Those other two “Chaffee Royalties” from Chris Mayer

Finishing up our look at the royalty/streaming tease from Mayer's Special SItuations

By Travis Johnson, Stock Gumshoe, September 5, 2013

We spent a fair amount of time talking about Chris Mayer’s favorite royalty stock yesterday — the main stock pitched in the newly reborn “Chaffee Royalty” teaser ad that’s been circulating lately. You can see that one and my thoughts on it here, the tease was for tiny little Sandstorm Metals & Energy.

But Mayer’s ad also teased two other “Chaffee Royalty” stocks that he’s recommending for Mayer’s Special Situations — two other passive royalty earners that he likes.

I won’t rehash the whole idea of royalty and streaming stocks here, I spent some time on that yesterday and you can check out that piece if you’d like more of a primer on what we’re talking about. But I will try to ID those other two picks for you.

Here are the clues for the first one:

“First, with one move, this next “Chaffee Royalty” play could give you a claim on royalty deals for nearly 15 mineral-rich mining properties in Canada, Nevada, New Mexico, Mexico, Brazil, Mongolia, Australia – including royalty rights to gold and silver.

“Like the other pure “Chaffee Royalty” companies, this next player owns no mines. Or mining equipment. In fact, it has only 13 employees. But that hasn’t stopped it from tapping into royalties from several of the world’s best gold mines… on the future sale of over 70,000 ounces of gold.

“Like the original Franco-Nevada that closed in 2002, this play is jammed with choice royalty deals in the gold market. Can this replicate the same success? Our research has the answer, which you can see for yourself in this special report.”

Well, whaddya know — Thinkolator sez this must be Sandstorm Gold (SAND), the much more fortunate elder (and far larger) sister of Sandstorm Metals & Energy. Sandstorm Gold is indeed active with streaming deals in each of those countries and states (though some of them are not producing yet). And they do indeed have 15 “Chaffee Royalties” — mostly streaming deals, a few royalties — plus the portfolio of smaller royalties they acquired through their takeover (now complete, was previously a controlling ownership) of Premier Royalty this Summer. Their streaming deals and royalties are almost exclusively in gold, though there are a couple future potential ones on platinum and silver as well.

I own a substantial chunk of Sandstorm Gold, holding it through the rough decline this year that was precipitated by the collapse in the gold price. It’s still my favorite stock for getting leveraged exposure to gold without all the risk of buying individual gold mining stocks, but it is absolutely levered to gold — if gold drops, SAND will drop. If gold rises, SAND will rise. They are having their share of difficulties as well with the weakness of some of their small partners who need more funding, but they have several good-sized streams at low-cost mines that can keep them generating positive cash flow for a long time as long as gold doesn’t stay down below the $1,000-1,200 range for very long. If gold gets below that level, some of their partners will be unprofitable so they’ll very likely stop producing gold or slow down operations substantially.

I’ve written about this one many times so I won’t bore you with more details here — you can see their investor presentation on their website if you’d like an overview, they currently have eight producing gold streams and two that aren’t yet producing, and five NSR royalties in addition to the Premier Royalty portfolio. Their biggest streaming deal illustrates the glory of these kinds of deals — they’ll get almost 40% of their revenue this year from Luna Gold’s Aurizona mine in Brazil, a mine that has been producing much better than anticipated when the initial streaming deal was made and that will likely expand again in the second half of next year. I can’t tell you whether SAND will rise or fall (unless you can tell me what will happen to the price of gold), but I can tell you that I keep this as my only substantial equity exposure to gold and I prefer it greatly to individual gold miners. If you like the passive and diversified exposure to gold royalties, you could also get it from the larger and more stable Franco-Nevada (FNV) or Royal Gold (RGLD). I think both of those are also excellent companies, I just personally prefer the valuation and growth prospects of SAND.

And what’s the other “Chaffee Royalty” from Chris Mayer? Here’s the hint from the teaser ad:

“Second, an unusual new ‘Chaffee Royalty’ company like we’ve never seen before. It’s the world’s first “Chaffee Royalty” company for agricultural commodities. Food prices are already up around the world. Meanwhile, global populations are rising, which means even more mouths to feed. Here’s the only way right now to “make money while you sleep” with royalties from agricultural commodities – and best of all, it only costs $1.80 a share to get in.”

