📈 Why are gold royalty companies merging right now?

Private Capital Insider: Weekend Edition

Author

Equifund: Weekend Edition
September 16, 2023

While the mainstream media is focused on the Biden impeachment inquiries, hypersonic missiles, and the UAW strike…

We’re paying attention to a recent acquisition inside the gold royalty and streaming market:

  • Metalla Royalty & Streaming Ltd. (TSXV: MTA) (NYSE American: MTA) is acquiring Nova Royalty Corp. (TSXV: NOVR) (OTCQB: NOVRF) in a deal worth ~$140m.

    The transaction will create a combined company, which will be positioned as one of the leading emerging Mid-Tier royalty companies.

This news comes as part of a broader consolidation trend across both gold mining and royalty and streaming markets – most notably, in Nevada.

Why should you care about any of this?

Because Mid-Tier royalty companies often rely on mergers and acquisitions to fuel growth.

And for any upstart royalty and mining companies who are looking for a potential buyer in the future, the more competition for your assets the better!

That’s what today’s Weekend Edition is all about.

P.S. As you may already know, Nevada Canyon Gold – a small, publicly traded gold royalty and streaming company – is raising capital via a Regulation A+ offering.

As usual, any investments in Regulation A+ securities should be considered high risk and speculative in nature. Please do not invest funds you need immediate access to, or cannot afford to lose.

Why Gold Miners Are Consolidating

In an economic environment where cash flow is becoming king – and commodities are booming as the demand for metals soars – there’s simply no ignoring the facts; within the commodities sector, no other subsector is currently showing higher margins than precious metals producers.

Even more interesting, gold production is one of the most fragmented commodity producing industries.

And in the face of more than a decade of underinvestment in exploration, many of the Majors are forced to grow through acquisitions of existing projects.

This – in addition to the prospect of higher gold prices, and record high cash levels – is driving the current consolidation cycle in the broader gold mining industry.

We expect that producers’ bubbling cash flows will lead them to replenish their shrinking reserves through acquisitions and mergers.

The biggest beneficiaries of this development will be junior producers, fully funded developers, and explorers with world-class discoveries in Tier 1 regions.

Most notably, Tier 1 assets in Nevada.

  • In 2019, Newmont acquired Goldcorp, owner of the Eleonore mine, for $10 billion. This made Newmont the world’s largest gold miner

  • In 2020, Coeur Mining acquired Northern Empire Resources, taking control of its flashing asset, the Sterling Gold project in Nevada, for $90 million

  • In 2021, Northern Vertex Mining Corp merged with Eclipse Gold Mining Corporation, creating a “well-funded gold producer and consolidator, operating entirely in the Western United States” – including the Hercules Gold Project in Nevada

  • In 2022, Barrick Gold acquired the remaining 50% interest in the Turquoise Ridge mine in Nevada from Newmont for $345 million

Also in 2022, there were at least four material acquisitions that took place in Nevada:

For investors hoping to profit from this consolidation, here’s something you’ll want to take into account – a major mining company that is considering the buyout of a junior is much less likely to be interested if the land package is an unconsolidated mix of patented and unpatented mining claims.

Consolidation is the key to unlocking shareholder value in a mineral land package.

[Majors] seem to lose interest fairly quickly because if the ground is not consolidated, then they’re limited on where they can explore. The bigger companies especially don’t like to spend a lot of time and money negotiating deals with people and consolidating it themselves.

And the consolidation of the historic data is also a key to increasing the value of a project.

Depending on where the claims are, differing ownership can become troublesome for exploration companies wanting to develop consolidated land packages; especially when the goal is to sell the complete package to a major mining company, following value-added exploration on the properties.

Derek Macpherson, president and CEO of Gold79, sees M&A activity as beneficial for actors in the state, to unlock its true geological potential:

I think we need to see M&As as there are about 50 of us there. There needs to be consolidation as it is difficult to fund all these firms from the same pool of capital in public markets. This will lead to higher quality assets being explored and better attribution of capital.

This means that some of the more interesting projects available today have been underexplored, due to fragmented claim status, and a lack of historical data.

That’s why this consolidation cycle could have the potential to drive a period of secular growth in the North American mining industry (pending, of course, poor policy decisions).

In addition, for those who read our previous Weekend Edition on the Nevada Mining Claims Rush, we could see several of these claims begin to change hands as early as this month.

However, the question of “who will finance these junior mining companies, who are exploring these claims,” still remains?

And just like we’re seeing in the broader consolidation cycle across gold mining, we’re starting to see the same thing happen in the royalty space, as well.

A Brief History of Gold Royalties (and notable M&A activity)

The very first gold royalty company dates back to 1985, when Pierre Lassonde, founder of gold exploration company Franco-Nevada Corporation, made a $2m bet – roughly half of the cash in treasury – to acquire a 4% royalty on the Goldstrike mine (which is still in production today).

Today, that single investment has produced $800 million in revenue, and is expected to make $1.2 billion in total profits… an astronomical 59,990% return. [source]

We call these high-performing royalty and streaming assets Golden Cash Flow Contracts. 

This single Golden Cash Flow Contract served as the foundation for one of the best performing gold stocks in history. After being acquired by Newmont in 2002, for CAD $2.5 billion, Franco-Nevada delivered a 15,614% return over 18 years for their shareholders… while gold returned essentially 0% over the same time frame.

