Nick Hodge and Gerardo del Real did not disappear for long when their newsletters stopped being published by the Outside Club… they’re back with new letters from a publisher they’re now calling Daily Profit, including Gerardo del Real’s Junior Resource Monthly (currently “on sale” for $99, this is effectively a restart of the Junior Mining Monthly letter he helmed for the Outside Club).
And, naturally, they’re out trolling for new subscribers — that subscription is being peddled with the promise of a new gold royalty stock that pays dividends and is Del Real’s “#1 Gold Stock for 2021.” And I loves me some royalties, and know that many Gumshoe readers are in the same boat, so I thought I’d figure out which one he’s hinting at. So let’s put the Thinkolator through its paces, throw in the clues, and see if we can come up with anything interesting to chew on.
Here’s a bit from the order form, just to get you juiced up…
“Gerardo has the inside scoop on a new gold royalty IPO… and why it’s priming up for 1,000% gains.
“He says it has all the upside of gold miners… while cutting your downside risk substantially.
“It gets paid royalties… including from some of the gold assets now owned by Warren Buffett himself… and then passes a portion of those royalties on to you in the form of cold, hard cash….
“This new IPO is backed by one of the world’s top ten major gold producers.
“Since it’s brand-new, nobody has heard of it. So it’s still cheap.
“Which is why, based on conservative calculations, it only trades at 1/10th its real value.”
Many royalty companies were founded by first spinning off the assets of an operating company — often a miner will own some royalties as a result of old acquisitions or exploration projects and the value of those royalties will be hidden and under-appreciated by investors, or sometimes mining companies will recognize the crazy valuations that royalty companies sometimes trade at and spin out new royalties of their own into a new company to try to “unlock value”.
Del Real seems to be hinting at one of these, a company that was spun out of a larger parent. Here’s more from the ad:
“… previous royalty company IPOs needed to rise 10X to 20X to match the value of their parent company.
“That means you’re looking at both a 10- to 20-bagger return on the stock… PLUS the cash payments that it spits out.
“But only if you get in now, while it’s still cheap.
“Gerardo has been eyeing this opportunity, and getting the inside scoop…
“Now that they’re publicly trading, you can get a piece of this next big gold success story.”
There haven’t been enough of these kinds of transactions to really fairly value them using the former parent as a yardstick, I’d say — better to look at the actual value of the royalties and the cash flow they provide, and figure out whether the company’s valuation is similar to royalty peers… but we’ll get to that in a minute. First we have to get a name, right?
So what other clues are dropped along the way? Here are a few tidbits:
“It even gets to collect a certain percentage of the gold Warren Buffett now owns through his purchase of Barrick shares!”
OK, so there’s somehow a royalty on a Barrick mine somewhere in their portfolio. Buffett surprised everyone by buying into Barrick over the summer, the first mining stock position in the Berkshire Hathaway portfolio in my memory… though it wasn’t a huge position, and Berkshire’s Barrick holdings were reduced within a few months, so it probably wasn’t Uncle Warren himself making the trades (he has a couple former hedge fund guys who each run large chunks of the portfolio, so Buffett’s signature is more often tied to Berkshire’s really big moves — if it’s an investment of less than $5-10 billion, Warren probably didn’t personally make the call).
We can get into royalties more in a minute, if the whole concept is new to you, but it’s basically a financing structure — investors buy a small portion of the future output of a mine for a set up-front fee. Royalty companies acquire portfolios of royalties on mines that are either in production now, generating cash flow, or possibly valuable in some future when those properties might get developed (closer to production or cash flowing royalties are, of course, much more expensive), and there are a dozen or so precious metals royalty companies in the US and Canadian markets.
Del Real gets us hotted up about the concept, maybe a little too much:
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“Once a royalty deal is signed…
“The payer is obligated to pay in good times and bad.
“It doesn’t matter if the gold isn’t mined yet.
“It doesn’t matter if the gold is late.
“The money has to be in the bank.
“This is why they perform in all gold markets — bear, bull, and sideways.”
Umm, that’s not really true. It DOES matter if the gold isn’t mined — royalties are a portion of the gold produced, usually a percentage of the net smelter return (ie, the actual amount that’s turned into gold bars from that mine). If the mine shuts down for a year for any reason, there is no royalty that year, not for a “normal” royalty (each royalty deal is a contract, so I’m sure there are some different structures). If the mine produces less gold, there is a lower royalty. If gold prices are lower, there is a lower royalty in cash terms. A typical royalty is not a guaranteed annuity, it’s effectively a share of the production — still a great thing to have, in my book, but let’s not exaggerate it that much.
