Seeking Alpha

Precious Metals Royalty And Streaming Companies: The June Report

|
Includes: AEM, BITTF, ELYGF, EMX, EQX, FNV, GCFFF, GDX, GDXJ, GFI, MMX, MSNFY, MTAFF, OR, RGLD, RNKLF, SAND, SROYF, SWYDF, WLBMF, WPM
by: Peter Arendas
Summary

Growing gold prices provided very nice support to the precious metals royalty and streaming companies.

The Precious Metals R&S Index increased by 10.18% in June.

Although the index was outperformed by GDX and GDXJ in June, its year-to-date performance remains better.

Sailfish Royalty experienced the strongest growth, jumping by 40% after a share buyback and the Terraco Gold acquisition were announced.

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.

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. However, based on the discussion to the May report, I expanded it to 11 companies by adding Maverix Metals (MACID) (the index performance was re-calculated back to January 1, 2019). The current composition of the index is as presented in the table below.

(Source: Author's own processing)

As can be seen, the sector is dominated by the heavyweights Franco-Nevada (FNV), Wheaton Precious Metals (WPM) and Royal Gold (RGLD) that also create the major part of the index. The majors are followed by a group of mid-sized companies, such as Osisko Gold Royalties (OR) and Sandstorm Gold (SAND). And there are also several small companies, such as Ely Gold Royalties (OTCQB:ELYGF).

(Source: Author's own processing)

The small players are much riskier, however, they can provide also very high returns over a short time period. As can be seen in the chart above, shares of Sailfish Royalty Corp. (OTCQX:SROYF), a company with a market capitalization of only $41 million, grew by 44% in June. Very strong double-digit gains were recorded also by Royal Gold and Maverix Metals. Franco-Nevada and Wheaton Precious Metals ended June just shy of the 10% mark. Only 2 out of the 11 companies, Metalla Royalty & Streaming (OTCQX:MTAFF) and EMX Royalty Corporation (EMX), ended June in red numbers.

(Source: Author's own processing)

A strong gold price growth also elevated the Precious Metals R&S Index, which is up by 21.68% year to date (chart above). However, the index grew only by 10.18% in June, and it was outperformed by the VanEck Vectors Gold Miners ETF (GDX) and the VanEck Vectors Junior Gold Miners ETF (GDXJ) that grew by more than 18%.

The June news

In June, the volume of company related news was lower than in May, as the earnings season is already over. The mid-sized and small-sized players were more active than the majors.

Osisko Gold Royalties announced that together with other financial partners, it will provide a senior secured bridge credit facility to Stornoway Diamond Corporation (OTCPK:SWYDF). It is an attempt to keep the heavily indebted company alive, as Osisko owns a 9.6% diamond stream on the Renard Diamond Mine.

On June 25, more positive news was announced. As Orion Resource Partners decided to decrease its Osisko Gold Royalties holdings, it made a secondary offering. Osisko Gold Royalties utilized this opportunity and agreed to repurchase 12,385,717 of its common shares for C$14.1 per share. The transaction should be financed by cash on hand and some other securities held by Osisko, and it should help to reduce the company's share count by 8%.

Sandstorm Gold Royalties provided a corporate update on June 25. Among other things, the company announced that since the beginning of its share buyback program, 7.9 million out of the targeted volume of 18.3 million shares have been already repurchased. Moreover, Sandstorm Gold was able to sell some non-core equity investments for $17 million. And Equinox Gold's (EQXFF) Aurizona gold mine should reach commercial production soon (Sandstorm owns a 3.0-5.0% sliding-scale NSR royalty).

Maverix Metals just ended a pretty busy month. On June 6, it announced that Gold Fields Ltd. (GFI) sold its 19.9% stake in the company to North American0based financial institutions, led by Resolute Funds Limited and Tocqueville Asset Management.

Later in June, Maverix was approved for NYSE and TSE listing. As a result, the company ceased trading on the OTCQX and the TSX Venture Exchange. The new ticker (the same for NYSE and TSX) is MMX.

And another information affecting Maverix Metals was announced on June 27 by RNC Minerals (OTCQX:RNKLF). RNC announced a significant growth of the Beta Hunt mine gold resources and also updated about some future plans. This news is very positive for Maverix, as it holds 6% gross revenue royalty and 1.5% net smelter return on gold and 1.5% net smelter return on nickel produced at Beta Hunt.

Metalla Royalty & Streaming acquired a 2% NSR royalty on the El Realito property, a satellite deposit to Agnico Eagle Mines' (AEM) La India mine. The company also agreed to acquire a 2.75% NSR royalty on the Orion project owned by Minera Frisco (OTCPK:MSNFY).

Sailfish Royalty Corp. made 2 news releases that pushed its share price 40% higher. On June 19, it announced a normal course issuer bid under which up to 1,918,678 common shares (approximately 5% of outstanding shares) of the company may be purchased by June 24, 2020.

On June 20, Sailfish announced the acquisition of Terraco Gold. Sailfish will pay 0.12 of its own shares per 1 share of Terraco. After the transaction is completed, the company plans to keep Terraco's royalties and spin-off its exploration assets.

Ely Gold Royalties was quite busy in June. The company sold its 1% NSR royalty on Wallbridge Mining's (OTC:WLBMF) Fenelon project to Eric Sprott for $1.25 million. However, it still holds a 2% NSR on the project. ELY optioned its Nevada Rand property to Goldcliff Resources (OTCPK:GCFFF) and its Castle West property to Bitterroot Resources (OTCPK:BITTF). And it also found a new CFO. Beginning on June 30, this post is to be held by Xavier Wenzel.

The July Outlook

In June, the gold price surprised positively and pushed the whole precious metals mining sector, the royalties and streaming sub-sector included, notably higher. The July price action will depend on the gold price once again. However, especially during the first half of the month, a slight decline and some consolidation are quite probable. Later in the month, the first Q2 earnings releases should arrive. Given the strong gold price, they should be quite positive.

Disclosure: I am/we are long RNKLF. 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.