The opening to Eric Fry’s latest teaser ad sounds similar to many other gold-focused teaser pieces we’ve looked at over the years…
“If you want to make a fortune in 2020, there is only one thing to know. After four years of going nowhere, gold is once again in a bull market.
“Because of events stemming from the recent ‘coronavirus panic’ (which I’ll detail in a minute), this new bull market will be unlike any other we’ve ever seen before…
“Frank Holmes, CEO of U.S. Global Investors, says the price of gold is going to hit $10,000 per ounce.
“Pierre Lassonde, chairman of Franco-Nevada Corp., has even higher expectations. He believes gold could easily hit $25,000 over the next 30 years.”
Those two dudes made fortunes on gold, and the fortunes they’re making today rely on them selling the gold story, so it’s no surprise that they’re super-bullish… they almost always are (Holmes manages mutual funds that are best-known for their gold focus, Lassonde founded and operates the largest gold royalty company).
So what’s Fry selling now? Well, he’s mostly selling his newsletter, of course, Fry’s Investment Report ($79/yr), but he’s using the notion of “the #1 Gold Investment in America” to get you to pull out your credit card. So let’s research that a bit, help you build your own opinion, then once you’re comfortable with the reality behind the tease you can make the call on whether you want to subscribe to another newsletter, without the pressure of “secret” behind the curtain.
Here’s a bit more from the tease:
“I’ll show you, step by step, the #1 gold investment you can make to capitalize on the new bull market in the yellow metal.
“And no, it has nothing to do with bullion, coins, ETFs, mining stocks, or any other type of investment you’ve likely heard about before.
“What I’m about to show you is MUCH better.
“The #1 Gold Investment in America
“In the last gold bull market from 2000 to 2011, this investment went up…
“Roughly five times more than bullion…”
He shows that in a handy graph, too, which always gets attention — during that bull market, the gold price rose 281% and this “#1 Investment” apparently rose 1,622%. Not bad, eh? Particularly since some actual mining stocks, like Barrick (GOLD) actually were worse investments during that time than just owning the metal itself (that happens with some regularity, unfortunately — miners tend to overspend in good times, and it’s a pretty terrible industry with high fixed costs, high uncertainty and risk in each operation, and no control over the price of the end product).
Fry throws in a good dose of fear as well, as is pretty much required of any gold pitch…
“I believe the world’s richest people know that an historic transfer of wealth is about to happen very soon.
“A huge financial ‘reset’ is coming.
“And the world’s richest people stand to get even richer as a result of it.
“Here’s what they know that you might not know…
“A paper currency like the U.S. dollar not only acts as money…but it’s also like the ‘stock price’ of a nation.
“If a nation’s government manages its tax revenue and spending smartly, that nation’s currency will rise in value—or at least remain relatively stable—over the long term.Are you getting our free Daily Update
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“On the other hand, if a nation’s government manages its finances like a drug addict, chances are good that its currency will fall in value.
“For example, from 2000 to 2010, the African nation of Zimbabwe managed its economy horribly. It printed way too much money.
“During that time, Zimbabwe’s currency dollar fell in value by over 99%.
“The savings of its citizens were wiped out….
“And then there was America’s neighbor to the south, the nation of Venezuela, from 2010 to today.
“Over the past decade, its political leaders have run the economy into the ground. The currency has plummeted in value.
“The savings of its citizens were also wiped out.
“These are small countries, but the currencies of large, rich economies can also experience big moves…”
The purchasing power of the dollar, like all currencies, has tended to fall over time — usually gradually, but sometimes suddenly, like during the inflation spikes 40 years ago. That is indeed one of the main reasons to own gold as a savings buffer — it tends to offer diversification against the dollar (or other global currencies), and it tends to hold its “purchasing power” over long periods of time. That does not mean it’s guaranteed to hold up during a particular year or even a particular decade, of course, gold fell in price from $1,800 to under $1,000, a 40% drop, over just a few years in the last decade — the stability that gold tends to provide is measured in centuries, not years, so we get plenty of volatility as sentiment rises and falls for the shiny metal. These fiat currencies, untethered to anything of specific value, are an experiment that’s only 50 years old now, so to a large degree we’re just guessing what the next steps will be… but I agree it’s important to have some gold as a way to diversify and protect yourself from falling currency values.
