In Part 1 I introduced the reader to prospect generators. Prospect generators are similar to mining companies, although they focus on the exploration part of the business in order to:
- Mitigate the high risks of exploration
- Pass on the high costs of exploration to other companies
- Devote capital and intellectual resources to exploration
In so doing they sell a portion of the upside enjoyed by taking a mine from exploration to production.
In this article I will introduce the reader to a few companies that incorporate the royalty model into their businesses. Investors who are not familiar with this model should see my article on royalty companies. These companies make deals with mining companies whereby they give mining companies an up-front 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. Prospect Generators that are also royalty companies will sell exploration properties, on which they have had success, to companies in exchange for a royalty or a stream on those properties. In this way these prospect generators do not have to find the capital necessary in order to develop these properties, while at the same time they are in a position to profit from production from these properties. Furthermore, some companies will also purchase royalties or streams as a way to fund their future exploration operations. Investors who like the royalty business model, and who are capable of analyzing an exploration team and its property portfolio should consider the companies I discuss in this article. They include: Eurasian Minerals (EMXX), Virginia Mines (OTC:VGMNF) and Almaden Minerals (AAU).
Before I discuss these companies I must emphasize that with a few notable exceptions, the companies I discuss here predominantly have royalty agreements on properties that are a long way from becoming producing mines, and as a result it is impossible to accurately value these agreements as a function of their future cash flows. Potential investors are urged to evaluate the competency of individual management teams and the capital situations of the companies involved. Briefly, Eurasian Minerals has several royalty agreements and joint ventures with larger companies, Virginia Mines has a huge royalty agreement with a large company [Goldcorp (GG)], and Almaden Minerals tends to have royalty agreements with smaller companies. While each of these companies is small and unprofitable, the latter of the three should be viewed as far more speculative than the first two.
Eurasian Minerals is one of the best prospect generators for investors who are interested in this business model. Management has created a company that is leveraged to exploration success while at the same time mitigating the risks that are typically associated with exploration. The company holds several exploration properties all over the world giving investors exposure to base and precious metals, although it focuses on copper and gold. The company also incorporates the royalty business model as well as a way to sell properties to development companies. As a result the company has an extensive pipeline of properties that will potentially provide a lot of future cash flow should these early stage properties eventually become producing mines. The following table lists these properties.
|Leeville||Newmont Mining (NEM)||U.S.A. (NV)||Gold||1% GSR|
|Maggie Creek||Newmont Mining||U.S.A. (NV)||Gold||3% GSR|
|North Pipeline||Nevada Rae Gold||U.S.A. (NV)||Gold (alluvial)||> of $0.50/yd or 4% NPI|
|Golden Ibex||Golden Ibex, Inc.||U.S.A. (NV)||Gold||1% NSR|
|Red Hills||GeoNovus (GMINF.OB) & Inmet (IEMMF.PK)||U.S.A. (AZ)||Copper||2.5% NSR|
|Middle Mountain||GeoNovus & Inmet||U.S.A. (AZ)||Copper||2.5% NSR|
|Silver Bell West||GeoNovus||U.S.A. (AZ)||Copper||2.5% NSR|
|Balya||Dederman Madencilik||Turkey||Lead, Zinc, Silver||4% NSR|
|Aktutan||Dederman Madencilik||Turkey||Precious & Base metals||4% NSR|
|Golcuk||Pasinex Resources||Turkey||Copper||2.9% NSR|
|Viscaria||Avalon Minerals Ltd.||Sweden||Copper, iron||0.5% NSR|
|Deli Jovan||Reservoir Capital (RSERF.PK)/ Orogen||Serbia||Gold||2% NSR on gold, 1% on base metals|
|Stara Planina||Reservoir Minerals (RVRLF.OB)||Serbia||Gold, copper, molybdenum||2% NSR on gold, 1% on base metals|
|Plavkovo||Reservoir Minerals||Serbia||Gold||2% NSR on gold, 1% on base metals|
|Brestovac||Reservoir Minerals, Freeport McMoRan (FCX)||Serbia||gold, copper, molybdenum||2% NSR on gold, 1% on base metals|
|Neavesville||Glass Earth||New Zealand||Gold, silver||2% effective NSR|
|Gezart||Young Hyun Chemical Company||Kyrgyzstan||Gold||2.5% NSR|
|Uchkol||Young Hyun Chemical Company||Kyrgyzstan||Gold||2.5% NSR|
*Investors are encouraged to view the following glossary of explanations of Net Smelter Royalties (NSR) and Gross Smelter Royalties (GSR) created by Franco-Nevada Corporation.
Unfortunately none of these properties is near production, and so Eurasian Minerals' royalty cash flow is a long way away. However the company recently purchased Bullion Monarch, which is a royalty company with roughly $5 million of annual cash flow. Given the company's exploration budget of $15 million and $20 million in cash this royalty cash flow will be essential in limiting share dilution. Furthermore, given that the company's fully diluted market capitalization is just $105 million it trades at just 21X its annual cash flow. Given that royalty companies such as Franco-Nevada (FNV) and Royal Gold (RGLD) trade at approximately 15X cash flow without such an extensive pipeline (relative to their market capitalizations) of exploration properties, Eurasian Minerals seems to be relatively inexpensive as a high risk/reward royalty company.