And the one he’s specifically touting today is apparently a pretty new entrant in the space, here’s how he leads up to that…
“Sometimes these royalty streams are separated from the main gold mining company… and spun out into a new company that starts trading on its own…..
“Back in 2003, Goldcorp spun off its royalties into a new company called Silver Wheaton.
“Since then, shares of Silver Wheaton — now called Wheaton Precious Metals — soared more than 1,600%, leaving Newmont shares in the dust….
“Then, in 2007, Newmont spun off its royalty business into a company called Franco Nevada.
“Since then, shares of Franco Nevada have surged more than 1,200%. The royalty shares again significantly outpaced the mining shares….”
So the implication is that because sometimes these spun-out royalties “caught up” with the valuation of the former parent company, that should be the target this time as well. It sounds logical, but is actually pretty misleading.
And then, finally, we get a little bit more specific with the clues…
“And just like Franco and Wheaton… this new gold royalty company stock is set to rise 10X to match the valuation of its parent company.
“This opportunity involves one of the world’s biggest gold companies — a Canadian miner operating five mines with a market valuation over $5.5 billion.
“It went up 80% in 2020….
“It just spun off its North American royalties into a new company that just began publicly trading.
“It’s already collecting big streams of cash from operating mines, has added new royalties, and is paying a dividend.”
And, yes, he makes that comparison to the former parent…
“And its shares will need to rise at least 10X to match the market valuation of its parent, just like Franco Nevada and Silver Wheaton did.
“Right now, this new royalty company’s market valuation is only $500 million while its parent company is being valued at $5.5 billion!”
So that’s pretty good… any other clues?
“… the new company shares some of Osisko’s management….
“… shortly after Buffett spent half a billion dollars buying shares of Barrick, this company hopped on the opportunity…
“They bought a company that already collects royalties on part of Barrick Gold’s legendary Cortez mine, situated in the world-class Carlin gold belt of Nevada….
“it just began publicly trading — It’s still below $2.00 — and nobody knows about it.”
Thinkolator sez this is Nomad Royalty (NSR.TO, NSRXF OTC in the US), which was founded by a few Osisko alumni and was essentially formed by royalty contributions (in exchange for shares) by Orion Mine Finance and, to a lesser degree Yamana Gold (AUY), and came public in a reverse takeover last summer.
Their presentation indicates that they pay a 1.9% dividend yield (two cents per year, Canadian), which they focus on as key to their strategy because it’s above average for a royalty company (which is true), and with six producing assets and 14 total assets, and they also say they have about $100 million in “capacity” available, mostly in a line of credit, but it’s very likely that they’ll get the capital for any large royalty acquisitions by selling shares (or trading shares for royalties).
It’s not really a spinout, but otherwise it’s a match, and I guess you can sort of say that it was spun out by Yamana Gold, which is roughly a $5.5 billion company, since Yamana essentially contributed to the creation of Nomad by selling a royalty portfolio to them for $65 million. And they do owe Yamana $10 million over the next couple years, and that miner is not particularly seen by management as a core long-term shareholder like Orion Mine Finance will probably be — Yamana did just sell about $25 million worth of their Nomad shares in a secondary offering in December, at C$1.10, (that’s about a third of the position).
So yes, Nomad is pretty new to the public markets, they were formed with those Orion and Yamana assets and started trading on the TSX back in May, at C$0.90, and it immediately shot up in the excitement over gold… but then, after gold topped off in September, it drifted down a bit. That’s fairly similar to the other royalty names, this is what the past six months looks like for Sandstorm Gold (SAND) and Royal Gold (RGLD), my two other current royalty holdings, compared to the price of gold and the Nomad shares…
So Nomad is an interesting and cash-flowing royalty company, several of those acquired royalties are currently generating cash flow and they said in their recent investor town hall that they expect free cash flow of $30-40 million this year if gold remains stays at $1,700 an ounce in 2021 (their operating costs are very low, as befits a royalty company — they aim to have General and Administrative expenses of about C$2.5 million in year one, probably C$4.5 million once they start paying themselves a salary in year two). That’s pretty impressive for a $500 million company, particularly compared to the generally richer valuations carried by the established royalty payers like Sandstorm or Franco-Nevada, so my guess would be that either investors have some concerns about the longevity of those assets, or they don’t trust management, or they just aren’t familiar with the company yet.
The Barrick connection comes from the Robertson Project on the Cortez Trend — they have a sliding scale royalty (1-2.25%) on that property, and they say that Barrick recently included Robertson in their five-year plan, with production “assumed in 2025.” That’s the biggest potential long-term growth asset, it appears, and could end up being dramatically larger once some real exploration takes place at depth on that property, but that’s not part of the current cash flow (three of their royalties are cash flowing, a few are just about to be in that position, in commissioning or the completion of construction, and a dozen or so more are really just “exploration” royalties — many of which will probably never go into production).
