Maverix Metals (OTC:MACIF)(MMX on the TSX-V) was formed when Pan American Silver (NASDAQ:PAAS) spun out its royalties and streams into a separate company. PAAS believed that its portfolio of royalties and streams would be valued more highly by the market in a separate vehicle.
From PAAS's corporate presentation here.
MMX went public through a reverse takeover of Macmillan Minerals, a much cheaper way than starting from scratch. The resource sector is filled with distressed companies that are out of options, so reverse takeovers have been quite common recently, as was the case with First Mining Finance (OTCQX:FFMGF).
MMX's share price soared after it went public on July 12th, and understandably so. Royalty and streaming companies are highly sought after due to their steady revenues and low-cost business model, and the small ones always have the potential of being taken over at a premium. For example, Premier Royalty, Gold Royalties, and Sandstorm Metals & Energy were all taken over by Sandstorm Gold (NYSEMKT:SAND), and Callinan Royalties was taken over by Altius Minerals (OTCPK:ATUSF).
MMX's share price has come down a bit since then, providing an attractive entry point to investors who want safe exposure to the gold royalty business at a reasonable value. The major players, Franco Nevada (NYSE:FNV), Silver Wheaton (SLW), Royal Gold (NASDAQ:RGLD), and Osisko Gold Royalties (OTC:OR), are not cheap from P/E and other such standpoints. Sandstorm looks much more attractive, but investors are hesitant due to past mistakes. Aurico Metals (OTCPK:ARCTF) is cheap, but their exploration and development work prevents shareholders from getting pure exposure to royalties and streams only. Abitibi Royalties (OTC:ATBYF) is reasonably valued, but a significant amount of their value is locked up in their equity positions in Agnico Eagle (NYSE:AEM) and Yamana (NYSE:AUY), and much of their miniscule revenues come from selling covered calls on these positions, so upside from these positions is limited. The only other significant players in the royalty space are Altius Minerals, Input Capital (OTC:INPCF), and Morien Resources (OTC:APMCF), but none of these are focused on gold or silver.
Before MMX becomes too well-known, I have decided to try to come up with an objective valuation of my own.
I believe we should value the company based on its 2018 revenue levels because 2018 is the year when MMX's main assets ramp up to their full potential. Two of the three main assets are operating mines in Mexico that are undergoing expansions, and one of them is a project under development in Nova Scotia that plans to reach full production by the end of 2017.
Their fourth main asset probably won't reach full production until the end of 2019 (by my calculations). You can read about the assets (and about the MMX reverse takeover) in PAAS's press release here.
Main Asset #1: 100% gold stream at US$650 per ounce on PAAS's La Colorada mine
In 2015, the La Colorada Mine produced 2630 ounces of gold. In addition, an expansion project is underway to increase production by 67% by 2018. As a result, I believe it is conservative to estimate that the mine will be producing 4300 ounces of gold per year by 2018. Purchasing 100% of these ounces at US$650 per ounce, MMX will realize $700 in pure profit per ounce (at US$1350 gold). This means the asset should provide US$3M in annual revenues starting in 2018.
Main Asset #2: 1.5% NSR on a portion of Fortuna Silver's (NYSE:FSM) San José Mine
MMX's NSR on the Taviche Oeste concession within this mine has already begun paying off, and considering FSM's tremendous exploration success on the Trinidad North veins within this concession, I believe more than 20% of this mine's revenue will come from this area over the next 5+ years starting in 2018. The milling capacity at this mine will increase 50% from 2000 tpd to 3000 tpd in the current quarter, and the mine will be producing approximately 200K AuEq ounces per year from next year. So 1.5% of the revenue from my estimate of 50,000 AuEq ounces per year (at US$1350 gold) means this asset should provide about US$1M in annual revenues starting in 2018.
Main Asset #3: 3% NSR on a portion of Atlantic Gold Corp's (OTCPK:SPVEF)(AGB on the TSX-V) Moose River Project
For this asset, I will assume AGB repurchases 2% of the NSR for C$2.5M, so I will only calculate a 1% NSR, and the rest as cash. According to AGB's corporate presentation, they expect to mine about 75K gold ounces per year for 5 years starting in late 2017 from the Touquoy deposit, which is subject to this NSR. So 1% of the revenue from my estimate of 75,000 gold ounces per year (at US$1350 gold) means this asset should provide about US$1M in annual revenues starting in 2018.
MMX's other main asset, the 1% NSR on the Shalipayco Project, should also pay well over US$1M per year, but I don't believe it will be built until 2019, so I won't consider it in my main calculations. You can read more details about the project here, but basically, a 3000 tpd operation milling 5.5% zinc and 40 gpt silver ore makes annual revenues from this operation great enough to provide at least $1M per year in revenues from this NSR.
I will discount the other assets since there are no plans for them to begin production anytime soon, but if metals prices continue to rise, I expect most of them to begin production in the next decade, which provides MMX with organic growth opportunities without their having to spend a single extra dollar.
Share Structure and Cash Position
MMX should have about 80M shares outstanding, with PAAS holding about 43M of them. PAAS also has 20M warrants, half with a C$0.70 strike price and the other half with a C$1.00 strike price, and all of which expire two years from now.
MMX should have C$5.5M in cash and no debt at the moment. Assuming C$1.7M from warrant exercises, and that Atlantic Gold pays the C$2.5M to buy back 2% of the NSR on its deposit, make that C$9.7M. So at MMX's recent share price of C$1.10, that gives them an enterprise value just over C$100M.
MMX should be very appealing to investors as the newest gold royalty and streaming company, with US$5M (C$6.5M) in annual revenues starting in 2018, and other assets that should provide optionality to higher metal prices and more revenues at no cost.
Personally, I would rate MMX a buy here, and a strong buy at or below C$1.00. It's a good bargain compared to its peers and arguably higher quality. I think investors will assign a premium to the management team, which includes Geoff Burns, the man who turned PAAS into one of the world's largest primary silver producers over the past two decades. I also think investors will appreciate PAAS's strong support as a 50%+ shareholder of MMX.
In addition, I believe the market will assign a premium to the company just because it's a gold royalty company, which automatically makes it a possible takeover target. Sandstorm Gold recently raised a significant amount of money, and they might use some of it to take a position in MMX. Sandstorm only gave up their pursuit of Aurico Metals when a poison pill was enacted. PAAS, on the other hand, would be more open to allowing the company be taken over at the right price, as their "long term strategy is to monetize stake at premium valuation," according to their corporate presentation.
Disclosure: I am/we are long SAND, ATUSF, SSL.WT, AGB.WT.
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.
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