Forest’s “The #1 Copper Investment in America”

What's being teased as "Copper Royalty" play on electric cars?

By Travis Johnson, Stock Gumshoe, August 11, 2020

Dave Forest at Casey is pitching some lithium ideas, and that’s an area where there are sometimes hot developments that surge higher during manias, so I’ll try to get to that tomorrow — but what I found most appealing, as a lazy investors who loves royalties, was his pitch about buying into copper royalties.

So I’m first going to take a quick look at that for you today. The ad this is from is a Casey Strategic Investor pitch all about surging demand for batteries for electric cars (a story we’ve certainly herd many times over the past dozen years, though perhaps it’s getting closer to reality now), and this is the part where he eventually gets to the idea of copper as a play on electric cars…

“In 2017, the electric car industry used just 185,000 tons of copper.

“By 2027, that number is expected to surge to 1.4 million….

“America’s copper industry – inside the area I call the breadbasket of American mining – is heating up.

“And I’ve found a very unique way to play this American copper boom.”

Now, to be clear, electric cars are not going to be the driving force in the copper market anytime soon. Annual copper production is something in the neighborhood of 18 million tons right now, so at a few hundred thousand tons electric cars are a very small part of demand… it’s certainly possible that if other demand stays steady, vehicle electrification will be a meaningful part of demand in a few years and can help prices stay buoyant, but it won’t be the main source of demand — construction and infrastructure buildout will remain the key demand driver for the foreseeable future (new homes, electrical grids and factories require a LOT of copper for wiring and plumbing, for example).

And since we mustn’t ignore the elephant in the room, I should note that for the past 25 years or so, China has been the vacuum sucking up much of the world’s copper as that country urbanizes… so shifting demand from China can impact copper prices dramatically, as is the case with all industrial metals.

That “very unique” way, of course, is royalties — royalties and streaming deals are one way that mining projects get financed, with the financier typically buying either a net percentage of production, like a net smelter return royalty (NSR), typically 1-3% or so, or buying the rights to a larger percentage of the production but paying an ongoing below-market fee for that, which might be something like a streaming deal that gives you 20% of the copper from a given mine for $1 a pound.

Usually royalty interests are sold at earlier stages, for smaller amounts of money because of the long odds that a project will be developed, or are formed because a landowner or a prospector is rewarded with a royalty… and streaming deals are typically larger and much more expensive, and are done when a mine is within a few years of production (that’s not always true, but tends to be how these deals work — there are also many variations, since each royalty or streaming deal is its own unique contract).

Here’s the lead-in on that from the ad:

“Instead of picking and choosing between dozens of projects, you can benefit from all of the best ones.

“You can buy a stake in over six massive American copper projects.

“If copper prices go up and production increases, you could make a fortune.

“But if copper prices stay the same – or even go down – your investment should hold up….

“… the best way to play copper is to invest in what’s called a copper royalty company.”

So which royalty company is Forest teasing here? We get a few hints:

“The best American copper royalty company has over 44 copper projects – spread across five different continents.

“Some of the most promising projects are here in the US.

“There’s one in Nevada, four in Arizona, and another in Utah.”

OK, so that’s the major clue… any other tidbits to help us narrow it down?

We’re told that the price is “around $2” … and that they also have interests in some gold mines…

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“Copper is often the byproduct of mining for gold.

“And this company has their hands in 15 American gold mines – most of them in Nevada.”

So hoodat?

Thinkolator sez, this must be EMX Royalty (EMX), which has a market cap around $220 million and is still fairly close to $2 — about $2.65 as I type (or C$3.50 in Toronto). That’s one of the few “large junior” publicly-traded portfolios of royalties — and they have for many years been just on the verge of sustainable cash flow, but aren’t quite there yet.

Like many other royaly companies, EMX started life as an explorer… and they have historically had a strategy that is somewhat similar to my favorite base metals royalty company (that’s Altius Minerals) — they buy or stake small exploration projects, do a bit of drilling to prove up the value, and then sell those projects to a miner who can fund the further exploration and development, keeping a royalty on the eventual mine.

They’ve diversified that a bit, so they sometimes also take equity stakes in juniors, either as an investment or in exchange for a project, or buy existing portfolios of royalties (in fact, they just added a bunch of Canadian royalties in Ontario and Quebec from Perry English in a deal that should pay for itself over the next couple years, and over the past year boosted their royalties on the Goodpaster district in Alaska and acquired royalties on 18 early-stage exploration prospects in Chile). So they’ve been pretty active, though without much current cash flow because most of their royalties are very early-stage assets, far from even declaring reserves or resources (let alone actually building a mine or producing).

The bad thing about an early-stage royalty portfolio is that it doesn’t generate any cash flow… the good thing is that they’re cheap to acquire and they don’t have an expiration date, so if you’re patient and choose well you might end up with lucrative royalties on huge projects in ten or twenty years. As long as you can stay solvent for that long.

Why EMX? Well, it’s not a perfect match for the clues — but it’s awfully close. EMX does have interests in “over 44” copper projects, though only about 30 of them have actually risen to the level of creating a royalty, and none of them are currently generating any cash flow. EMX does have a few cash-generating projects, including their Leeville royalty on a Carlin Trend gold mine in Nevada, and a 20% interest in a producing Nevada gold & silver project that they bought just last year (Rawhide), along with a Turkish zinc mine royalty, and with some very small cash payments from pre-production deals (like optioning out properties, or milestone payments for discoveries), but none of the cash flow comes from copper right now.

