We first heard the “Chaffee Royalty” pitched a little more than five years ago, back when Chris Mayer was touting the “next Franco-Nevada” with a pitch about passive mining royalties — and, as you’ve probably guessed if you’ve read this far, it’s baaaaack!
The basic idea of royalty investments is familiar to most Gumshoe readers — I love the concept of royalty investing and have bought (and sometimes sold) many of these stocks over the years, and we’ve certainly covered plenty of different royalty stocks as they’ve been teased by pretty much every natural resources newsletter. In essence, royalty companies are financiers of natural resources projects — they put up capital to help build a mine or drill a well or explore a property, and in exchange they get some kind of “cut” of the production, usually in perpetuity and typically with no further obligation to put more capital into the project.
Generally speaking, mining royalties are often for very small portions of the net return of the mine, perhaps between 1-5% of the net smelter return of produced gold or silver or copper or whatever, and they’re usually held either by original landowners or explorers or by companies who finance early exploration — a royalty doesn’t cost that much on land where there aren’t yet large proven reserves, and it’s a compelling way for junior miners to raise cash without diluting their shareholders by selling more stock.
Streaming deals, which are similar, are usually done on more advanced properties these days — they involve buying a right to a usually larger slice of the production, often 10-30%, and there’s also usually an ongoing payment that’s well below the market rate. These are usually larger deals that help a company get over the hump to actually construct a mine and start producing, or to expand a mine, long after the initial exploration phase and when the mine is much more likely to actually get built. Those aren’t rules, there are lots of different ways in which mines are financed, but it tends to be the way it works at the public royalty companies.
In oil and gas it’s usually a little bit different, with royalty companies and trusts more often being spun out of producing energy companies who want to monetize a steadily producing asset (they can sell a large royalty interest in a producing oil field to a subsidiary, spin that company out to investors who are interested high dividends, and use the cash they get from the deal to keep exploring or developing new reserves). But it’s the same basic concept — you own some kind of share of the top line of a resource company, so you get a cut of the revenue without worrying (much) about ongoing costs, like labor and energy costs that are rising rapidly for many miners. It’s not perfect, because in exchange for that lack of exposure to costs or operating expenses or hassles you are turned into a passive investor in the asset, with little recourse if they decide to shut down the mine because it’s too expensive, or isn’t producing as expected, or because the operator goes bankrupt, or for any other reason.
Last time around, Chris Mayer was using the “Chaffee Royalty” term to pitch a specific royalty company called International Royalty (ticker was ROY), which probably worked out pretty well for most of the investors who were interested at the time, since ROY was bought out by Royal Gold (RGLD) after a bidding war with Franco-Nevada (FNV) … incidentally, that deal also worked out very well for a company I own and have written about for you a few times, Altius Minerals (ALS in Canada, ATUSF on the pink sheets), a more “grassroots” royalty company that had opportunistically built up a position in ROY shares as well.
But ROY is long gone now, so what’s Mayer pitching?
Well, I’ll give you a little taste of his ad — this is how it starts:
“Closed to New Investors 11 Years Ago…
“The ‘Chaffee Royalty Program’ That Turned Every $1 Into $50
“In 2002, the royalty “paycheck program” that paid out $50 for every $1 invested… decided to shut the door to new “members.”
“In 2013, a new door has opened… and it just got easier than ever to “make money while you sleep”…
“But there’s no telling when it could close again…So you’d better collect your own “Chaffee Royalties” right NOW!”
That “closed to new investors” line has been used to tease royalty stocks before, too — that refers to the fact that Franco-Nevada was taken private in 2002, though it went public again in 2007. Mayer mentions Franco-Nevada a bit later when he gets around to teasing his new idea:
“… by the time Franco-Nevada got snapped up in 2002, it had ballooned from a tiny $2.3 million firm… to a company worth the $3.0 billion shelled out by Newmont Mining… which saw the writing on the wall and bought up Franco-Nevada’s whole portfolio of royalty deals in one grab.
“With the buyout, your chance to get in on the original Franco-Nevada pool of ‘Chaffee Royalties’ ended.
“But that’s not the end of the story…
“Because there’s another ‘Chaffee Royalty’ opportunity opening up right now. It’s still very small. Just as Franco-Neva