In addition to having current cash flow and a deep pipeline of potential future royalty streams, the company has an extensive portfolio of exploration properties, which can provide it with enormous upside if just a couple of them end up being large mines. Being a project generator, Eurasian Minerals has joint venture partners with interests in many of these properties, and so its exploration costs remain low while it retains meaningful exposure to the upside that positive exploration results can yield. Some of these properties include the Akarca gold/silver project in Turkey and the Vert de Gris Porphyry property in Haiti.
Virginia Mines is a prospect generator that has several exploration properties, all of which are located in Canada (which is one of the best places in the world to mine given the lack of political activity and the fact that mining permits are easy to obtain). The company's business model isn't spelled out as clearly as Eurasian Minerals', although it seems to be set on selling properties that they have explored successfully to larger companies for development in exchange for royalties. The company's focus is geographic: it only explores in Canada. As for the company's metal exposure, it has a gold focus, although it has exposure to base metals and uranium.
Virginia Mines is currently valued at roughly $300 million, making it the second largest prospect generator by market capitalization [behind only Seabridge Gold (SA)]. It has a substantial royalty agreement on Goldcorp's (GG) Eleonore mine in Quebec: the mine is expected to begin production in 2014 and yield 600,000 ounces of gold per year, of which Virginia Mines has a Net Smelter Royalty of 2.2%, meaning that Virginia Mines will receive 13,200 ounces per year. This can go up to 3.5% later on in the mine's life. Given that the major royalty companies are valued at around 15X cash flow, conservatively at 10X cash flow this royalty is worth $185 million at $1,400 gold.
Going out several years the company has several other royalty agreements, some of which should provide cash flow, although presently none of these projects is nearly as large as Eleonore. The following chart lists these agreements.
|Duncan||Augyva||Iron Ore||Virgina Pays $0.40 per ton|
|Stabell||Alexandria Minerals||Gold||2% NSR|
|Dubuisson||Northern Star||Gold||2% NSR|
|Malartic||Northern Star||Gold||2% NSR|
|Lac Dufault||Nyrstar||Base Metals||2% NSR|
|Sagar||Energizer Resources||Gold/Uranium||1.5% NSR|
|Northbelt||TerraX Minerals||Base Metals||2% NSR|
|Lac Clark||Chibougamau Independent Mines||Copper, Gold, Silver, Zinc, Iron||1% NSR|
These agreements are all on early stage properties that are owned by very small companies. Nevertheless it owns several properties that are subject to limited geo-political risk. All of these properties have enormous upside potential, but the same can be said for Eurasian Minerals' early stage royalty properties that are owned by much larger companies that do not face bankruptcy should their properties not be valuable enough to become mines. For this reason, at current valuations, I prefer Eurasian Minerals to Virginia Mines except for the additional political risk taken by investors in the former company.
Almaden Minerals is the riskiest of the companies discussed here, although there is enormous upside potential. Currently it is valued at $105 million, the same as Eurasian Minerals, although it has only $13 million in cash compared to Eurasian's $20 million. Its properties are all located in low risk jurisdictions: the United States, Canada, and Mexico. All of its properties (and there are 40 or so) are early stage exploration properties, so it is difficult to value them. It is additionally difficult to value the company as a whole given the fact that unlike its peers Almaden has no foreseeable cash flow. Nevertheless for a company as small as Almaden it only takes a couple of properties yielding impressive exploration results to greatly reward shareholders, and the company's Ixtaka property in Mexico is one such property, as early drill results have shown that the property may contain high grade gold and silver deposits.
Other than that the company has several early stage royalty agreements on gold, silver, and base metal exploration properties. The following table lists these properties.
|Cabin Lake||Tarsis Resources Ltd.||Yukon Territory||Zinc, silver||2% NSR|
|Caribou Creek||Tarsis Resources Ltd.||Yukon Territories||Copper, zinc, lead||2% NSR|
|Elk Gold Project||Gold Mountain Mining||British Columbia||Gold||2% NSR|
|Meister Property||Tarsis Resources||Yukon Territory||Zinc, silver||2% NSR|
|Mor||Tarsis Resources||Yukon Territory||Zinc, silver||2% NSR|
|The Ram||Ross River Minerals||Yukon Territory||Gold||2% NSR|
|La Bufa||Lincoln Gold Corp.||Chihuahua State||Gold||2% NSR|
|Caballo Blanco||Gold Group Mining||Vera Cruz||Gold||1.5% NSR|
|Erika Project||Tarsis Resources||Guerrero State||Gold, silver, lead||2% NSR|
|El Poulpo||Ross River Minerals||Sinaloa||Copper, gold, molybdenum||2% NSR|
|Mezquites||Tarsis Resources||Nayarit||Gold, silver||2% NSR|
|San Pedro||Tarsis Resources||Nayarit||Gold, silver||2% NSR|
|Yago||Tarsis Resources||Nayarit||Gold, silver||2% NSR|
As I mentioned above it is difficult to value these royalty agreements. Given that investors can purchase Eurasian Minerals for the same price as Almaden it is difficult to make a case for investing in the latter company at current valuations. Nevertheless I like the locations of Almaden's mines, and the company's Ixtaca property is the only property owned by the three companies mentioned here that can potentially become a major mine. If Ixtaca yields a mine similar to other early stage high grade mines such as Pretium Resources' Brucejack, Almaden can be worth several times its current valuation. Thus, given the exploration potential here this might be a good speculation stock at lower valuations, or if there are additional positive drilling results.