This one, according to the Mighty Mighty Thinkolator, is a tiny littly startup called Input Capital (INP in Canada, INPCF on the pink sheets). I added them to the watchlist in a Friday File piece for the Irregulars about a month ago but haven’t yet gotten comfortable enough with them or seen enough of how their model works when it trickles down to the financial statement to actually buy it myself or get really excited about it.

It’s an interesting model, they basically give farmers money up front to help pay for seeding and fertilizer and operations and collect a set number of tonnes of canola at a set (well below market) price from that farmer at harvest. They send agronomists and experts out to the farm to help them increase their yield, and they get a bonus in the form of extra tonnes of Canola if the harvest exceeds the agreed-upon yield per acre benchmark.

The price has drifted lower over the last month or so, hopefully that will continue and it will be a bargain by the time I get comfortable with their financials — they just updated their investor presentation here, the base model for their deals seems to be for annual projected cash flow that has them recouping their upfront investment in the fourth year of a six year deal, so as long as canola prices don’t get crushed or Western Canada have a couple terrible harvests it may well work out, I just don’t know what the financials will look like once they start getting that cash flow so it’s hard for me to assess what the company should be worth.

Most of their deals will generate cash from harvests this year, so they shouldn’t be hungry for cash, but I suspect they’ll probably want to issue new capital to grow more quickly at some point over the coming year — their deals average between $1-2 million, so they’re still quite small and they also generate cash flow almost instantly (unlike the long wait to build and develop a mine, a field can be planted and a harvest sent to market at least once every year), but they can’t lever up and grow quickly without more capital. So far, according to that latest presentation, they’ve made streaming deals with upfront payments of about $20 million in total, and that’s the majority of the company’s assets, so you’re certainly paying a stiff premium for management above that invested capital (the market cap is about $60 million). On the plus side, management is well-connected and experienced in the industry and owns a lot of the company. Short answer from me so far is: I like the model, I like the company, but this is a new company and a new business model with no real comparables so it looks like it’s still a bit expensive in my uneducated early assessment … but I really have no idea what the price should be at the moment. That’s why I’m just watching for now — and pleased to see the share price coming down a bit.

What do you think? Interested in getting aboard either of these “Chaffee” royalty/streaming deals? Think they’ll work out well for investors at these prices? Let us know with a comment below.

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September 5, 2013 4:28 pm

this is good as i own all three. i might add more Input Capital.

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Martial Artist
September 5, 2013 5:07 pm

In looking at SAND, I noticed that they don’t pay any dividends. Am I correct in assuming that one owns SAND or others in same “Chaffee Royalties” category, solely for the potential of the shares to appreciate and be sold at a higher value? Or, did I miss something about this category of stocks?

Thanks for any insight anyone can provide.

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September 5, 2013 6:13 pm
Reply to  Martial Artist

MA, that’s correct, investing in these streaming companies is based upon growth in share prices. If you believe in higher PM or canola prices, that’s where these shares will grow. I think the SAND CEO said at the latest conference call that divys would happened, at the earliest, late 2014 or 2015, based of course on PM prices. What INP guys plan to do, I dunno. Seems they’ll just plow back any cash flow into growing their company. No divys on the imminent horizon from these boys.

September 5, 2013 5:30 pm

I was all set to write about Input Capital, but I have such a long list Travis beat me to it.
I appreciate them for pioneering a new field and was quite excited about the potential, but had other priorities at the time. I think it is reasonable to allow at least a first year crop experience before jumping on the bandwagon, though early investors in new concepts frequently stand to make quick gains when the broad market finally catches up and discovers a new trend. A definite “watch list” stock I will certainly consider when I find what I consider a good entry point.

TODAY Chris Mayer released more information on his “Chaffee Royalty” program and not surprisingly, since he favours proactive investors/founder ownerships is recommending a recent Eddie Lampert company spun out of Sears Holdings that is a fast growth, royalty based business focussed on smaller markets that Home Depot, Loew’s, another favourite of his, (Tisch family) are to small a market for them to effectively compete with.
Sears Hometown & OUTLET Stores (SHOS) are aimed at small town and rural markets.
Have not yet taken time to check it out thoroughly but anything Chris Mayer recommends is at least worth a good look.

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September 5, 2013 5:54 pm

Anyone familar with the company that Michael Robinson is touting in the Mems-Microsensor (Micro Electro Mehanica Systems) arena?

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September 5, 2013 6:54 pm