And in the near term, most of the Milton Friedman economists will tell you that the fact that we’ve washed a few more trillion dollars into the system with the coronavirus rescue and the Federal Reserve easing means that inflation is inevitable… which could crush the value of the dollar, and therefore make the value of gold rise in dollar terms. I don’t know about “inevitable,” if we head into a long recession or a long recovery from this sharp recession, and people are reluctant to spend, then we might not see inflation for a long time…. but I’ll agree with “likely.” That’s why I’ve upped my exposure to gold a bit this year.
But anyway, you’re not here for my musings… it’s Eric Fry’s secret investment idea that you’re curious about, no?
He reiterates that it’s the global “rescue” money for COVID-19 that’s going to really prime the pump for gold…
“… we have never come close to the amount of credit that we’re about to see pumped into our economy.
“This will cause things to change drastically…
“The effects of which are going to cause the price of gold to go parabolic.
“I know this because almost every single time this has happened throughout history — when a country tries to “print” its way out of a crisis — it has ended the same way…
“With massive swings in the price of gold…”
And the examples he gives, like the Weimar Republic’s inflation that sent the gold price in Deutsche Marks up more than 10,000% (and led to the rise of Hitler), or the 829% rise in the gold price in Peso terms when Argentina’s inflation crisis took hold in the early 2000s. Will zero interest rates and negative interest rates and massive stimulus spending bring that to the big Western economies in the years to come? Maybe, though probably to a lesser degree… partly because the COVID-19 crisis is happening to everyone, all at once, around the world. We’re managing the public health crisis worse than most, for sure, but we also have the wherewithal, at least for now, with confidence in the dollar still strong enough to allow the Fed to print as many of them as we want, to spend freely on the rescue and the “rebuilding,” and the financial world is far more interconnected than it was even 20 years ago.
So again, I mostly agree that there’s meaningful potential for gold to soar in the next decade… but let’s not get ahead of ourselves and say it’s inevitable or guaranteed. Words like “inevitable” lead to disastrous portfolio decisions from folks who can’t accept their inability to predict the future.
And Fry does say some sensible things along those lines in his ad, to be fair… here’s that little section…
“Hope for the best, but plan for the worst….
“Yes, the dollar has lost over 95% of its purchasing power since the introduction of the Federal Reserve, back in 1913…
“And yes, by printing trillions, that same Federal Reserve risks driving inflation to record highs and dropping real interest rates lower than ever before.
“All that being said, the dollar remains, for now at least, the world’s currency. And in all likelihood, it’ll remain the world’s reserve currency next month…and next year, too. Maybe even 10 years from now.
“But the dollar seems likely to continue gradually losing its value against gold and other hard assets.
“In fact, it is not unimaginable that the dollar could, one day, go to that great currency graveyard in the sky…
“And there it would meet its predecessor, the U.S. continental, which was inflated out of existence toward the end of the 18th century.
“Whether that day comes a year from now or 10 years from now, it pays to be prepared.
“The best, most simple way to do that right now is by owning gold.”
And now, finally, we get into the clues… what is the “secret” he recommends?
“I don’t recommend going out and buying regular old gold bars or bullion.
“Instead there’s one investment I know will do much, much better….
“Most people don’t know this, but there’s a way to own lucrative royalty rights on America’s richest gold mines…
“This is about as off the radar as you can get in the gold industry right now.
“The kind of investment I’m passionate about finding…
“Because the upside is undeniably huge.”
Ah, so we’re dealing with some kind of royalty investment in gold… that’s a small universe of stocks to play in, but it’s certainly not “off the radar” — gold investors have been delighted by (and sometimes obsessed with) royalty companies for decades now. Two of the top ten holdings of the biggest mining ETF (GDX) are royalty companies, Franco-Nevada (FNV) and Wheaton Precious Metals (WPM). You may or may not know much about them, but they’re not “off the radar.”
What else does Fry say about the one he favors at the moment?
“One reason these royalty investments clobber just about everything else in the gold universe is because of the way they’re structured…
“You see, with gold royalties there’s no exploring, developing, or any of the regular costs that come with building a gold mine.
“You’re simply buying rights to an existing mine’s gold production and collecting the royalties as these mines churn out the metal.”
And he gives a couple examples…
“One of these royalty investments, for instance, owns royalty stakes on the famed Cortez gold mine in Northeastern Nevada.
“Since its inception in 1986…
“It has made gains as high as 297,900%.”
