- Ely Gold Royalties is a high-growth royalty company that also recently landed a major new investor in Eric Sprott.
- The company owns a total of 43 royalties, of which 3 are currently producing, with strong third-party operators.
- A recent acquisition of five 3% NSR royalties in Nevada carries strong economics for Ely.
- I break down the recent performance of the stock.
- I do much more than just articles at The Gold Bull Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
Ely Gold Royalties Analysis
This article was first published and made available to subscribers of my marketplace service on April 2, 2020, when the stock traded at US$.50. It has been edited and updated.
Recent stock price: US$1.30 (C$.68)
Shares outstanding: 119.3 million
Market cap: US$190.89 million (C$259 million)
52-week range: $.13-1.48
Ely Gold Royalties is a small company in the royalty space (sub-$200 million market cap), but it is growing fast and has been completing some attractive deals lately. It also has strong third-party operators on its royalties - such as Barrick Gold (GOLD), SSR Mining (SSRM), and Coeur Mining (CDE) - which is pretty rare for a company of its size.
Management and insiders are aligned with investors as they own 8% of the company, while new investor Eric Sprott owns 26%, according to the company's most recent corporate presentation (slide 6).
What is a royalty? And the benefits
A royalty gives a company a fixed percentage of the revenue generated from a mine for the entire life of the mine, regardless of who is the mine's operator.
The benefits of royalties include: Leverage to gold prices, the ability of a company to diversify over many royalties, high profit margins (80%+), no ongoing capital requirements, and no exploration costs (but exploration upside), and it makes it easier to scale the business versus the high cost of building a gold mine.
Example: if Ely buys a 1% net smelter returns royalty on a mine that produces 100,000 ounces of gold annually and gold averages $1,500/oz, then Ely would earn $1.5 million in annual royalty revenue (estimated). If that gold mine is able to increase production to 200,000 ounces, then revenue rises to $3 million at no additional cost to Ely.
Royalty companies trade at higher premiums than mining companies. For example, the typical streaming/royalty company might trade at 15-20X EV/EBITDA, while miners typically trade below 10X.
Royalty/streamers are also more likely to return capital to shareholders via buybacks and dividends. That's because of the high profit margins and much less lower risk and capital requirements of owning a royalty on a mine versus running a gold mine. Ely is a small company but is growing fast and is already aiming for an initial dividend by 2021.
There have been substantial rewards to getting in early on a high-growth royalty company, as you can see below, some of today's most successful companies started out with a very low stock price/market cap but were able to successfully (and quickly) scale the business:
(Credit: Ely Gold Royalties presentation)
Sandstorm Gold (SAND) was a huge winner with nearly 700% gains from 2009 to 2013, as well as larger streaming/royalty peers Franco-Nevada (FNV) and Royal Gold (RGLD) as several of these companies saw their stock price increase by 20X or more in just 2-3 years' time.
While rising gold prices contributed to these gains, these companies have greatly outperformed the typical mining company as they created more value with less dilution to shareholders.
Smaller royalty companies typically have the most upside. According to Noble Capital Markets in a new research report:
As its business grows, Ely Gold offers the potential for multiple expansion, dividend payments and the ability to execute larger transactions which could accelerate its growth. Junior royalty companies generally perform well in their early years since they can grow very rapidly based on an increasing capacity to transact larger deals.
In our view, the company could become an attractive acquisition candidate for a larger royalty company seeking to enlarge its royalty portfolio."
How the business model works
(The location of Ely's royalties and assets in Nevada. Credit: Ely Gold Royalties)
Ely's business model works a bit differently from Sandstorm and others in that it acquires royalties in two ways.
Like the other royalty companies, it purchases cash flowing or near-term cash flowing royalties; Ely aims for royalties that carry strong returns (20%+) and which cost it up to 10% of its market cap ($3-5 million).
However, it also generates royalties through land staking and acquisitions. Ely will develop a project and then sell it to a third-party mining company on a 100% basis, typically under a 4-year option agreement. After payments are completed and the property sells, Ely will retain a royalty interest. However, if the miner cannot make payments, Ely would get the property back.
