Gold And Silver Royalty Companies Part 5: Smaller Royalty Companies

| About: Sandstorm Gold (SAND)

This is the fifth in a series of articles dealing with gold and silver royalty and streaming companies. In part 1 I introduced the reader to the business model employed by gold and silver royalty and streaming companies. These companies make deals with mining companies whereby they give mining companies an upfront payment in cash or stock in exchange for a royalty or a stream on an agreed upon mine. A royalty agreement entitles the royalty company to a predetermined portion of the resources produced by the mine in question, while the mining company operates the mine. A stream entitles the streaming company to the right to purchase a predetermined portion of the resources produced by the mining company at an agreed upon price. In general royalty and streaming companies offer investors exposure to the mining industry with lower risk than if they were to purchase mining shares.

In subsequent articles, I discussed the three major publicly traded royalty companies: Franco-Nevada Corporation (NYSE:FNV), Silver Wheaton Corp. (NYSE:SLW), and Royal Gold, Inc. (NASDAQ:RGLD).

In this article, I introduce the reader to some of the smaller, younger, up and coming royalty companies. The royalty/streaming business model has proven to be extremely successful, as evidenced by the strong performance of the aforementioned companies. Each of these companies has been consistently profitable, has maintained high profit margins, and has maintained positive free cash flow. I cannot say this about the younger and smaller companies that I discuss in this article. Nevertheless, the consistent success of the royalty/streaming business model leads me to believe that the companies I discuss here will likely be successful, and I believe that they will offer investors exposure to the world of high risk/high reward gold and silver equities without the extremely high risk of investing in non-producing junior mining companies. That being the case, the companies that I discuss in this article will not offer investors the more direct leverage that I imply investors get investing in the three companies that I discuss above. Furthermore, the companies I discuss here are speculative, and they should not comprise a significant portion of any portfolio.

In what follows, I will discuss three companies: Sandstorm Gold (NYSEMKT:SAND), Premier Royalty Inc. (formerly known as Bridgeport Ventures (OTC:BPVIF), and Gold Royalties Corp. (OTC:GRYCF).

Sandstorm Gold

Sandstorm Gold is a relatively new gold streaming company that is significantly smaller than Franco-Nevada, Silver Wheaton, or Royal Gold. The company currently has a fully diluted market capitalization of just $855 million. Furthermore, unlike the three major royalty companies, Sandstorm Gold does not pay a dividend. Nevertheless, it shares the advantages that I have discussed above that are unique to gold royalty/streaming companies. Currently, like its peers, the company has incredibly high net profit margins that exceed 25%. While the company has exhibited extraordinary growth, it trades at "just" 32 times trailing earnings. This is more expensive than its larger peers, yet given its anticipated future cash flow of $90 million by 2016, it can be argued that Sandstorm Gold is the cheapest of the profitable royalty companies (the two I discuss below are too small and young to be profitable at this point in time). While the company has a couple of properties in politically unstable jurisdictions, it generally holds streaming contracts on properties in the United States, Canada, and Brazil, which are considered to be safe places to mine. I should also note that the company holds 33.7 million shares of Premier Royalty, which I discuss in the next section.

Sandstorm Gold estimates seeing $50 million in cash flow in 2013, which means that the company trades at a premium to its peers at roughly 17 times cash flow. This cash flow will come from eight properties. The following table details the most significant of these:

Mine Operator Portion of Est. 2013 Cash Flow
Aurizona Luna Gold (OTCPK:LGCUF) 35%
Santa Elena SilverCrest (NYSEMKT:SVLC) 17%
Black Fox Brigus Gold (BRD) 15%
Bachelor Lake Metanor Resources (OTCPK:MEAOF) 10%
Ming Rambler Metals and Mining (OTC:RBMTF) 7%
Summit Santa Fe Gold (OTCPK:SFEG) 5%

Investors who like the royalty/streaming model for diversification may not appreciate the fact that over two thirds of the company's estimated 2013 cash flow is anticipated to come from just three properties: Luna Gold Corp.'s Aurizona Mine in Brazil, SilverCrest's Santa Elena mine in Mexico, and Brigus Gold's Black Fox mine in Canada.

However, over time the company anticipates that its production will come from more diversified sources, and given its anticipated growth of nearly 20% per year. Its most notable development-stage projects include:

  • Mutiny Gold's (OTC:MTYGF) Deflector Mine in Australia, which will yield an estimated $8.25 million in annual cash flow (at $1,500/oz. gold) beginning in 2014.
  • Donner Metals' (OTCPK:DONFF) Bracemac-McLeod Mine in Canada, which will yield an estimated $2.45 million in annual cash flow beginning later this year.
  • Solitario Exploration and Royalty's (NYSEMKT:XPL) Mt. Hamilton Mine in Nevada, which will yield an estimated $1.63 million in annual cash flow, although production is several years away.

Investors looking to minimize the risks that they take in purchasing gold and silver companies would be better off turning to the three aforementioned major royalty companies: they have established histories of success and pay rising dividends. However, investors who wish to take on a little more risk should seriously consider a position in Sandstorm Gold.

Premier Royalty Inc.

