydirt.

My favorite of these comes from Pierre Lassonde, who is still Chairman Emeritus of Franco-Nevada (FNV) and is widely considered the Grandfather of the royalty business. Back in 1985 he raised a little bit of money for his gold exploration company (under a million dollars) to purchase gold royalties, something that was common in the oil space at the time but not talked about much in gold (the royalty owners then were really just the folks who owned the land that gold was found on, or sometimes prospectors who identified the deposit, there wasn’t a big secondary market for them).

That money and most of the rest of the cash the company had on hand at the time, a total of $2 million, was used to buy a 4% royalty on a mine in Nevada that was producing about 44,000 ounces of gold a year. Lassonde and his partners figured that the production of known reserves was enough to pay off the royalty even if the mine never got bigger, and they were right… but they added luck to their smarts, and the mine got far larger over the years. By 2002, that royalty bought for $2 million in 1986 was generating $23 million per year in cash flow to Lassonde’s firm, Franco-Nevada, and millions more ounces in reserves had been found by the operator, both because gold prices had risen and because of the obvious incentive for any existing mine to be extended with more exploration drilling once it’s operating (since that’s far cheaper than building a brand new mine elsewhere). So little Franco-Nevada, which in 1985 was an afterthought of a company scraping to raise a million bucks, is now the blue chip of the royalty business, with hundreds of royalties, a billion dollars in annual revenue, and a market cap of $30 billion.

So that’s the dream, that’s what every company buying up a portfolio of royalties aspires to achieve. And there are always dozens of small royalty companies starting up, trying to build a portfolio, get a toehold, and build a compounding machine that can reinvest royalty revenue into new royalties (which is hard, and takes a long time, so the industry remains quite concentrated at the top of the food chain). Most of the focus over the years has been on royalties on precious metals, gold and silver, since those have the most appeal for investors, but we’ve thankfully begun to see that expand to the much larger base metals markets in the past decade.

What other clues does Shaw drop about this royalty company that focuses on electric vehicles?

“The folks who run this $4 stock have successfully navigated the royalty streaming business model before…

“Years ago, they started a gold royalty business, where they made one-time investments purchasing the rights to several gold mines, and were able to make huge profits on whatever gold was discovered there…

“Gold has done well lately, up 41% in the past five years.

“But get this…

“If you simply invested in their gold royalty business – which is available through your average brokerage account – you would have done better….

“Because over the past five years that stock is up roughly 15,000%.”

That’s Metalla Royalty (MTA.V, MTAFF), one of the relatively newer and younger gold royalty companies that sprouted up over the past five years or so. And that’s a pretty good hint.

What else?

“Just in the past year, they’ve acquired six of the world’s largest Tier-1 nickel mines giving them a dominant market share in the future of the global energy supply chain.

“And the best part is, as a first mover, this company has already looked at many (if not most) of all the available nickel royalties. And as they build a reputation, holders of any other royalties will likely give them the first opportunity to make a deal.

“So, if a new player were to enter this space and attempt to replicate what they’ve done, it would be unlikely to find much left to buy. They’d be operating at a massive disadvantage.

“As nickel demand skyrockets in the coming years, this company is positioned to benefit more than any other company I’ve found…

“This firm has a portfolio of royalties on some of the most strategic nickel mines in the world, and right now they’re generating $8 of value for every $1 invested…”

I’m not sure what that “generating $8 of value for every $1 invested” bit means — I guess “value” is subjective, and royalty companies tend to be popular, so maybe it has just gotten $8 of “credit” from investors for each $1 they’ve invested in the portfolio, which wouldn’t necessarily be a good thing for current investors. But food for thought, once we get into the details.

Which we will, eventually… patience, dear grasshopper.

Other clues? Well, it’s not just a nickel royalty company….

“You see, aside from the nickel mines this $4 stock has been buying up… they’re also buying up mines collecting a resource vital to electric vehicle charging stations.

“In the coming years, copper will be in demand almost as much as nickel…

“In fact, electric vehicles can contain up to 10X more copper than conventional vehicles.”

So yep, copper royalties, too. Hard to complain about that, copper is obviously a big beneficiary of electrification, both because EVs use more copper than conventional cars and because the electrical infrastructure, including more “green” energy production, requires a lot more copper to grow. Like nickel, EVs are not the primary driving force for copper demand, the biggest demand for copper comes from building construction, but the combination of electrical components and transportation equipment does consume about 40% of copper today, and that seems likely to grow as the electric grid is improved and “greened” and as EVs become a bigger part of the auto business.

And, coincidentally, copper and nickel are often produced from the same mines, there are quite a few big cupro-nickel deposits in the world… so it’s good for miners if the prices of both commodities rise.