Ely has been able to build a respectable royalty portfolio is a very short period of time, and as Ely states on its website, the majority of the properties are located in some of the most prolific and desirable gold trends in Nevada (the Walker Lane district of western Nevada and the Cortez Trend).
Nevada was ranked the No. 1 mining jurisdiction in the world in 2019 and it consistently ranks at the top of the list.
Some of Ely's notable assets include:
- A .50% NSR royalty on the Jerritt Canyon mine, a private gold mine acquired from Eric Sprott for C$8 million. The company issued Sprott 12.698 million shares of stock at C$.63 share. Since mining began at Jerritt Canyon, more than 8 million ounces of gold have been produced, according to the miner's website.
- A 2% NSR royalty on Wallbridge Mining's Fenelon mine in Quebec, with production estimated by late-2020. Wallbridge has announced a merger with Balmoral Resources, and the newly combined company will be well-financed with C$67 million in cash. Kirkland Lake Gold (KL) has also invested in Wallbridge Mining and its CEO is on the board.
- A 1% NSR royalty on Coeur Mining's Lincoln Hill mine in Nevada, with early 2023 production targeted.
- A .75% NSR royalty on SSR Mining's Marigold mine in Nevada, slated for production in 2022.
- A 1.5% NSR royalty on the Goldstrike mine in Nevada, operated by Nevada Gold Mines which is a joint venture between Barrick (61.5% owner) and Newmont Corporation (38.5%). Projected production is scheduled for early 2023.
- A 15% net profits interest on Rawhide Mining's Regent Hill deposit in Nevada, with payments beginning in late-2020.
Projected revenue for 2020-23
(Ely Gold Royalties projected revenue, according to its April presentation).
Previously, in April, Ely Gold Royalties had projected as high as C$12 million in total revenue, of which just over C$8 million coming in from royalties, and this is estimated from its existing asset base and does not factor in any new royalty acquisitions or land sales/option deals between now and then.
June 3 update: However, Ely Gold Royalties' latest June investor presentation estimates that the company will produce as much as $17-18 million in total revenue by 2023 following several new acquisitions, and most of this is expected to come from royalty revenue.
What is the upside case?
If Ely is able to continue its strong growth in the "junior royalty" space, achieving a $300-500 million market cap, then the upside is a stock price gain of 100-200% with the company competing with companies like EMX Royalty (EMX), Abitibi Royalties (OTCPK:ATBYF), and Metalla (MTA).
However, the gains could be much larger if Ely is able to grow larger and enter the "mid-tier" royalty space which is currently occupied by companies like Maverix Metals (MMX), Sandstorm Gold (SAND), and Osisko Gold Royalties (OR). That would lead to higher multiples and a possible share price re-rating. In that case, shares have 300-500%+ gain potential. I believe the company is likely 5 years out from achieving this status based on its current growth trajectory, and it will need to continue acquiring royalties at a rapid pace. I think it'll likely get bought out before reaching this stage.
The biggest risks include fluctuations in gold prices, and counterparty risk as some of its mine operators are struggling in the current environment, but Ely's counterparty risk is surprisingly low for a company of its size. Another risk is lack of trading volume, while volume has increased recently, it is still a thinly traded stock with avg. volume of less than 500,000; this makes trading the stock is difficult and there may be some challenges in buying shares and then taking profits.
Bottom line: I bought shares of Ely Gold Royalties back in April and recommended my marketplace subscribers do the same, and the stock has more than doubled since then. The stock may be due for a pullback in the short term following the huge share price run-up, but I still believe in the stock's long-term potential. Look to sell on rallies and buy the dips.
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This article was written by
With over a decade of experience in the investment industry, I am a highly skilled private investor with a proven track record of success in the commodities and hard assets sector. My areas of expertise include investing in gold and silver miners, royalty and streaming companies, pure exploration companies, as well as oil and gas producers and MLPs. My comprehensive understanding of these markets and my ability to identify and capitalize on profitable opportunities have enabled me to consistently deliver strong returns for my subscribers.
Analyst’s 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.
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