And that was what caught my eye with this one, really, because I remember that project. They bought the Robertson royalty when they acquired Coral Gold back in November. That’s a significant royalty because it’s an important piece of land in the Cortex complex, near the existing mills, and has an inferred resource of just under 3 million ounces but also, they believe, has significant exploration potential at depth (there’s some drilling going on now). And who knows what they’ll find if Barrick really focuses on drilling out the property as they plan the growth in the Cortez trend.
Rhat rang a bell for me because I owned Coral Gold for a little while, back in 2016. I just went back to see what I had written about this one — it was a company that owned the Robertson Project entirely, and at that time had just solid it to Barrick, but held back a pretty appealing royalty that I thought was undervalued… and it seemed that they intended, eventually, to reinvest in some other assets (they never really got around to that, and I sold my shares and forgot about them for years) — here’s what I said at the time:
“July 2016: The PEA for the Robertson Project, which was completed way back in 2012, indicated that it would take five years to develop the property, and that at $1,350 gold it could produce 57,000 ounces a year for more than ten years. That might never happen, this is a consolidation deal for Barrick that didn’t cost them very much (it is a huge deal for Coral, but didn’t even generate a press release from Barrick), and they may or may not end up producing gold from Robertson in a few years. They’ve had a joint exploration deal with Barrick for part of the project in recent years, though Barrick pulled back on exploration last year with low gold prices so there’s no guarantee that anything comes of the royalty.
“If they do build a mine on the Robertson project, and gold is at $1,200 an ounce at that time (let’s say that’s 2022), and if the production level is similar to the PEA estimate, that’s almost $700,000 a year (or if you want to be crazy, if gold’s at $2,000 an ounce then the annual royalty would be $2.5 million). If they do not build a mine and start production by 2023, then Barrick is still obligated to start paying them — they have to advance royalties of US$500,000 a year to Coral every year until 2033 (or until the mine goes into production, whichever comes first)..”
Fast forward four and a half years, and Nomad decides to acquire this sleepy and largely ignored “potential royalty” company that had never really acquired any other royalties of note or done anything beyond owning that Robertson royalty. Nomad noted that the acquisition cost was about C$46 million (C$35 million ex cash, Coral was still holding a lot of cash four years later). That US$5 million guarantee from Barrick ($500K/yr for ten years if the mine isn’t built) still exists, so that will kick in if the mine isn’t under construction over the next few years (it’s actually 2025 now that’s the cutoff for commercial production to start), and if I had held my Coral shares that I bought around 30 cents in 2016, I guess I could have tripled that money in five years if I had stuck with it. I didn’t, at that time I happened to decide to cash out of a lot of positions to buy a house, so I have no regrets on that… but it’s interesting that the story of that long-ignored royalty is coming back around again, now that Barrick is getting close to thinking about maybe doing something with the Robinson Property in the next few years.
And $2,000 gold doesn’t seem quite as nutty as it did five years ago, so you can envision this pretty easily becoming a larger project… but that is, of course, entirely hypothetical and still several years in the future. We have to trust that Nomad’s team sees potential for not only commercial development, but likely production that is well beyond what was envisioned in the PEA a decade ago, and, as is always the case with a passive royalty investment, we have to be patient. You get that sense of the potential long-term excitement from Nomad’s December Town Hall call with investors, where they noted that they don’t really know what Barrick will do, they don’t have to tell them anything as a passive royalty holder, but that it seems like they’re moving forward with Robertson in their plans, with Robertson mentioned in Investor presentations as a likely producer in 2025… and they said something along the lines of, “Barrick doesn’t do small projects.”
While we wait for that to possibly become a big deal in the hypothetical future, there is cash flow and there are likely to be some pretty steady small acquisitions as they build, perhaps like the one they just added last month (Nomad paid about C$3 million, half in shares and half in cash, for a tiny 0.21% NSR royalty on part of the Blackwater Gold project in British Columbia, now owned by Artemis Gold). You can get a decent idea of their current portfolio and their strategy (and their claim of being relatively undervalued) from the January Investor Presentation.
