Precious Metals Royalty And Streaming Companies: The May Report

by: Peter Arendas

The precious metals royalty & streaming companies have been outperforming gold and silver as well as the traditional miners so far in 2019.

A capitalization-weighted index of the precious metals royalty and streaming companies is more than 10% up year-to-date.

In May, the company news were focused primarily on Q1 2019 financial results.

Some minor acquisitions were realized by the smaller royalty and streaming companies.

Precious metals royalty and streaming companies represent a very interesting sub-industry of the precious metals mining industry. They provide some leverage to the growing metals prices, similar to the typical mining companies, however, they are less risky in comparison to them. Their incomes are derived from royalty and streaming agreements. Under a metal streaming agreement, the streaming company provides an upfront payment to acquire the right to future deliveries of a predefined percentage of metal production of a mining operation.

The streaming company pays also some ongoing payments that are usually well below the market price of the metal. They can be set as a fixed sum (e.g. $300/toz gold) or as a percentage (e.g. 20% of the prevailing gold price), or a combination of both (e.g. the lower of a) $300/toz gold and b) 20% of the prevailing gold price). The royalties usually apply to a small fraction of the mining project production (usually 1-3%) and they are not connected with ongoing payments. They can have various forms but the most common is a small percentage of the net smelter return (NSR). The NSR is calculated as revenues from the sale of the mined products minus transportation and refining costs.

The precious metals royalty and streaming sub-industry is dominated by the big three, consisting of Franco-Nevada (FNV), Wheaton Precious Metals (WPM) and Royal Gold (RGLD). These three companies maintain a market capitalization of approximately $15 billion, $10 billion and $6 billion respectively. The big three is followed by two mid-sized companies, Osisko Gold Royalties (OR) and Sandstorm Gold (SAND). And there are also numerous companies with a market capitalization around $100 million and lower.

To better track the overall performance of the whole sub-industry, I created a capitalization-weighted index (Precious Metals Royalty and Streaming Index) consisting of 10 companies (table below). As the index is capitalization-weighted, it is dominated by Franco-Nevada, Wheaton Precious Metals, and Royal Gold. These three companies represented more than 90% of the index, as of the end of May.

Source: own processing

The value of the index was calculated back to January 1, 2019, when a value of 100 points was set. As of May 31, the value of the Precious Metals R&S Index was 110.32 points. The chart below compares the year-to-date performance of the R&S index to the gold price represented by the SPDR Gold Trust ETF (GLD), silver price represented by the iShares Silver Trust ETF (SLV), and gold miners represented by VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners ETF (GDXJ).

Source: own processing

As can be seen, the precious metals royalty and streaming industry outperformed gold as well as silver significantly. Only GDX and GDXJ were able to keep pace with the R&S index in early 2019, however, both of the indices declined back down over the recent months. In May, the R&S index grew by 3.63%, outperforming GLD (1.76%), SLV (-2.64%) and GDXJ (0.68%) and it did also slightly better than GDX (3.35%).

The May news:

In the month of May, the news reported by the precious metals royalty and streaming companies were dominated by the Q1 financial reports. Some acquisitions of new royalties and streams took place, however, they were related only to some minor asset allocations made by the smaller companies.

Franco-Nevada reported its Q1 2019 financial results on May 8. And the company did really well, setting a new revenue and net income record. Franco-Nevada sold 122,049 toz of gold equivalent, generating revenues of $159 million. Revenues of further $20.8 million were generated by Franco-Nevada's energy royalties. The adjusted EBITDA equaled $140.9 million and net income climbed to $65.2 million. The operating cash flow equaled $134.6 million. Although the Q1 numbers were really good, they should keep on improving in the coming quarters, especially due to initial gold deliveries from Cobre Panama, normalized production volumes at Candelaria and growing revenues from the energy royalties. It means that the current quarterly dividend of $0.25 may keep on growing as well.

On May 9, the results of the election of directors were announced.

Wheaton Precious Metals was well synchronized with Franco-Nevada. Also Wheaton announced the election of directors on May 9.

And just like Franco-Nevada, Wheaton released its Q1 2019 financial results on May 8. The company produced 93,585 toz gold, 5,614 toz silver, and 4,729 toz palladium. However, the volume of metals sold was even higher, resulting in revenues of $225.049 million and net earnings of $57.349 million. The operating cash flow equaled $118.194 million. Wheaton's dividend remains at $0.09.

Royal Gold investor relations department was quite busy in May. On May 1, the company announced that its President and CEO, Tony Jensen, plans to retire by the end of Q1 2020. He served as President and CEO since 2006.

