Source: http://epsteinresearch.com/2017/05/05/is-metalla-royalty-the-next-franco-nevada/
Is Metalla Royalty & Streaming Ltd. [CSE: MTA / OTCQB: EXCFF /
Frankfurt: X9CP
]
the next Franco-Nevada [NYSE: FNV / TSX: FNV]? No. It’s still early days. It has a market cap of C$21.5 M (US$16 M), just 0.12% that of Franco.
Precious Metals Royalties & Streaming Business
Most
people understand the basics of the precious metals royalty/streaming
(“R/S”) business models, at least enough to know they can be highly
profitable. When an experienced, well-connected management team comes
together and executes on robust, accretive transactions, a company can
command strong market valuation multiples. A streaming
company provides non-equity financing for mining companies via an
upfront cash payment in exchange for the right to acquire a percentage
of metals produced at a predetermined price from a
select mine or properties. Since deals are frequently for the life of a
mine, a streaming company typically stands to benefit greatly if
additional zones are mined (i.e. increasing annual production and/or extending mine life).
Like
streaming, royalties require upfront cash investment, but no further
capital need be paid over the term of the agreement. In exchange for
cash, the royalty holder receives a fixed percentage of explicitly
defined revenues OR profits. There are several ways in which annual
royalty payments can be derived, including a percentage of Gross Smelter
Revenue = “GSR” (revenue-based) and a percentage of Net Smelter Revenue = “NSR” (profit-based). There are several iterations of these 2 conveyances. NOTE: {There’s a prodigious amount of information on the R/S business models on the websites of industry participants}.
Strong Market Multiples, Trusted Blue-Chip Companies
An average EBITDA multiple of 21x (trailing 12 months),
and as high as 31x, is quite impressive. And, industry multiples
typically move higher in hot markets. For example, Franco-Nevada traded
as high as a 30x multiple when gold was bouncing around $1,350/oz. last
summer. Imagine the perfect storm if gold & silver returned to
$1,800/oz. & $35/oz., respectively, a level seen in 1H 2013?
Industry multiples, margins & production growth would soar. As
underlying valuations rise, it becomes more attractive to acquire other
R/S companies than to underwrite their own streaming & royalty
transactions.
R/S
agreements are long-lived and unique, offering diversification benefits
unavailable from single project mining juniors. At any given time, a
successful R/S player’s investment portfolio might have cash flow schedules extending 20 years (from existing cash flowing deals, plus ones expected to go cash pay in the future).
That’s why many believe that R/S companies are the best risk-adjusted
way to play precious metals bull markets…. and survive bear markets.
R/S
companies invest in all stages of mining, from early-stage through
production and (importantly) expansion. They invest with the goal of an
attractive return on capital (base case), plus valuable optionality on a
strong or even spectacular outcome. R/S managers can fine-tune their
investment portfolios based on market cycles (i.e. enter into more bullish or more conservative transactions). With new deals they can steer away from jurisdictions experiencing an increase in (geopolitical, environmental, permitting, geological, etc.) risks.
Much of the Upside of a Junior Miner, With Less Risk & Volatility
Expertly
structured transactions can yield outsized returns without the need of
major discoveries. Instead, a meaningful expansion of an existing
project can do the trick. Even if an expansion project experiences
cost-overruns, R/S companies receive the benefits of increased
production. Essentially, portfolio company margins don’t matter much, a
luxury in an otherwise cyclical industry! Also avoided, closing &
reclamation costs…. which can be significant, and might entail
off-balance sheet debt. In addition to risk avoidance, the absence of
these functions means low overhead and high margins.
The
list goes on and on; R/S companies have limited to no risk exposures to
key factors including; operations, legal issues, labor negotiations,
taxes, environmental & permitting challenges. Anything that happens
before or after actual production is largely irrelevant to a R/S
company. This frees management to focus on new opportunities and
jurisdictions, making new contacts, structuring and (if necessary)
funding operations. Consider this, a real eye-opener for me,
Franco-Nevada reportedly has something like 30 full-time employees, Newmont Mining [NYSE: NEM] has closer to 30,000!
