Precious Metals Royalty And Streaming Companies: The August Report

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Includes: ELYGF, EMX, FNV, GDX, GDXJ, GLD, MMX, MTAFF, MUX, RGLD, SAND, SLV, SROYF, TCEGF, TMMFF, USTDF, WPM
by: Peter Arendas
Summary

The Precious Metals R&S Index increased by 8.56% in August and is 45.48% up year-to-date.

The Precious Metals R&S Equally Weighted Index increased by 5.02% and is 53.01% up year-to-date.

Interestingly, the highest returns were recorded by the big three (Franco-Nevada, Wheaton Precious Metals, Royal Gold) in August.

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 also pays 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. Later, based on the inquiries following the June report, I introduce also an equally-weighted version of the index. Both indices include the same companies and are calculated back to January 2019.

Source: Own processing

In the capitalization-weighted index, no major changes occurred. The index is still dominated by the big three, consisting of Franco-Nevada (FNV), Wheaton Precious Metals (WPM) and Royal Gold (RGLD). These three companies have a combined weight of 91.13%, which is more than 90.43% one month ago.

Source: Own processing

In August, gold price increased by another $100 and crossed the $1,500/toz level. The silver price did even better and grew by $2 to $18.3/toz. As a result, also the precious metals royalty and streaming companies did very well. However, quite surprisingly, the best results were recorded by the big three. Shares of Royal Gold grew by 16.54% and double-digit gains were also recorded by Wheaton Precious Metals (12.6%) and Franco-Nevada (12.47%). Numerous analysts attribute the recent steep gold price growth to the turbulent global political and economical situation.

The investors get nervous and gold starts to act as safe heaven once again. This could also explain the notable outperformance of the streaming big three. As these companies are much bigger than their peers and they also eliminate some risks related to the traditional mining companies, some investors may take them as a relatively safe alternative to owning physical gold. Moreover, this alternative also offers them some leverage to the gold price.

Only two of the 11 companies recorded negative returns in August. The share price of Ely Gold Royalties (OTCQB:ELYGF) declined by 4% and the share price of Sailfish Royalty Corp. (OTCQX:SROYF) declined by 11%. However, in the case of Sailfish, the decline was caused by the acquisition of Terraco Gold (OTCPK:TCEGF). As a result, its share count increased, its share price decreased, and its market capitalization grew by 48.5%.

Source: own processing

As shown in the chart above, the Precious Metals R&S Index and the Precious Metals R&S Equally Weighted Index did very well in August. The market capitalization-weighted index grew by 8.56% and the equally-weighted index grew by 5.02%. Although the gains were nice, they were less impressive than in July. In August, the SPDR Gold Trust ETF (GLD) recorded similar returns (7.91%). However, the VanEck Vectors Junior Gold Miners ETF (GDXJ), the VanEck Vectors Gold Miners ETF (GDX) and the iShares Silver Trust ETF (SLV) outperformed, recording returns of 9.35%, 12.68%, and 12.75% respectively. On the other hand, the two royalty and streaming indices still maintain their position of leaders in terms of year-to-date performance.

The August news

August news was heavily impacted by the Q2 earnings season. Financial results were reported by Franco Nevada, Royal Gold, Wheaton Precious Metals and also Sandstorm Gold (SAND).

Franco-Nevada reported its Q2 financial results on August 7. Its gold equivalent sales equaled 129,695 toz which resulted in revenues of $169.9 million. Franco-Nevada recorded operating cash flow of $119.1 million and net income of $64 million. Its net debt declined from $87.4 million to $2.7 million. An article focused on Franco-Nevada's Q2 results can be found here.

Wheaton Precious Metals announced its Q2 financial results only one day after Franco-Nevada, on August 8. The company sold 143,561 toz of gold equivalent and recorded revenues of $189.5 million. The operating cash flow equaled £109.3 million. However, the company booked a net loss of $124.7 million. The loss was caused by a $166 million impairment charge related to the Voisey's Bay cobalt stream. On the other hand, Wheaton was able to reduce its net debt from $1.062 billion to $1.013 billion. An article comparing the Q2 results of the big three can be found here.

Royal Gold reported its Q2 (fiscal Q4) financial results. The company recorded gold equivalent sales of 88,388 toz and revenues of $115.7 million. The operating cash flow equaled $72.3 million and net income $26.5 million. The company was also able to reduce its net debt from $146.9 million to $95.1 million. An article comparing the Q2 results of the big three can be found here. On August 14, Royal Gold declared a quarterly dividend of $0.265 per share.

Sandstorm Gold announced that its Q2 volume of attributable gold equivalent sold equaled 16.356 toz, which is a new quarterly record. The company generated revenues of $18.9 million, operating cash flow of $13.8 million and net income of $2.4 million. Sandstorm Gold also announced that during Q2, it repurchased and canceled 2.5 million shares.

Maverix Metals (MMX) reported Q2 net income of $0.6 million and operating cash flow of $5.4 million. The attributable gold equivalent production equaled 6,425 toz. The company reiterated its 2019 guidance of 22,500-24,00 toz of gold equivalent sold. Moreover, Maverix intends to grow its attributable production further. On August 14, it announced the acquisition of an additional 1.5% NSR on the Hope Bay Mine operated by TMAC Resources (OTC:TMMFF). After completion of the transaction, Maverix holds a 2.5% NSR (2.75% until some conditions are met) on a mine that should produce 160,000 toz gold this year.

Metalla Royalty & Streaming (OTCQX:MTAFF) purchased 3% NSR on the Fifteen Mile Stream Project owned by St. Barbara Ltd. for C$2 million. In late August, the company declared a monthly dividend of C$0.001 per share. This dividend applies for September, October and also November. After annualizing, the dividend yield equals approximately 1%.

EMX Royalty Corporation (EMX) reported Q2 loss of $5.05 million. However, as of the end of June, its working capital amounted $62.7 million. It also announced some progress at its Queensland Gold Project.

Sailfish Royalty Corp. announced the completion of Terraco Gold acquisition. Terraco was acquired at a price of 0.12 Sailfish shares for 1 share of Terraco. As a result, the former Terraco shareholders control 37.2% of Sailfish now. Sailfish acquired Terraco especially due to the 1.5-3% NSR on the Spring Valley project. Spring Valley is located in Nevada and it is operated by Waterton. It contains measured, indicated and inferred resources of 5.11 million toz gold.

Ely Gold Royalties announced that Fremont Gold (OTCPK:USTDF) sold its option to acquire a 100% interest in the Gold Canyon Claims to McEwen Mining (MUX). Although ELY doesn't benefit from this transaction directly, the indirect benefit is that McEwen should be able to develop the property quicker than Fremont. If the option is exercised by McEwen, Ely Gold will retain a 2% NSR on the property.

The September outlook

As the earnings season is over, the news reported in September should be related especially to some developments at the existing projects of interest and possibly to some new acquisitions. The share price development of the royalty and streaming companies should be driven especially by the gold and silver prices. However, it is important to note that the royalty and streaming companies recorded steep share price growth over the recent months. If the gold price stops growing, a painful correction should be expected.

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.