Precious Metals Royalty And Streaming Companies: The July Report

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Includes: AEM, ATBYF, AUY, CGOL, ELYGF, FNV, GDX, GDXJ, GLD, MTAFF, OR, RGLD, RRC, SAND, SLV, SROYF, WLBMF, WPM
by: Peter Arendas
Summary

The precious metals royalty and streaming companies did well also in July.

The Precious Metals R&S Index increased by 10.14%.

The newly introduced Precious Metals R&S Equally Weighted Index rose by 13.27% and is 45.17% up year-to-date.

The strongest growth, almost by 80%, was experienced by ELY Gold Royalties.

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 11 companies. This month, based on the inquiries following the June report, I introduce also an equally-weighted version of the index. The equally weighted index includes the same companies and is calculated back to January 2019. It can be found in one of the charts below.

Source: own processing

In the market capitalization-weighted index, only small changes in weights occurred during July. The dominance of the big three (Franco-Nevada (FNV), Wheaton Precious Metals (WPM) and Royal Gold (RGLD)) is still huge. Their combined weight remains over 90%.

Source: own processing

Because the gold price remained strong and finished the month of July above the $1,400/toz level, and also the silver price finally started to grow and crossed the $16/toz level, the royalty and streaming companies did as good as in June. The highest gains were recorded by the smallest company included in the index, ELY Gold Royalties (OTCQB:ELYGF). The share price of ELY Gold increased almost by 80%, as the company sold 1/3 of its Fenelon royalty for $1.25 million, made an equity financing worth almost $800,000 and signed an option agreement with Contact Gold (OTC:CGOL), regarding the sale of its Green Springs Gold project, for 2 million shares of Contact Gold, $25,000 in cash and ongoing payments of further $250,000. On the other hand, the only company that experienced a negative month was Sailfish Royalty (OTCQX:SROYF). After a 44% growth in June, its share price declined by more than 7% in July.

Source: own processing

As can be seen in the chart above, the Precious Metals R&S Index outperformed the VanEck Vectors Gold Miners ETF (GDX), as well as the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV). Only the VanEck Vectors Junior Gold Miners ETF (GDXJ) was able to keep pace. While the Precious Metals R&S Index value increased by 10.14%, GDXJ recorded 7.83% gains in July. However, the chart shows that the newly introduced equally weighted index did even better, growing by 13.27%. Also the year-to-date performance of the equally-weighted index is dominant. It is up by 45.7%, while the market capitalization-weighted index is up only by 34.01%.

The July news

Several interesting news were released during the month of July. However, as the earnings season has only started, it is possible to expect that a significantly increased activity of the PR departments will be seen in August.

Franco Nevada announced the acquisition of further energy interests. It will pay Range Resources Corporation (RRC) $300 million to acquire 1% gross production royalty from a property covering 350,000 net acres of Range Resources' working interest positions in Washington, Western Allegheny and Southern Beaver Counties in Pennsylvania (Marcellus, Utica, and Upper Devonian formations). The royalty is expected to generate revenues of $25-30 million per year.

Royal Gold reported that in Q2 2019 (its fiscal Q4 2019), it sold 57,000 toz gold, 589,000 toz silver 1,100 tonnes copper, or 70,000 toz of gold equivalent. Moreover, as of the end of the quarter, it held 25,000 toz gold, 512,000 toz silver, and 400 tonnes copper. The financial results will be released on August 7.

Osisko Gold Royalties (OR) was quite busy in July. On July 15, the company announced the completion of repurchase of 12,385,717 of its own shares from Orion. In the second tranche, Osisko repurchased 5,066,218 shares. The whole operation resulted in an 8% reduction in the volume of Osisko Gold Royalties' outstanding shares.

On July 16, Oskar Lewnowski resigned from the board of directors. He resigned, as Orion Resource Partners ceased to be a major shareholder.

On July 31, Osisko Gold Royalties announced a quarterly dividend of C$0.05. The Q2 financial results were released the same day. Osisko Gold Royalties' attributable production equaled 19,651 toz of gold equivalent. The operating cash-flow amounted $16 million, however, the company recorded a net loss of almost $5 million, or $0.03 per share. An article focused on Osisko Gold Royalties' Q2 2019 financial results can be found here.

Sandstorm Gold Royalties (SAND) announced that it sold 16,400 toz of gold equivalent in Q2.

Abitibi Royalties (OTC:ATBYF) announced that it generated total cash flow of approximately C$1.2 million in Q2. As a result, it declared its historically first quarterly dividend of C$0.03. As there are 12,527,210 shares outstanding, the dividends should amount C$375,816 per quarter, which is fully sustainable at the current level of cash flows. At the current share price of C$13.23, the annualized dividend yield equals 0.9%.

On July 29, Abitibi Royalties reported new developments related to its portfolio. It seems like at Odyssey and East Malartic (3% NSR), a production expansion is being considered by the current owners, Agnico Eagle Mines (AEM) and Yamana Gold (AUY).

Metalla Royalty & Streaming (OTCQX:MTAFF) reported some news related to its portfolio of assets as well. Probably the most important news is related to the New Luika Gold Mine, where Metalla owns a 15% silver stream. A recently released resource estimate is expected to extend the mine life to 2025. Moreover, the company believes that it will be able to extend it further in the future. On the other hand, at the Australian Endeavor mine (100% silver stream), the production rate is about to scale back from 25,000 tonnes of ore to 17,000 tonnes of ore per month. However, a production decision on the Deep Zinc Lode that could add 3-5 years to the mine life, is expected in Q4 2019.

ELY Gold Royalties sold 1% NSR on the Fenelon mine operated by Wallbridge Mining (OTC:WLBMF) for $1.25 million. As a result, ELY Gold will retain a 2% NSR on Fenelon. Moreover, Eric Sprott bought 5,615,454 shares and 2,807,727 warrants of ELY Gold for C$1,010,782.

On July 24, ELY Gold Royalties closed an option agreement with Contact Gold. According to the agreement, Contact Gold will acquire a 100% interest in the past-producing Green Springs gold project by issuing 2,000,000 common shares and paying $25,000 now and $250,000 over the next 4 years. Ely Gold will retain a 1% net smelter royalty on 76 core claims and a 0.75% royalty on the 2 leased claims.

The August Outlook

Besides the gold price, also the earnings season should be affecting share prices of the precious metals royalty and streaming companies in August. Especially the period between August 7 and August 8 will be pretty interesting, as the quarterly results will be reported by Royal Gold, Franco Nevada and also Wheaton Precious Metals.

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.