“old” Franco Nevada’s incredible rise from CAD$0.21 per share and a market capitalization of CAD$2 million, to the eventual buy out by Newmont for CAD$2.5 billion at over CAD$33 per share – a 15,614% return in 18 years!

We grew the company at 36 percent compounded for 19 years in a row.

Even Warren Buffet doesn’t have a record of 36 percent per year compounded.

When asked about the success of Franco-Nevada and its business model, Pierre Lassonde responded:

We get a free perpetual option on the discoveries made on the land by the operators, and we get a free perpetual option on the price of gold.

It’s the optionality value of the land, the value of the operator spending money on our land, and the optionality to higher gold prices. And that is worth so much money.

When you buy a stream, on the other hand, you get price optionality. You’re buying, say, 100,000 ounces of gold for the next 25 years. So you get optionality on the price of the commodity, but you don’t get much optionality on the land.

Put another way, they were able to secure a Golden Cash Flow Contract on promising properties… got “lucky” on the embedded optionality portion of the play… and leveraged that success into more success.

But that’s not where the Franco Nevada story ends…

Newmont maintained Franco-Nevada as a royalty holding division, transferring numerous other royalties to it over the five-year period following the acquisition, building its portfolio of royalties to include investments in almost 300 royalties (two-thirds in base and precious metal miners, and one-third in oil and natural gas) at the time.

Then, in 2007, Newmont spun out Franco-Nevada via an IPO, led by Pierre Lassonde, David Harquall, and a small team led by the original management… and then, “New” Franco-Nevada (NYSE: FNV) was officially born!

The $1.3 billion initial public offering was one of the largest IPOs in Canadian history, second only to the 2000 Sun Life IPO, and the largest mining IPO in North American history!

Despite a long history and a proven business model, Franco was not the easiest offering to sell.

Unlike a simple gold company, which can be valued on the basis of either one or a handful of projects, Franco has stakes in 290 different properties, including many oil and gas assets.

But in the end, the bankers were able to show that Franco has a great future as a gold royalty play.

Since then, the stock has gone up another 848%...

With the portfolio generating ~$2.1 billion in revenue…

Boasting a substantial increase in their gold reserves, which highlights the optionality of the gold royalty and streaming business model…

And has paid out ~$2.05 billion in dividends since IPO!

Franco Nevada is the largest royalty and streaming company by market cap, and since its IPO, has outperformed the Nasdaq, S&P 500, and the price of gold.

But Franco Nevada certainly wasn’t the only company to utilize this unique business model.

Today, there are 23 royalty and streaming companies trading on either the TSX, TSX.V, Nasdaq, or the NYSE (22 after the Metalla-Nova acquisition is complete), with Franco Nevada, Wheaton Precious Metals, and Royal Gold the three “majors.”

In addition, we’re seeing signs of growth in the “Mid Tier” royalty and streaming segment of the market – like Osisko, Triple Flag, Sandstorm, Gold Royalty, and Metalla – as consolidation continues.

But where this story gets interesting for investors, is the performance of gold royalty and streaming companies in their early years of growth (i.e., small cap and micro cap companies). 

Please keep in mind the performance of these early stage companies can be volatile and could result in losses.

Some of today's most successful R&S companies started out with a very low stock price/market cap, but were able to successfully (and quickly) scale the business.

For example: Ely Gold went from one royalty to 45 royalties between 2017 – 2020. During this period, the stock grew from roughly $0.11 per share to as much as $1.50 per share – a gain of almost 1,260%.

Gold Royalty acquired Ely Gold for a premium of approximately 42% to Ely Gold shareholders (based on the 30-day volume weighted-average price of the Gold Royalty shares and Ely shares, ending on June 18, 2021).

But the real question is “what does an early stage royalty and streaming company do to scale up this quickly?”

Answer: Using their limited resources, they develop a pipeline of promising early stage royalties BEFORE looking to compete for more expensive contracts, on already cash flow producing mines.

These companies, big or small, have additional exploration royalties on their books, and if some of them never do end up delivering production and cashflow, others will.

Royalty companies fuel their own growth by using existing cash flow to generate and fund new opportunities.

The more cash that comes in, the more the company can acquire early stage exploration royalties that will gradually move along the development pipeline and fuel the next generation of growth.

Thus, taking an early-stage exploration project all the way into production … [may deliver] rewards for investors.

Final Thoughts: Bullish on Gold and Royalty and Streaming

One of the selling points of a gold royalty and streaming company is the “optionality” on the price of gold.

However, this knife cuts both ways – while higher gold prices mean higher potential profits, lower gold prices mean the opposite.

While we saw gold hit new highs in early 2023, gold recently dropped below $1,900/oz, and it now trades at ~$1,910/oz.

If you are bullish on the long term price of gold, this pullback could present an excellent opportunity for a cashed up royalty and streaming company to negotiate favorable deals.

If you believe that a recession is likely, inflation is inevitable, and gold prices will likely go up…

It means there could be a significant upswing in the price of gold, which might pay royalty and streaming investors handsomely.

For these reasons, we continue to be bullish on both gold, and gold royalty and streaming companies that have US-based mineral assets in their portfolio.

What Did You Think About Today's Issue?

Select an option below and send us any feedback you have. We're always looking for input from our readers on how we can improve our editorial.

Login or Subscribe to participate in polls.