That’s Royal Gold (RGLD), which as I do the math has total returns of more like 5,500% from the early 1980s to today… still excellent, but 297,900% is way off unless they found some way to buy at an all-time low price in the mid-80s (that was a failed exploration company that started to turn itself into a royalty company around 1986).
“Another royalty investment has stakes on one of the largest gold deposits in the world today, the Goldstrike mine, which has produced a total of more than 40 million ounces of gold.
“This company has handed investors incredible gains as high as 1,273% since it went public in 2007…”
That’s Franco-Nevada (FNV), which is seen as the founder of the royalty business… though Royal Gold might argue, since they started to build their portfolios at near the same time. FNV did come public most recently in 2007, but that’s only because they had been bought out by Newmont around 2000 and Newmont eventually decided to sell off most of its royalties, which the Franco-Nevada founders effectively bought and re-listed the company. So their lineage as a public company and royalty firm is a bit broken in the middle, but the recent stock market performance has been exceptional, with FNV typically getting the highest premium valuation of all the gold royalty companies, and the history really goes back to the mid-1980s as well.
And one more…
“A third royalty investment company has stakes on the San Dimas mine. It is among the oldest, most profitable gold deposits in Mexico, one with excellent upside potential for exploration.
“It has soared as much as 1,569% since starting out in 2004.”
That’s the second biggest precious metals royalty firm, Wheaton Precious Metals (WPM), which used to be called Silver Wheaton — they were founded with a somewhat different strategy, buying up the ancillary silver rights from miners who were focused on other metals, calling these “streams” — for relatively small amounts, they would buy the right to buy all the silver from your copper and gold mine, for example, at $1 an ounce (just an example), so it was a relatively low-impact way to get financing for mines that were primarily focused on more exciting metals (silver was quite beaten down at the time). That worked out quite well, though they’ve morphed more into gold streams and royalties as well over the years, and had a longstanding tax dispute with Canada that also depressed the shares for a few years.
Those are probably names you’ve heard if you’re at all interested in gold and mining, they’re multi-billion-dollar companies and they’re the three best-known gold royalty owners in the world. That’s not what Fry is teasing, however, those are just examples to whet your appetite for the huge potential returns — he’s got something a little more obscure in mind…
“I’ve found just the royalty investment to own as world governments print their currencies into oblivion and turn interest rates negative…and the price of gold skyrockets in the coming months.
“With a total of 43 streaming and royalty deals attached to gold mines in five different countries all over the globe…
“And many more on the way…
“This little company is like a hidden gold deposit just waiting to be tapped.
“Shares are currently trading for just $5.”
So with 43 deals and a $5 share price, that’s certainly not one of the biggies. Which one is he talking about? Thinkolator sez this is relative upstart Metalla Royalty & Streaming (MTA), which is now actually up to 49 deals in its portfolio (they were at 43 less than a year ago, after their big deal to buy 18 royalties from Alamos Gold (AGI) in the Spring of 2019.
The big deal for Metalla over the past year is that their steady acquisition of royalties led them to grow big enough that they could get a listing in the US in January, which got investors excited, and unlike most of the small players in this space they actually pay a dividend as well. It’s a trivial dividend, but that’s still meaningful for a lot of investors… and, indeed for some of the companies they partner with (since they’re small, they’ve made a lot of their royalty deals by mostly exchanging Metalla shares for royalties — and the little companies who get those shares might want a little cash flow). The dividend is more of a signal than it is a financial driver — they have come close to breaking even most quarters on a cash flow basis, but even the limited cash flow from operations has not yet quite covered their roughly $300,000 per quarter dividend commitment.
Metalla now, after about four years of building the portfolio, has four producing assets that generate their cash flow, and another four that they anticipate generating cash flow in the near term — mines that are being built or will soon be built. They’ve gotten quite a bit of attention, mostly because they’ve built their portfolio very quickly… but probably partly also because publicity-friendly Adrian Day Asset Management and Peter Schiff’s Euro Pacific Capital are both substantial shareholders, and E.B. Tucker, who writes newsletters for Casey Research, is on the Board of Directors — that’s a very promotional bunch, and when you’re building a mine company promotion tends to be part of your DNA.