With this in mind, an emerging R/S company, Metalla Royalty & Streaming Ltd. [CSE: MTA / OTCQB: EXCFF / Frankfurt: X9CP] should
be on investor’s radar screens. Make no mistake, Metalla is a highly
speculative investment, not an industry bellwether company. As a
newcomer, it’s not widely followed, but it has a strong management team,
{see mgmt. bios below} great industry contacts and A LOT going on behind the scenes. NOTE: {I will leave for my next article the news of yesterday, May 4th, except to say that this transaction of multiple NSRs looks very attractive, and was a positive surprise}
On April 28th, Metalla announced the imminent closing of its first currently cash paying precious metal stream. The Company is investing US$1.86 M (net of initial streaming cash flow of US$138,136), in exchange for 15% of the silver (“Ag”) produced at the New Luika Gold Mine in Tanzania, successfully operated by Shanta Gold Ltd. since
2012. Metalla management estimates the stream will generate between
19k-22k ounces of silver per year through 2026. The Company is required
to pay ten percent (10%) of the prevailing spot price for each ounce produced.
Management is paying US$1.86 M (C$2.48 M) for an annual (un-discounted) cash flow stream of roughly US$325k (C$430k), assuming $18/oz Ag and 20k ounces/yr.
However, Metalla has considerable upside in the form of higher prices and increased production. For example, if both production and the Ag price were to increase just 3%per year, ending in 2026 at ~26,000 ounces produced, net to Metalla, (on an Ag price of ~$23.5/oz), un-discounted cash flow in 2026 would be about US$550k (C$735k).
As
a frame of reference, if silver were to increase 12% per year, it would
reach ~$48/oz, equal to the high tick of 2011, generating cash flow of
~US$1.1 M (C$1.5 M) in 2026. NOTE: {the all-time, inflation-adjusted high tick on silver was about $150/oz in 1980!} I don’t mean to suggest that this particular deal is a company maker, I’m merely pointing out the tremendous upside (a valuable call option) on precious metal prices embedded in properly structured agreements.
Two
things come to mind. First, C$430k per year nearly covers the cash
burn of the Company, affording management the flexibility and breathing
room to cherry pick the best opportunities. Second, a 10-20x cash flow
multiple on C$430k suggests C$4.3 to C$8.6 M in market value. That’s
from just one modest-sized stream. The Company fully expects to execute
2 – 4 R/S deals per year, in the
US$2
– $10 M zip code. Not all will be cash flowing from day 1. Notably,
small R/S players have an advantage in terms of deal flow, their
opportunity sets are much larger than mutli-billion dollar giants that
can only look at transaction sizes in the hundreds of millions.
That’s on top of 3 other prominent assets, royalties on 2 mines and a development project in Timmins, Ontario. NOTE: {On May 4th, Metalla signed a definitive agreement to acquire additional NSR royalties, not included below}.
-
A 1% NSR on Goldcorp’s [NYSE: GG] Hoyle Pond Extension properties east of the producing Hoyle Pond Gold Mine, (in production since 1985). And, a
1% NSR on Glencore’s [LSE: GLEN] “Bint Property” also east of the Hoyle Pond Mine. This royalty is on a non-producing portion of an operating mine (no cash flow to Metalla yet).
-
A 1.5% NSR on the West Timmins extension properties owned by Tahoe Resources [NYSE: TAHO / TSX: THO], (subject to a buyback of 0.75% for $750,000). This royalty is on a non-producing portion of an operating mine (no cash flow to Metalla yet).
-
A 1.5% NSR on the Desantis properties, owned by Osisko Mining [TSE: OSK], (subject to a buyback of 0.5% for $1 million). This is a development-stage project.
While
it’s difficult to value non-cash generating Royalties & Streams,
transactions written on, “extension projects” are lower risk than
development projects. Blue Chip counter-parties like [Goldcorp, Glencore, Tahoe, Osisko and Detour Gold [TSE: DGC] add credibility and a “vote of confidence”
in the above mentioned properties of interest to Metalla. The Timmins
gold camp in one of the world’s most prolific gold belts.
Management Bios
Disclosures
:
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Peter Epstein, about
Metalla Royalty & Streaming
,
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[ER]
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