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Ely Gold Royalties Could Be A 10-Bagger Based On Similar Emerging Companies In This Space

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About: Ely Gold Royalties Inc. (ELYGF), Includes: KL, WLBMF
by: Tim Paul
Tim Paul
Value, special situations, momentum, contrarian
Summary

Ely Gold stock price has surged as producing royalties accrue.

Junior Gold royalty companies can display powerful upward moves.

Ely has quietly been staking and acquiring mostly Nevada properties.

Purchase of Eric Sprott's 0.50% royalty (Jerritt Canyon Gold Mine) for $8 million could be a major catalyst for shareholders.

Jerritt Canyon Gold mine is 80% owned by Sprott and well known to Ely Gold.

Ownership of quality gold royalty companies can be a lucrative manner in which to gain exposure to gold. A royalty company typically earns a gross or net profit from each ounce produced on their property and avoids the risks of mine construction, labor, energy costs, and overall capital expenditures - including exploration. Ely Gold Royalties (OTCQB:ELYGF) deserves consideration for those speculative investors looking for a potential ten-bagger.

Here is an example of why I think Ely can become a ten-bagger. Look at the huge appreciation of similar small royalty companies as they matured into Juniors.

Beta in Emerging Royalty space

Ely Gold Presentation - February 6, 2020

Ely has a unique strategy of staking and acquiring promising exploration properties in Nevada and then selling or "optioning" these parcels back to miners while retaining a royalty. The company also purchases third party royalties. Ely structures a sales agreement such that the buyer pays an annual stipend over 4-5 years back to the company until fully paid. Ely benefits from recurring cash flow payments and then retains a royalty upon completion of the final payment. The company has an impressive capital structure with backing from Eric Sprott who extended a $6 million line of credit to enable further royalty purchases.

Ely Gold capital structure

At the recent Metals Investment forum, CEO Trey Wasser revealed the company expects to do $4 million in revenue in 2020, including property sales of $2 million and generation of $2 million in producing royalties. Ely expects 2021 revenue at $5 million based on additional royalties, including the recent $8 million purchase of the Jerritt Canyon Gold 0.50% royalty from Eric Sprott. Sprott was given 13 million Ely stock warrants, saving the company from costly debt. In 2022, the company expects revenue to jump to $7 to $8 million based on its current portfolio. (from Wasser interview linked above)

CEO Trey Wasser recently articulated that his company favorably compares to two other smaller Junior Royalty companies whose stock prices have seen 3,000% gains over the last several years.

Ely Gold upside comparison Junior Royalty space

Ely Gold Corporate Presentation - February 6 2020

The company has approximately 140 million shares outstanding after full dilution based on the exercise of warrants. The stock is trading at $0.53 per share, OTCQB:ELYGF, today and has shown a solid upturn as news on drilling results near its most promising royalties have begun to reach the investment community. The Fenelon mine 2% royalty in Quebec operated by Wallbridge Mining (OTC:WLBMF) has been instrumental in stirring investor interest of late. Wallbridge announced highly promising drill results on January 28, including the intersection of 43.47 g/t over 19 meters at Fenelon. Investors should note that Kirkland Lake Gold (NYSE:KL) purchased a significant 9.9% stake in Wallbridge, which might foreshadow a potential takeover in the future. Ely expects royalty payments on Fenelon to begin in the third quarter of this year as Wallbridge ramps up production.

Wasser mentions that a small royalty company such as ELYGF ($100 million Canadian market cap) benefits greatly with one outstanding royalty at a price tag in the $1 million range. At the time, ELY held two producing royalties. The announcement of the $8 million royalty from Eric Sprott is a potential game-changer for a small aspiring Junior Royalty company. The company has been unable to release official indicated and inferred gold reserves at Jerritt Canyon gold mine due to IROC and Canadian stock exchange regulations that prohibit and limit the premature release of private mine results. The company does intend to complete due diligence within 45 days and release an updated NI 43-10 technical report.

Ely Gold stock appreciated from the low $0.40 range up toward $0.60, and ELYGF had to halt trading on the stock on February 3rd - since they needed to lock in the purchase with Sprott and file the information with the TSX, but the stock price was climbing away from the agreed-upon warrant strike prices. Investors should due their due diligence on this company as always. I am not a geologist but the information that I have reviewed would seem to indicate that investors will continue to take notice that Ely is a profitable well-backed royalty company whose story is unfolding as we speak. They hold little debt - about $1 million and have access to plenty of cash with a $6 million line of credit from its soon to be controlling stockholder. My only concern is whether Ely can curtail the issuance of additional shares as shareholder dilution can sink a stock price. Right now, I believe they are utilizing a low share price to their advantage and preserving cash.

Disclosure: I am/we are long ELYGF. 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.

Additional disclosure: I own Abitibi Royalties which is a Junior Royalty company whose stock price has appreciated sharply over the past few years.