You can get a pretty good overview of the company and where they see themselves from their latest Investor Presentation here, which came out when they made their latest acquisition of a 1% royalty on the Wharf mine operated by Coeur (CDE), which is a major shareholder of Metalla (though a shrinking one, Coeur sold a big chunk of its shares in a secondary two weeks ago at $5.30, so now owns about 4%, down from 15%).
If you want to get an idea of the economics of Metalla’s deals, you could go through their past filings… but we at least have this latest one to consider. Metalla and Coeur’s deal effectively ends up with Metalla paying $5.76 million for a 1% NSR (net smelter return) royalty on the Wharf mine, $4.76 million worth of MTA shares and $1 million in cash. They say that Wharf is expected to produce 80,000 ounces of gold (or more) annually for a seven-year mine life, based on the updated 2019 reserves.
A 1% NSR effectively means you get 1% of the production, at no further cost. Sometimes the NSR is a little lower than the actual reported production, but they’re effectively the same thing — the amount of gold that gets mined and smelted, and turned into bars. 1% of 80,000 ounces would be 800 ounces, so at today’s price of roughly $1,800 that would mean roughly $1.44 million of annual cash flow for those seven years (assuming that the production stays at this level, the mine continues to operate, and the gold price stays at $1,800 an ounce). That’s exactly a four-year payback period, meaning by the end of the fourth year the investment Metalla made to get the royalty would have been repaid, and everything after that is a return on the initial investment. Of course, if gold is at $2,300 in a couple years then the payback is dramatically faster… and if gold trades instead at $1,000 an ounce for the next seven years, Metalla would just barely earn back its money and make no profit (or worse, since if gold stays at those levels for a long time it’s quite possible the mine could be losing money, so they might shut down and wait for better prices).
And beyond that, the upside comes from the fact that the mine has another 400,000 ounces in measured and indicated resources, not yet proven up as reserves or in the mine plan… and once they get closer to the end of the mine’s life, they might decide to drill more and try to extend the mine if they believe the ore body is larger, so it’s possible that if the mine turns out to be very long-lived they might be basing the royalty acquisition price on the current economics, but have some hope that the seven year mine life could turn into 12 or 15 years or longer.
That’s what creates value in royalties, the two sources of leverage are commodity prices and mine extension — a royalty that’s sold in the secondary market is based on the current expected value of the production from the mine, with some rational payback period, usually in the 3-5 years neighborhood depending on how close the mine is to production and how risky it seems to the buyer (royalties on “might never be developed” projects that are really just discoveries and land packages might be far cheaper, since they might sit idle for decades, and sometimes those on large and well-established high-quality mines might be more expensive)… but the best royalties are on mines that keep extending their life, adding more reserves and producing for years longer than originally expected.
My favorite streaming and royalty company has long been Sandstorm Gold (SAND), which was a little fella like Metalla eight or nine years ago but has grown up quite a bit, thanks in part to some great deals they made early on… so let me give an example from Sandstorm’s portfolio that illustrates this.
Santa Elena is a good example of the kind of profit that can come from the best royalties, even for a small company and a small initial investment. That little mine was one of the first three streaming deals Sandstorm Gold made when they were just forming the company, a little over ten years ago. Here’s what I said about it at the time:
The Santa Elena gold and silver mine in Mexico, owned by Silvercrest, expected to begin production in the second half of this year. Sandstorm bought 20% of the life of mine gold production from Silvercrest for $12 million and will have an ongoing payment of $350 per delivered ounce. The life of the mine is currently projected at 8 years, but there is potential for more exploration beyond what has been defined.
So using the same assumptions ($1,000 gold), 20% of 30,000 ounces would bring in roughly $3.9 million per year in free cash — so again, about three years before they break even on this deal and begin booking “profit.” They expect their first pour this Summer, and commercial production by the end of the year.
(Yes, I’ve owned Sandstorm since April of 2010, about six months after this Santa Elena deal was finalized with SilverCrest Mines… and, no, I was not smart enough to sell out during the initial enthusiasm when gold crested $1,800 an ounce last time just as Sandstorm got a NY listing, driving the shares to over $15 for a very brief moment in the Summer of 2012… this week is the first time SAND has gotten back to even $10 since then, so it’s been a long wait, thankfully one during which I’ve added to my position many times… I just checked, and it turns out I’ve bought SAND shares 17 times since 2010.)