But that’s enough, dear friends, shall we get to the Thinkolator? It’s a nice day here in New England, so I rolled her out of the garage and pulled the tarp off… took just a few minutes to get her started, and shovel in those few piles of clues, and I didn’t have long to lounge about while she cognitationized for us — Thinkolator sez this is Nova Royalty Corporation (NOVR on the Venture exchange in Canada, NOVRF OTC in the US).

Which, yes, is pitching itself as a “green” royalty business, built for the clean energy world and the growth in EVs, and owns a portfolio of mining royalties on both development and exploration projects (actually up to 19, not 18 as teased, but the world keeps moving — they bought that 19th royalty in June).

And yes, the management team does include a couple veterans of Metalla (including former Casey Research newsletter editor E.B. Tucker, incidentally, who is listed as one of the founders of Nova Royalty and was one of Shaw’s colleagues until he disappeared from publishing last year). Here’s how the company describes itself:

“We are a company formed by mining sector entrepreneurs to invest in the building blocks of clean energy – copper and nickel. Our world is in the early days of a fundamental change of how we live, breathe, and work. At the center of that shift is a new energy supply chain – driven by metals – copper and nickel.

“Nova buys royalties on the world’s leading copper and nickel projects – the strategic assets necessary for the world’s energy transition. We believe that the royalty model is the superior method of owning any commodity. The royalty owner makes a single upfront payment to purchase the royalty, and in exchange, has the benefit of the entire stream of the mine’s revenues – irrespective of operating costs and capital expenditures – with no additional capital commitments.

“Since our founding in 2018, with our systematic evaluation process and experienced team, we have built a portfolio of royalties on some of the world’s leading copper and nickel development projects. These projects are being advanced by major mining companies including Teck, Newmont, First Quantum and Rio Tinto. We always continue looking for attractive opportunities to add to our portfolio, and welcome new investors as shareholders in the Nova story.”

The challenge is that building up a royalty portfolio takes either a lot of money or a lot of time — buying royalties on producing or even under-construction mines is really expensive, because the project has been so de-risked by that point, and buying a royalty on a project that doesn’t even have a reserves statement yet, or which is still in the feasibility study phase, can mean waiting many years for a construction decision to be made, followed by financing and often a couple years of building the mine before any cash return comes to the royalty holder. And those are just the “development” ones, an exploration project is much more of a wild bet and might sit there with little activity for a decade.

And Nova Royalty didn’t have that much money to get started, they didn’t get spun out of a mining company with an established cash-flowing portfolio as has been the case with some smaller royalty companies of late, and so they don’t have any royalties on actual producing mines yet. Which means cash flow is likely at least several years away — this is still a startup, essentially.

I have not dug deep into the info on all of their projects, they say six of them, their “cornerstone” assets, are “development” stage projects, with the rest in the “exploration” stage, and their biggest and closest-to-production royalty (on the Taca Taca copper project, in Argentina) won’t even have a construction decision until “2023-2024” (always take the “over” when guessing at the timing of a mining project, so I’d guess “December of 2024”)… the next important one, NuevaUnion in Chile, also a copper project has great developers (Teck and Newmont), is still at the bankable feasibility stage so is probably also a ways from a construction decision. Others are permitted, or shovel ready, including their most advanced nickel project (Dumont, in Quebec), or still being explored, but nobody is actually under construction yet, let alone producing and spitting out cash yet. That means we’ll need quite a bit of patience.

Still, copper and nickel aren’t going away, and they are likely to grow in demand with electric cars and with other electric grid upgrades… though in the near term, their prices tend to be tied to just the level of industrial activity and GDP growth generally. And Nova does make the case in their Investor Presentation that buying these somewhat earlier-stage projects is a value-creation strategy in itself, since royalties that are several years or more from production are dramatically less expensive, but grow steadily more valuable as the project advances to construction and production (the reason is risk, of course, since being a “development stage” project does not guarantee that a mine will be built, so that’s where a management team earns its money — by assessing and valuing that risk).

The challenge, of course, is that my first question when valuing a royalty company is “how much cash do they generate?” I’m willing to pay a stiff premium for a strong royalty company because of the possible leverage of exploration and rising commodity prices, but what kind of premium do you pay on $0 cash flow? You have to make some assessment of what those projects might be worth, discount that however you feel is appropriate given the unpredictable nature of mining and the near-certainty that even good projects will take far longer to build than miners expect (the core requirement for any mining CEO is “pathological optimism”), decide whether you want to be involved with these managers as they build a portfolio beyond what they currently own, and make your call on what price you’ll pay. It’s an art, to a large degree.