The other thing that jumped out for me was that they’ve got some warrants trading on these shares, thanks to the Coral Gold acquisition, and warrants are always interesting to me. It looks like these are two year warrants (ticker NSR.WT on the Toronto Exchange), and they have a strike price of C$1.71, so they’re well out of the money (NSR is trading at about C$1.12 at the moment), and they’re still priced low enough that they should trade with quite a bit of leverage if things heat up. So I did put in a small and speculative position on the Nomad warrants (they also have an early expiration clause after November of 2021, if the price gets above C$2.14 for 20 days out of 30, they can accelerate the expiration with 30 days notice.) This is a speculation on rising gold prices and/or a rising amount of enthusiasm for Nomad once they become better known — and really, the latter probably won’t happen without the former, so if gold falls apart over the next couple years this is likely to be a failed speculation.
I did read through their materials and look at the asset base and the cash flow — and while I like the warrant, I also like the relative valuation, the steadiness of the strategy as described by management, and the focus on paying a dividend… so while it’s still quite small and speculative, I did also decide to add a small equity stake. The biggest risk beyond just “gold falls” or “their royalties are not as good as they think they are” is that royalty acquisition is a very competitive business, with everyone looking to buy royalties, so anyone building a royalty company right now is in some danger of overpaying… but I do like these kinds of ideas and I think it’s worth getting involved with some experienced operators who are trying to go the entrepreneurial route and “make their bones” with their own company. I was delighted to be able to do that with Nolan Watson when he and David Awram struck out from what was then Silver Wheaton (now Wheaton Precious Metals (WPM)) to form Sandstorm Gold (SAND) a decade ago, and I don’t have the level of trust with this team that I do with the Sandstorm folks, not after just 24 hours or so to chew on the name, but I like what I hear so far.
I wouldn’t go in with a huge position here, it’s still a small portfolio and a small business, with only 14 royalties and a $500 million market cap… but I’m impressed with their cash flow forecast for this year, the dividend provides some discipline and investor appeal, the portfolio is pretty diversified given how tiny it is, and, as a little bonus, sometimes these folks get exciting if they catch fire with investors. I’ll effectively go in with a position here that’s about half shares, half warrants.
If you’re curious about royalties in general, here’s a little more from Del Real’s pitch as he describes the appeal of royalties:
“ROYALTIES: THE SAFEST AND EASIEST WAY TO GET RICH ON GOLD
“How is this possible?
“You see, large companies like Barrick Gold, Newmont and others own thousands of properties.
“Some of them are mines. Others are untapped land.
“These companies aren’t explorers though.
“They’re miners. They stick to what they do best.
“So instead of looking for gold themselves…
“They buy up a bunch of potential gold properties…
“And lease the vacant lands to smaller companies in exchange for a percentage of any gold discovered.
“Just as in music, TV, or art…
“This claim is called a ‘royalty’.
“And these gold mining companies often have dozens of similar opportunities…
“Each generating flows of cash from mines they don’t touch.
“Pumping out pure liquidity with none of the expenses from mining.
“These royalties are the ‘cash kings of gold.’
“This is how history’s gold barons got rich.”
And I shared a much longer explanation about the way royalties work, and how they generate upside, in a piece I wrote for an Eric Fry pitch about Metalla Royalty (MTA) last summer — the numbers will be a little out of date, but I went over the rough details for a bunch of the players in the space (not including Nomad, which had just barely come into existence at that point), and the basic business model hasn’t changed. Here’s a little excerpt:
“July 9, 2020: 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….
“… 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….
“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.”
Ot 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. All of the gold-focused royalty stocks are going to be driven by gold prices most of the time, so they’ll all be down today… but most of the time, the royalty companies will get most of the upside of gold and less of the downside.
And I’ll leave you with an image that represents that point… here’s what the biggest royalty firms have done over the past decade, compared to the miners and to the price of gold — that’s Franco-Nevada (FNV) in red, Royal Gold (RGLD) in orange, Wheaton Precious Metals (WPM) in dark blue, Sandstorm Gold (SAND) in light blue, and you can see that over time they’ve all been much more volatile but have returned considerably more than the metal itself (in green)… and, more importantly, have been dramatically more appealing businesses than the big mining companies who are represented by the Van Eck Gold Miners ETF (GDX), in purple — buying a gold coin a decade ago would have been a better call than buying an average mining stock:
So I’ll stick with royalties… and as I did here, I’ll continue to dabble in some of the smaller guys who get my attention, though I should note that Nomad is not exactly teensy — since they launched with a substantial portfolio last summer, the company is already roughly half the size of Sandstorm.
But what matters, of course, is what you think — it is your money, after all. Ready to invest in royalties? Think gold is dead and will be replaced by bitcoin? Prefer one of the other younger royalty companies over Nomad? Do let us know with a comment below… and thanks for reading!
Disclosure: Of the companies mentioned above, I own shares of Berkshire Hathaway, Sandstorm Gold and Royal Gold, and shares of and warrants on Nomad Royalty. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.