That Santa Elena deal worked out really well, it turns out. It was a deal that was too small to attract Royal Gold or Franco-Nevada, both of which were already large and established companies at the time, and it looked like a very small if lower-risk project… just the thing for Sandstorm, which at the time had a market capitalization of about $100 million (it’s up to $1.8 billion today). Santa Elena was initially processing some old tailings and a shallow pit, starting roughly on time within a year of the deal being made, and Sandstorm did earn back their initial $12 million investment much faster, in less than two years (by mid-2012), mostly because gold prices were soaring… but they are still getting meaningful revenue from Santa Elena today, long after the mine was expected to be done producing at the time, mostly because they pitched in a little more capital to participate in Santa Elena’s underground expansion.
That additional participation, which they earned by right with the original deal, required another $10 million, so we’re up to a $22 million total investment by Sandstorm now… and the deal was for the “ongoing ounces” streaming payment to bump up to $450/oz once 50,000 ounces of gold had been delivered to Sandstorm, a line they crossed a couple years ago. In the meantime, the mine was bought (in 2015) and is now operated by First Majestic Silver, a larger company and less-risky partner who is still drilling to try to extend the mine life by finding yet more reserves. In 2019, Santa Elena produced 45,119 ounces of gold, so if the ongoing rate is something similar that would be 9,023 ounces to Sandstorm a year, with Sandstorm paying now $455 an ounce. At $1,800 gold, that’s annual revenue of just over $12 million. Prices were a little lower than that in 2019, so the total net cash flow from that streaming deal for Sandstorm in 2019 was $8,832… but at similar production rates, the cash flow this year will be much larger.
That’s what you get when you find a strong royalty and gold prices rise — you want a project that makes sense at the price you pay given current market prices, with the likelihood that your investment will be paid back within the first 3-5 years of production using pretty conservative estimates. You take the risk that the production will be slower in coming, that the gold price might fall instead of rise, or that they might have trouble building the mine, but you don’t ever have to pay any more for that risk… and in exchange, you get a mine that made sense on the initial plan, with clear leverage to rising gold prices if they do indeed rise — but you also get a expansion bonus hiding in the royalty.
That “bonus” comes because every operating miner is incentivized to start exploring to extend the project after a while — once they’ve got a sustainable economic mine working, they want to drill more and find more ore to feed into their mill, a mine is a huge sunk capital cost and it’s a lot more profitable to extend a mine than it is to close it down and go try to find another deposit, and many mines do have potential for expansion (finding the best ones, with the most expansion potential, is where royalty buyers make their money).
Why is there usually expansion potential? Because when you first identify a deposit, you don’t keep drilling forever to find the extent of it, or determine the ultimate size of the gold-bearing body of rock, drilling is expensive and time-consuming… you drill enough to justify building the mine, and to get a reserve base that is large enough, with a long enough and profitable enough expected mine life, that bankers will lend to you to build the mine, then you stop drilling for a bit and focus on building and operating the mine. Once you’re making money, it’s time to prepare for the future, and whaddya know, maybe that mine which made economic sense with an eight year mine life could actually produce for 30 years, generating a slow-building windfall for the royalty holders.
And since I’m a bit of a geek for the numbers when it comes to this kind of thing, I did go back and check all of Sandstorm’s 10-Ks for the past decade — the total operating cash flow Sandstorm has received in exchange for their $22 million investment, from 2011 through 2019, now tallies up at $67.7 million… and still growing. The best year so far was 2012, with gold prices high and the company rushing to produce from their pit at high prices, netting Sandstorm $9.3 million… the worst year, with gold prices in a slump, underground operations just beginning, and a new owner yet to come on board, was 2014 with only $4.9 million. If gold prices keep rising, 2020 or 2021 could set a new record for the Santa Elena royalty quite easily, and it’s still a nice revenue generator for Sandstorm even though the company is much larger now, with a portfolio of dozens of cash-flowing royalties (Santa Elena this year might generate close to 10% of Sandstorm’s cash flow).
That’s the dream. It doesn’t work every time, not by a long shot, but that’s what the small royalty financiers are looking for when they sniff around for deals… an affordable up-front investment that has the potential for extraordinary long-term returns. A few of those can build a company, if shareholders are patient enough to wait for the payoff.
That’s what happened earlier on for Pierre Lassonde, too — he’s widely considered the Grandfather of the royalty business, and that’s because 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 really not talked about 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. 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, $900 million in annual revenue, and a market cap of $28 billion.