On May 1, the company announced also its Q1 2019 financial results (it's Royal Gold's fiscal Q3 2019). Royal Gold produced 55,600 toz gold, 588,700 toz silver and 2.5 million lb copper, or 84,200 toz of gold equivalent. The revenues of $109.8 million resulted in operating cash flow of $77.4 million and net income of $28.8 million. The dividend increased to $0.265. As of the end of Q1, Royal Gold held cash and cash equivalents of $216 million. It had also an undrawn revolving credit facility of $1 billion at its disposal. This is why it should be able to deal with the June maturity of $370 million convertible senior notes quite easily.

On May 30, Royal Gold announced the volume of attributable gold reserves. As of the end of 2018, the volume of metals reserves attributable to Royal Gold equaled 3.8 million toz gold, 50 million toz silver, 440 million lb copper, 73 million lb lead, 181 million lb zinc, 39 million lb nickel, 2.3 million lb cobalt and 4.3 million lb molybdenum. Together it equals to 5.8 million toz of gold equivalent.

Osisko Gold Royalties announced its Q1 2019 financial results on May 1. The company earned 19,753 toz of gold equivalent. It generated revenues of C$33.5 million ($25.2 million) and operating cash flow of C$24.8 million ($18.65 million). Net earnings were negative C$26.549 million ($19.96 million), especially due to a C$38.9 million ($29.2 million) impairment charge. The adjusted net earnings equaled C$5.8 million ($4.4 million). The impairment charge was related to the Renard diamond stream. The positive news is that Osisko Gold Royalties was able to repurchase 852,500 of its own shares, worth C$10.2 million ($7.67 million). The Q1 dividend was set at C$0.05 ($0.038).

On May 2, vote results from the annual general shareholders meeting were announced.

Sandstorm Gold Royalties reported the Q1 2019 financial results on May 7. The volume of attributable toz of gold equivalent equaled 14,071. Revenues climbed to $18.2 million, operating cash flow to $12.1 million and net income to $2.1 million. The production volumes should improve in the near future, due to the recent acquisitions of the 0.9% Fruta del Norte NSR and the Relief Canyon gold and silver stream.

Abitibi Royalties (OTC:ATBYF) provided a corporate update on May 6. The update just sums up that the company generated a cash flow of C$1 million in Q1 2019. It also repurchased 56,500 of its common shares, at an average price of C$10.9. The volume of outstanding shares stands at 12,467,739 now.

Metalla Royalty and Streaming (OTCQX:MTAFF) announced an addition to its board of directors. The board was joined by merger and acquisition expert James Beeby.

On May 29, Metalla declared monthly dividend for the months of June, July and August. It was set at C$0.001 per month.

EMX Royalty Corporation (EMX) reported its Q1 2019 financial results on May 17. The company generated revenues of C$1.4 million, operating loss of C$1 million and an after-tax loss of C$2.8 million. The results are not good, as the vast majority of royalties held by the company doesn't provide any revenues. However, the company held cash of C$78 million as of the end of Q1, which leaves some room for new acquisitions.

On May 21, EMX acquired new Goodpaster Mining District royalties for C$350,000. It also purchased 500,000 common shares of Corvus Gold (OTCQX:CORVF) for C$900,000.

On May 30, EMX optioned the Nevada located Swift and Selena projects to Ridgeline Minerals.

Sailfish Royalty Corp (OTCQX:SROYF) provided an update regarding the current status of its San Albino and El Compas royalties. It seems that some visible gold was intersected at San Albino. Moreover, the project is expected to start production by the end of Q3 2020, which is good news for Sailfish that holds a 3% NSR. Endeavour Silver's (EXK) Compass mine declared commercial production on March 16. Sailfish holds a 1.5% NSR.

ELY Gold Royalties (OTCQB:ELYGF) announced some interesting news in May. On May 2, it acquired a 0.75% gross receipts royalty on the Isabella Pearl Mine operated by Gold Resource Corporation (GORO). The mine started gold production only in April.

On May 23, ELY acquired another producing royalty, a per ton royalty on the Jerritt Canyon Operations.

The June outlook

As the Q1 earnings season is already over and the Q2 earnings season starts only in July, it is possible to expect a relatively calm period for the precious metals royalty and streaming companies. The only exception is Royal Gold with its convertible notes maturity. Also announcements of some new transactions cannot be excluded completely. However, the performance of the whole sub-industry should be driven especially by the gold and silver price development during the month of June.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.