It’s an interesting story, and it’s very new — the company has been building the portfolio for a couple years, but were called BatteryOne Royalty Corp in the beginning, and the company was quite small and quiet. They really ramped up the storytelling and the investment about a year ago, when they raised a new chunk of capital, changed their name to Nova Royalty, and listed on the Venture exchange in Canada, around which time they also brought on E.B. Tucker and those other Metalla Royalty folks (the companies have been connected for a while — Metalla had made at least one joint venture with BatteryOne earlier in 2020, on the NuevaUnion royalty), and made their largest investments, buying a portfolio of nine exploration-stage royalties (cheap at around $1 million, but it fleshed out the portfolio and provided growth potential further into the future, which investors like) and finalizing their acquisition of that key Taca Taca royalty (by far their biggest single acquisition, at about $30 million).

I have not dug really deep into the numbers, but my back-of-the-envelope math indicates that they’ve spent about $60 million in buying the current portfolio of royalties, with half of that being for Taca Taca (that comes close to matching what they claim as “total long-term assets”, so it’s at least in the neighborhood). All of those royalties were acquired in the past year or two, and prices of copper and nickel are generally up in that time… so one way to think about it is, how much will they have increased in value since Nova made those deals, and how much of a premium do you want to pay over what they’ve spent on the portfolio, in order to get access to the broader portfolio, whatever they buy in the future, and the skill of the management team?

With copper up by 40% and nickel up by about 20% since most of those deals were negotiated, and with a year passing for those projects to inch closer to production, I can see paying a 100% premium to the acquisition price of those royalties, that seems fairly rational, and gives them a premium for the fact that they’re small and growing and have found a solid niche in which to operate and sell themselves to investors. They don’t have any cash on the books to speak of, so there will be steady dilution as they make more acquisitions (either for shares, or for cash which they have to sell shares to raise), and that means I’d definitely think about nibbling at a $120 million market cap… the problem is that it currently trades at a $220 million market cap, at US$3 per share.

I might still be talked into Nova Royalty if I look into the larger deals and build up some more optimism about copper prices in the next year or two, I do, as I noted in the beginning, have a soft spot for royalties in general, and this management team proved in the past few years that they can spin a stock-moving tale at Metalla (which is also not generating much cash flow yet, incidentally)… but I also have a fair amount of copper exposure through royalty-driven investments in Altius Minerals (ALS.TO, ATUSF), Sandstorm Gold (SAND) and Anglo Pacific Royalties (APF.L, APY.TO, AGPIF) already in the portfolio, all of which are already generating quite a lot of cash flow, so I’m not feeling particularly feverish about jumping into another new growth story in royalties just yet. Interesting and small, which is always tempting, but not close enough to cash flow to make me excited about paying a big premium.

And if copper does make you feel shiny, there’s also always the more diversified portfolio over at EMX Royalty (EMX), which was teased by Dave Forest over at Casey last year (Forest was E.B. Tucker’s successor at the helm of at least one Casey newsletter, coincidentally enough) — EMX has some producing royalties and therefore has better cash flow right now (though it’s from gold and zinc, not copper yet), and doesn’t have as much nickel exposure as Nova, but it does own a LOT more early stage project royalties, close to 100 at this point, mostly on gold and copper projects, so if you like the “shots on goal” approach at improving your odds perhaps that one will appeal.

That’s just me, though, and what I’m doing with my money — with your money, it’s your call that matters. Think this little fella will catch the imagination of investors as an EV play over the next year or two, or that copper and nickel prices will drive a new bubble that the might ride, or see enough value to just sit patiently and wait for that cash flow to catch up with the valuation in the next five or ten years? Have other favorite ideas in the battery metals? Let us know using the happy little comment box below… and don’t worry, we don’t bite.

May 2022 Update: Now that about 10 months has passed since this pitch was first circulated, there’s been a little change — Nova has made a couple acquisitions, so they have gotten even more exposed to copper (not much more nickel recently), and they bought their first cash-flowing royalty, so they now have a little revenue… it’s trivial in size, the Aranzazu royalty should pay them $1.5-2 million per year, but it at least starts adding a number to the top line of their income statement. You can see their most recent update of the status of each of their larger royalties here, they’re generally moving forward but still at least a couple years from production, or their updated presentation here.

I’d still prefer Anglo Pacific or Altius Minerals for my “base metals” royalty exposure, though they are more focused on copper and cobalt than on nickel… and I think Vale probably represents the best exposure to nickel in the market right now, with some of the best nickel mines outside of Russia, but that comes with a complex global mining operation and it’s not a simple royalty investment. Nova Royalty is at least falling in price, as people drop speculative future stories like hot potatoes, and is now trading down much closer to the acquisition cost of their royalties, so it’s getting more attractive… it’s just hard to commit to a royalty company that’s a few years from meaningful cash flow and compounding when the more established royalty companies are trading at reasonable valuations.

Disclosure: of the companies mentioned above, I own shares of Sandstorm Gold, Altius Minerals, Royal Gold and Anglo Pacific Group. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.