So that’s what the hopefuls are shooting for… I imagine these founders all want to be the next Nolan Watson to build a meaningful royalty company from the ground up (Nolan is CEO of Sandstorm, which he left Silver Wheaton to found), and secretly they probably all hope to become the next Pierre Lassonde.
It has not missed anyone’s attention in the mining business that investors are willing to pay more for royalty companies than they are for miners — so we’ve seen plenty of smaller companies try to build royalty portfolios, sometimes starting out with miners who might spin off lower-quality royalties on small or undeveloped projects to try to get some value out of them. Here are a few that I check in on from time to time, if you’re interested in trying to find a strong little company trying to build itself in this space, I don’t own any of them — this is in order from largest to smallest:
- Maverix Metals (MMX, MMX.TO) — $550 million market cap, trailing revenue $38 million. Somewhat similar to Metalla in size and structure, with Pan American Silver being Maverix’s big initial partner (and PAAS selling down its Maverix stake with a recent secondary offering). They have 13 paying royalties, though just also agreed to reduce the royalty on Beta Hunt, an emerging producer for them, to help the company reinvest in expansion. I’ve owned Maverix in the past, and appreciate the large stable of royalty-paying properties that provides some stability and positive cash flow, even if most of the projects are fairly small. Pays a small dividend.
- EMX Royalty (EMX, EMX.V) — $228 million market cap, $1 million trailing revenue, just bought another package of early-stage royalties… diversified into base metals, too, but most projects very early stage… two producing gold mines in Nevada, one producing Zinc mine royalty in Turkey.
- Abitibi Royalties (RZZ.V, ATBYF) — C$270 million market cap, $3 million trailing revenues. Pays a small dividend.
- Ely Gold Royalties (ELY.V, ELYGF) — $200 million market cap, $1.7 million trailing revenues but almost $3 million in revenue expected this year from lease payments and royalties, four mines should be producing by the end of the year. A hot name among investors this year, given the 70 royalties in the portfolio and the “penny stock” size.
- Metalla Royalty (MTA, MTA.V) — $200 million market cap, trailing revenue $3.5 million.
- Sailfish (FISH.V, SROYF) — C$60 million market cap, one producing royalty and a few in development, revenue growing but less than $1 million a year at this point.
And even GoldMining (GOLD.TO, GLDLF) should probably make the list now — that company has a $240 million market cap, with no revenue as they’ve sold themselves as a “gold bank,” acquiring projects that would be monetized at some future date when gold soars. That’s perhaps the most promotional gold company in the junior ranks, and they are now creating a gold-focused royalty company out of their assets (and seeing their share price soar on the announcement). They call these “advance-stage resource and development projects,” but none of them are currently being developed as far as I know, and none of them even reports a meanignful reserve base (the big numbers they cite are resources, not reserves — which means they’ve been discovered with some degree of certainty, but not precisely enough, and not analyzed enough, for them to be counted as economically viable reserves, and inspire enough confidence to get someone to finance the building of your mine).
Those are the little fellas I’m aware of, and I don’t currently own any of them.
The big five, all billion-dollar (plus) companies, are well ahead of the rest of the class, that’s because they have much larger portfolios of projects and a meaningful amount of those royalties or streaming deals are actually in production, generating growing cash flow… those big fellas are, also in size order…
- Franco-Nevada (FNV)
- Wheaton Precious Metals (WPM)
- Royal Gold (RGLD)
- Sandstorm Gold (SAND)
- Osisko Gold Royalties (OR)
Sandstorm was one of the first real startups in the space in years when Nolan Watson and David Awram left what was then Silver Wheaton (now Wheaton Precious Metals) to build what they thought would be a new kind of gold streaming company, offering streaming deals to near-production juniors instead of just royalties… though it has matured to now be quite similar to Royal Gold and Franco-Nevada in most ways, with lots of royalty and streaming assets tied to major mining companies now.
Osisko is largely built on the base of Osisko Mining’s discovery of the Canadian Malartic mine, the largest mine in Canada, on which they own a big royalty, but they’ve also got a couple disastrous assets on the books, including a big investment they made to try to rescue their royalty on the troubled Renard diamond mine when Stornoway Diamond was filing for bankruptcy last year, and they clearly have also moved to developing more prospects on their own, which is partly why I sold my shares a while back (developing your own prospects and then partnering them off in exchange for a royalty has higher potential than just buying royalties on existing projects, and can be cheaper if you’re good at it, but it also takes longer and carries more risk). I have a large position in Sandstorm Gold and a small one in Royal Gold (RGLD) at this point… Franco-Nevada is the best company in the space but it’s also priced at a stiff premium to the others so I haven’t been willing to buy it of late.
