International Royalty Corporation: Capitalize on the Commodities Boom

Apr.19.07 | About: International Royalty (ROY)

International Royalty Corporation (ROY) is in the business of acquiring and creating natural resource royalties with a specific emphasis on mineral royalties. A royalty is the contractual right to a share of revenues or operating profits generated by commercialization of an owner’s rights or property. Royalties are beneficial because they provide all the upside attached to a discovery, metal price appreciation, transition into production without the downside of exploration & mining costs and environmental issues.

IRC’s portfolio is diversified over 5 continents and 10 countries and consists of more than 13 commodities. Of this portfolio, 65% are Net Smelter Royalties [NSR], 15% are gross royalties, 8% are net profit and 12% are fixed dollar amounts and other kinds of royalties. Since most of IRC’s royalties are either NSR or Gross royalties, this means that mining companies have to pay IRC before net income or taxes are paid. The only hindrances to the royalty payment are dependant on weather issues prohibiting production, timing lags between shipments, processing and sales and non synchronized costs and revenues incurred by the mining company during the quarter. The primary minerals in the portfolio are nickel, zinc, copper and gold.


The jewel of their portfolio of over 60 royalties is a 2.7% NSR on the Voisey's Bay nickel mine in Labrador, Canada. During 2006, International Royalty Corporation received $19.1 million in royalties from Voisey’s Bay. The company estimates that it will receive $16 million to $20 million in annual revenue from the Voisey’s Bay royalty over an expected 30-plus year mine life. Management believes the royalty will provide the basis for implementing IRC’s business plan of building a large portfolio of royalties diversified by mineral commodity, geographic region and stage of development.

IRC’s second jewel is their sliding scale 0.4 to 2.25% NSR on the Pascua Lama Gold Mine in Chile. The Pascua-Lama Gold Mine will become Barrick Gold’s (NYSE:ABX) third largest operation and with commissioning expected in 2010. The Pascua-Lama Project is expected to produce 750,000 ounces to 775,000 ounces of gold per year at an approximate cash cost of $130-$140 per ounce. IRC will be paying $37.4 million for this royalty and expects to receive around U.S. $2 million a year at $400/ounce gold, U.S. $6 million a year at $600/oz gold and U.S. $12 million a year at $900/ounce gold at an average production rate of 600,000 ounces per year. Regarding the environmentalist threat in Chile, I believe that Barrick will be able to overcome this obstacle and push onward with Pascua Lama.

IRC currently holds a .225% NSR royalty on the Williams Mine property located in Marathon, Ontario. The mine is the largest gold producer in Canada and is currently operated through a 50/50 joint venture between Teck Cominco Limited and Barrick Gold Corporation. In 2006, IRC received $415,000 in royalty payments from this mine. IRC’s 1.5% NSR royalty on Western Australian gold gives them exposure to more than 3 million acres, 13 projects and dozens of gold deposits. The Western Australian royalty gives IRC to one producing mine, St. Barbara Limited’s Southern Cross operation which bought in payments of $1.5 million to IRC in 2006. For more on IRC’s other royalties I shall direct you to their website.

Management (Check out the website for details on others)

Douglas B. Silver (Director, Chairman and Chief Executive Officer): Mr. Silver has 25 years of experience as an active professional in the minerals industries, having served in a variety of capacities, including exploration geologist, business development specialist, mineral economist, corporate advisor and director of investor relations. Prior to and during the past 15 years Mr. Silver has provided management and mineral economic consulting services through his company Balfour Holdings Inc. Mr. Silver has a Bachelor of Arts from the University of Vermont and a Masters of Science in Economic Geology from the University of Arizona and is a certified general appraiser.

George S. Young (Director and Vice President): Mr. Young has over 25 years of experience in mining and natural resource financing and development having performed the duties of metallurgical engineer in the construction and start-up of a new copper smelter. From 1984 to 1988, Mr. Young was general counsel and Acting General Manager of the Intermountain Power Agency; from 1988 to 1990, he was general counsel of Bond International Gold, Inc.; from 1998 to 2002 Mr. Young was in the private practice of law, and since that time has been chief executive officer of Palladon Ventures Ltd. and Fellows Energy Ltd. and a director of MAG Silver Corp., all exploration companies. Mr. Young holds a Bachelor of Science in metallurgical engineering and a law degree from the University of Utah.

Robert W. Schafer (Director): Mr. Schafer has acknowledged expertise in mineral exploration, managing and supervising exploration budgets and has more than a decade of senior management experience working with some of the world's largest base and precious metal companies. From 1992 to 1996 Mr. Schafer was the U.S. Regional Manager for BHP Minerals Internationals Inc. and from 1996 to 2002 Mr. Schafer was vice-president of Kinross Gold Corporation. From 2002 to 2004, Mr. Schafer was president and chief executive officer of Coniagas Resources Ltd. Since 2005, Mr Schafer has held the position of Vice President, Business Development of Hunter Dickinson, Inc. Mr. Schafer has a Bachelor of Science and a Masters of Science in geology from Miami University and a Masters of Science in Mineral Economics from the University of Arizona.

Edward L. Mercaldo (Director): Mr. Mercaldo is a financial consultant and private investor. Following his successful career as an international commercial and investment banker for several leading companies including the Wachovia Bank, Bank of Montreal, Bankers Trust Company of New York, Gordon Capital and First Marathon Securities, Mr. Mercaldo also served as the Executive Vice-President, Chief Financial Officer and Director of Diamond Fields Resources Inc. Following the purchase of Diamond Fields by Inco in August 1996, Mr. Mercaldo continued as a Director of Inco until September 2000. He is currently a Director of Norwood resources Inc., a Canadian company exploring for oil and gas in Nicaragua, and Quest Capital Corporation, a Vancouver based merchant bank.

IRC declared a dividend on February 22, 2007 of US$0.015 per share. IRC's Board adopted a policy of paying semi-annual dividends at this rate for a total annual dividend payment of US$2 million or US$0.03 per share per year. This is in accordance with the dividend policy stated in the August 15, 2006 press release that IRC would pay a dividend upon reporting US$15 million in annual revenues. Annual revenues for the Company were US$20.3 million for 2006. This is the first dividend in the history of the Company, paid on revenue from IRC's first complete year as a publicly traded company and I see this as a positive move on the part of management demonstrating to shareholders that they have their best interests at heart. Additionally, management and insiders own close to 20% of IRC.


While International Royalty Corporation may not offer the leverage of a single junior explorer it offers diversity and steady growth as commodities continue to increase in price and their exploration and production royalties either make discoveries or ramp up production. I think IRC offers a low risk way to play this boom in commodities. As Warren Biffet wrote in his 1978 Berkshire Hathaway annual report, "The best business is a royalty on the growth of others - requiring little capital itself."

ROY 1-yr chart

Disclosure: none