Premier Royalty Inc. is a relatively new royalty company formed out of Bridgeport Ventures. The company currently has a fully diluted market capitalization of $156 million (there are 78 million shares outstanding, but 105 million fully diluted shares). Currently the company has NSR (net smelter return) agreements on producing properties that should yield approximately 7,000 ounces of gold in 2013. Thus the company currently has just over $10 million in annual revenues, meaning that its price to sales ratio is roughly in line with the major royalty/streaming companies that I discussed in previous articles. The company also has royalty agreements on nine development and exploration stage projects, along with approximately $30 million in cash.

While this company is considerably smaller than its peers in the royalty/streaming business, it shares many of the same advantages that I point out in part one of this series including low costs and diversification. Because all of its agreements are NSR agreements the company receives its metal for free in exchange for previously made payments. Furthermore, the company is eligible to receive a portion of these mines' total production even if exploration yields additional metal. Its producing royalty projects are located throughout the world, including: Canada, the United States, Brazil, South Africa, and Honduras. Furthermore, these deals were predominantly made with major gold producers including Yamana Gold (NYSE:AUY), Anglo Gold Ashanti (NYSE:AU), and Newmont Mining (NYSE:NEM).

Potential investors should take note of the following royalty agreements that will impact Premier Royalty's current and future cash flow.

  • Newmont Mining's Emigrant Springs Mine in Nevada that Premier Royalty estimates will yield $1.5 million annually (at $1,500 gold) for at least 10 years.
  • Anglo Gold Ashanti's Buffelsfontein mine in South Africa that is estimated to yield $1.9 million annually for at least 20 years.
  • Lake Shore Gold's (NYSEMKT:LSG) Thunder Creek mine in Canada that is estimated to yield $1,000,000 annually for at least 8 years.
  • Yamana Gold's Gualcamayo mine in Argentina that is estimated to yield $1.8 million annually for at least 9 years.
  • Aura Minerals' (OTCPK:ARMZF) San Andres mine in Honduras that is estimated to yield $1.2 million annually for at least 9 years.

For a small company, this is a significant and diversified portfolio of royalties. Nevertheless there are still risks attributable to Premier Royalty that one does not find with its larger peers. For instance the company's shares are extremely illiquid trading just 2,600 shares per day over the past month, which equates to just under $4,000 worth of volume. Second, despite the fact that the company has limited costs and rising gold production, the company has yet to turn a net profit (although it did turn a gross profit of $1.4 million in 2012). That being said, the company is certainly riskier than its larger peers, but it is on its way to becoming a successful royalty company that provides investors with all of the advantages that its peers have for the past several years, and given that present investors are entering their positions early, they will potentially see much larger returns than if they take positions in the larger royalty companies.

Gold Royalties Corp.

Gold Royalties Corp. is an extremely small gold royalty company with just a $13 million fully diluted market capitalization. I base this figure on the last trade on the Canadian Venture Exchange. (The OTC market in the United States is extremely illiquid, with the last trade made two weeks ago on April 15, 2013. This is a significant risk factor that investors must consider when evaluating this company.)

Of the royalty/streaming companies that I have covered in this series, Gold Royalties Corp. is the one company that does not offer investors some of the crucial risk-mitigating characteristics that make the larger companies so appealing relative to their mining company counterparts.

  • It has only received a single royalty payment (of $605,000) from Metanor Resources in connection with its Bachelor Lake NSR Royalty agreement.
  • It offers very little diversification in that it only has royalty agreements on 10 mines, and all of them are located in Canada.

That being said, like with the other royalty companies Gold Royalties Corp. does not have to raise capital to build mines, and it is not exposed to the volatile costs of mining. In this way, Gold Royalties Corp. offers investors with a unique alternative to micro-cap junior gold mining companies.

The company has 10 royalty agreements, with two that are gold-focused expected to go into production in 2015. This is a long time to wait, but if all goes well, patient investors should be rewarded. Most of the company's current value is based upon its gross sales royalty with Victoria Gold (OTCPK:VITFF) on its Eagle Zone property in the Yukon. The company anticipates receiving 1,850 ounces of gold per year, or $2.7 million per year assuming a gold price of $1,475/ounce. Given the company's current $13 million market capitalization, this is significant, although if the project fails then much of Gold Royalties' value dissipates. The company also anticipates seeing revenues from its 1% NSR (net smelter return) royalty on the Bachelor Lake project run by Metanor Resources. If the company produces the 60,000 ounces of gold that it anticipates starting in 2015, then Gold Royalties should see 600 ounces per year, or $885,000. The company also has agreements on eight other properties, although they will likely not see any production for several years.

Given the high profit margins that royalty companies tend to see, Gold Royalties is trading at a very reasonable valuation relative to its future projected earnings. However, this is based on just two properties. While these two properties are excellent resources and offer significant upside given their exploration potential, Gold Royalties is basically a high speculation stock.

A brief remark regarding the company's other agreements: most of them are base metal royalty agreements with the exception of the Justin property owned by Aben Resources (OTCPK:ABNAF), which is currently a penny stock with a market capitalization of under $2 million. One positive note is that one of the company's PGM properties, the Bermuda property, is run by a major mining company--Stillwater Mining (NYSE:SWC), although it is still an exploration-stage property, meaning it will not see any production for several years.

Disclosure: I am long OTC:GRYCF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.