So yes, there’s a growing cadre of royalty companies to choose from these days, and Metalla is the pick Eric Fry is teasing. Metalla will be entirely a growth story from here, because it has almost no revenue right now and only three or four of its royalties are actually in production. I’d argue that a more established idea at a similar price point might be Maverix right now, that’s a royalty company I owned for a little while as it was emerging (I decided in the end that I liked the big guys a lot more, so rolled that money into Sandstorm instead). The little fellas take bigger lumps when something bad happens with one of their royalties, since they tend to be quite dependent on one or two partners or mines… that happened with Sandstorm Gold when it was much younger, too, they took a terrible hit to revenues when the Aurizona mine, their largest royalty at the time and one of their biggest acquisitions in their early years, was shut down, partly because the gold price was falling and the cost of that streaming deal was too much for the mine to handle (and like Osisko with the Renard mine last year, Sandstorm threw more money at Aurizona to try to rescue it… though it’s now reopening, after changing hands a few times, and the restructuring worked out OK for Sandstorm in the end, even if it took five years).
Will the folks at Metalla make it? I wish them the best, but it’s certainly a more competitive business than it was even in 2009 when Sandstorm started, and wildly more so than it was in 1985, so it might be that they aren’t as likely to get windfalls dropped in their laps, since so many folks are looking at any potential deals out there… but with some smart planning and patience, and a little good fortune, it’s certainly still possible to create great royalty portfolios.
Just be mindful about debt and any other obligations a company takes on, whether regular debt or any partner obligations — a debt-free royalty company can ride through a bear market and survive OK, even if their share price craters for a few years (like Sandstorm from 2013-2016, for example), but that’s only because they can cut their overhead costs to the bone and they don’t have the obligation of debt service or mining costs like the actual miners often have. It’s not magic, it’s just a portfolio that gives upside exposure without downside risk — but even though their portfolios needn’t cost them any more capital, they can certainly lose value as assets and cause investors to give up. In a bear market, where royalties might dry up for a while, companies with liabilities are the ones who get in trouble — those with fixed costs or debt service can find that to be instantly burdensome if cash stops rolling in because mines close, and the debtholders or partners can sometimes take over a company with surprising speed. Most of those little fellas have only a tiny amount of debt right now, if any, and I haven’t studied all of their partnership deals, but it’s worth watching — somebody on Bay Street might convince them to issue too much cheap debt before too long.
On the plus side, at least for the little guys, the popularity of royalties these days means that they can raise money at much more attractive valuations… and that’s important, because all royalty companies rely on raising capital in their early years (either using their shares to buy royalties, or selling more shares to generate cash that they can use to buy royalties). The cash flow to reinvest into new royalty deals will eventually come and allow the value of the portfolio to compound, if they’ve made good deals, but the deals that tiny new startups can make tend to be small royalties or streams on mines that aren’t producing yet, so unless they get really lucky the cash flow doesn’t come in quickly, and they tend to have to use their stock as a currency to make the deals, which further dilutes the impact of the initial cash flow.
It takes time for a royalty portfolio to build up to being really sustainable, where the cash thrown off from the royalties is enough that they can report a nice profit and continue to invest in more royalties to provide future growth. If you find a management team that you think is making good choices, has the right incentives, and can be trusted, try to stick with it for a long time and let the business model work.
So… sorry about the long screed there, but mining royalties is a fascinating topic… and royalty companies in all businesses are among my favorite investments, from music to pharmaceuticals to gold, the combination of upside leverage and growth potential with no downside or boring operator risk (beyond the initial investment) is compelling for a lazy fella like me.
And that’s just my take, of course, I know a lot of Gumshoe readers have different favorites among the royalty companies — so if you’ve like to pitch in with a question or an opinion about any of those fellas, or anyone I might have missed, feel free to use the happy little comment box below. Thanks for reading!
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Disclosure: of the companies mentioned above, I own call options on Barrick Gold and shares of Sandstorm Gold and Royal Gold. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.