The price is down slightly from where I mentioned it as one of the many smaller precious metals royalty companies that I keep half an eye on (that was for an Eric Fry pitch about Metalla, just FYI, and that was well-timed — Metalla has jumped 50% in the month or so since that piece came out).

The company does say in recent investor presentations that their current focus is on the Western US and Scandinavia, with most of the projects currently getting attention targeting either copper or gold (or both), and that includes a huge number of copper projects mostly in Arizona — a few of those have reached “royalty creation” stage and found a partner, but most of them are either available for partnering or already part of an alliance project. The Scandinavian projects are focused on gold, zinc and platinum group or battery metals, for the most part.

There are a few companies trying to build up a portfolio of copper and other royalties, including some really tiny players like Copperbank Resources (CBK.CX, CPPKF) who have so far failed to reach a sustainable scale (where royalty cash flow can at least cover most of their overhead, or where they have enough cash to build a portfolio without selling a lot of new equity), but the world of base metals royalties is pretty small. In the public markets, at least, the leading base-metal royalty players are two slightly larger companies who have diversified and (arguably) sustainable cash flowing portfolios, Anglo Pacific Group (APY.TO, AGPIF) and Altius Minerals (ALS.TO, ATUSF).

Both of those have some hair on them, Anglo Pacific is overwhelmingly dependent on one huge coal mine in Australia (Kestrel, about 60% of revenue) and Altius has been buffeted for years because of their ill-timed coal investment in Alberta and the failure of the Kami iron ore project (on which they still hold a royalty, though their spun-out Alderon Iron Ore company that was supposed to develop it went under when iron prices cratered), but they’re also both interesting and generate enough royalty revenue to grow without dilution, with large portfolios of earlier stage projects that might provide future growth. The one big project they have in common, interestingly enough, is Labrador Iron Ore, which you can also buy directly if you’re so inclined through Labrador Iron Ore Royalty Corp (LIF.TO, LIFXF).

There are plenty of other players in the business, but the other big ones are either private or hiding under gigantic gold royalty companies. Franco-Nevada (FNV) and Royal Gold (RGLD) each have meaningful base metal or energy royalties in their portfolio, for example, including a little copper, though gold drives their results, and there are also several lesser-known big royalty portfolios owned by insurance companies or hedge funds. I’ve been watching a new hedge fund-backed royalty group called Tripleflag Precious Metals in recent years because they were supposed to go public late in 2019, and they have some copper on the books as well, but that IPO was pulled because the market was uninterested — it wouldn’t be surprising if they come back soon, given the strength in metal prices, but I haven’t seen any updated on their IPO plans (their major backer is the huge hedge fund Elliott Management, so they don’t have to rush to market if Elliott doesn’t want them to — in fact, they just did a major deal for $550 million with China Molybdenum for an Australian project, something most of the public royalty companies would have been too small to consider).

Interestingly, one of Tripleflag’s larger current projects is the Gunnison Copper project owned by Excelsior, which is just beginning to generate cash flow… and Altius also has a (much smaller, about 10% the size of Tripleflag’s exposure) royalty on that project.

EMS Royalty does have an impressive portfolio of early-stage projects, and they detail it nicely in their investor presentation here. If you’d like to look into those two more mature royalty leaders in base metals, the latest investor presentation from Anglo Pacific Group is here… and the latest presentation from Altius Minerals is here. Altius gets about a third of their revenue from copper… Anglo Pacific has a couple copper projects, including the producing Mantos Blancos copper project that they bought last year, and I’d guess copper is likely to generate 15-20% of their revenue over the next year.

Royalty companies need a balance of producing assets that can generate some cash flow (or assets that are at least under construction, and very likely to produce in a year or two), and exploration and earlier-stage discoveries that can fuel future growth. Mining is an extraction business, so for the longer term you need to be able to cycle through projects, adding on new ones over the next ten years so you’re ready for the point when your best asset might be reaching the end of its life. Scale and sustainable cash flow are important because they allow royalty owners to survive downturns (and, in the best case, to invest during the weak parts of the cycle, when miners are desperate for cash).

EMX Royalty is an appealing one, but for me it’s slightly less appealing than Altius and Anglo Pacific — just because their portfolio is so early stage, almost all still in “exploration” projects, and they have not yet established a portfolio of cash-flowing assets that can help them start to compound the portfolio (using profits to buy new royalties). It often takes years or decades for these projects to come to fruition and generate cash flow, and though I’m not an expert on the portfolio or all their partner companies, to be sure, I don’t see any particularly big projects that should come through for EMX anytime soon. Maybe I’m wrong about that, and it was encouraging to see EMX make some acquisitions that are in that “cash flowing” position, like the Rawhide mine, but I’d still be a little cautious. EMX might require a lot of patience, particularly if you’re really focused on copper.

Which is not to say it won’t work out with EMX, or that I have a crystal ball for when the tide might turn — I’ve held on to Altius Minerals through some wild swings for almost a dozen years now, for example, and it has yet to generate a return for me (the first purchases turned out great, but I added heavily when they acquired a big chunk of cash-flowing royalties several years ago, and overpaid for that).

I remain a sucker for royalties, which are by far the most appealing way to invest in mining projects, but that doesn’t mean that they’re always great investments at any price — and, as always, you have to make your own call when it’s your money on the line. Are you interested in EMX? Have other favorite ways to get exposed to copper or base metal royalties? Think there’s a better copper royalty stock out there that I missed? Let us know with a comment below.

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