Metalla Royalty & Streaming Ltd. (NYSE:MTA) with a market cap of $195 million specializes in development and exploration stage gold and silver mining transactions. The company has a diverse portfolio of 48 assets including deals with several major mining companies. While many of the projects are medium- and long-term opportunities with no current cash flows, management has proven to be successful in growing the business with several recent acquisitions. We think the overall outlook is positive and see value in the stock leveraged to the upside in the context of a strong bull market for precious metals.
(source: finviz.com)
Metalla Background
The business model of streaming and royalties represents an alternative form of financing for mining companies outside of traditional banks and capital markets. In the royalty process, Metalla provides capital for a project in return for a percentage of revenues generated by the asset. In streaming, the deal sets an exchange of future metals production at a predetermined price along with any other contract agreement. The benefit for miners is to receive upfront cash in off-balance-sheet financing that is not recognized as debt. Metalla, for their part, can lock in margins and avoids the related risks of operating a mine while accepting the uncertainty of the resource potential or project viability. The higher the underlying commodity price goes, the more valuable these interests become.
(source: Company IR)
Within the segment, Metalla has a unique business model that targets deals in the secondary market of royalties. Metalla typically offers cash along with an equity interest that allows the 3rd parties to participate in its broader asset portfolio representing a form of diversification. As a "micro-cap" company, Metalla has the advantage of being able to conduct relatively small transactions with attractive returns that typically fly under the radar of large-cap streaming peers.
(source: Company IR)
The company currently has 48 assets, including interest in 28 projects classified as in the exploration phase, 17 in development, and 3 with current production. The project diversification is global, including mines in Canada, Australia, Argentina, Peru, Mexico, Chile, Ecuador, Tanzania, and the U.S. 72% of total assets are based on a royalty type of deal compared to 28% streaming. 66% of the deals are for gold with the remaining being silver. The company notes that the exposure to silver projects is higher than most other publicly traded streaming companies, making Metalla more leveraged to upside in silver.
(source: Company IR)
Among key assets, Metalla holds a 2.0% NSR on the Joaquim Mine along with a 1.5% NSR royalty on the COSE Mine in Argentina, both operated by Pan American Silver Corp. (PAAS). The NSR is defined as a percentage of the gross revenue from a mining operation, less a proportionate share of transportation, insurance, refining, and smelting costs. During Q1, Metalla received its first royalty payment on the deals related to Q4 2019 development ore. Despite temporary suspension of activities on the projects given COVID-19 restriction in the country, it's expected both mines will still ramp up production this year.
(source: Company IR)
Metalla also is generating revenues from the Endeavor Mine in NSW Australia operated by "CBH Resources" as the other revenue-generating deal with a 100% stream on silver production. Separately, Metalla owns a 15% stream on gold production from the New Luika mine operated by Shanta Gold Ltd. (OTCPK:OTCPK:SAAGF) in Tanzania. Several other projects are in the development phase with expected production over the coming few years with varying terms. The value in royalty deals with exploration and development stage projects is that they typically offer higher net smelter returns ("NSRs") given the risks.
(source: Company IR)
Fiscal Q3 Earnings Recap
The company last reported earnings back on April 9th for the period ending February 29th with a GAAP EPS loss of -$0.06 per share and revenue of C$1.3 million. The context here is the stage of its portfolio with most deals not generating cash flows. Revenue here was primarily related to royalties from the Joaquin/COSE mine in Argentina along with the Endeavor in Australia.
During the quarter, Metalla closed a new deal by acquiring a 2.0% NSR royalty on future gold production from a portion of the "NuevaUnion" La Fortuna deposit in that Atacama region in Chile jointly owned by Newmont Corp. (NEM) and Teck Resources Ltd. (TECK).
After the quarter-end, in April, Metalla also announced the acquisition of Idaho Resources Corp. ("IRC") for $4 million between cash and shares of MTA. The purchase includes control of two royalties covering 19,000 hectares. IRC holds a 0.5% gross overriding royalty ("GOR") on the Angle-Zeke claim owned by Nevada Gold Mines, a joint venture between Barrick Gold Corp. (GOLD) and Newmont Mining Corp. The "goldrush south" mineralization deposits are described as one of the world's most prolific gold trends in the world. IRC also holds a 1.5% GOR on the NuLegacy Gold Corp. (OTCQB:NULGF) Red Hill project.
(source: Company IR)
The takeaway here is that Metalla continues to be active in pursuing opportunities and has an expanding pipeline of future potential cash-generating assets. According to management, 16 deals closed since 2016 is more than any other publicly traded precious metal streaming and mining company. The peer group here includes Franco-Nevada (FNV), Osisko Gold Royalties Ltd. (OR), Maverix Metals Inc. (MMX), Sandstrom Gold Ltd. (SAND), Royal Gold Inc. (RGLD), and Wheaton Precious Metals Corp. (WPM). Metalla also highlights that it trades at a discount to this peer group in terms of price to net asset value as supporting the company's investment thesis. The number of deals in the portfolio and continued acquisitions support a long-term growth outlook.
(source: Company IR)
It's also worth mentioning that the Metalla ended the quarter with a relatively stable balance sheet position C$7.3 million in cash against $4.5 million in long-term debt. Liquidity is also supported by an additional $5 million available in a convertible loan facility. The company typically issues common shares in conjunction with a cash payment to fund acquisitions.
Citing uncertainties related to the emergence of the COVID-19 pandemic, management expects near-term cash flows associated with production assets to be weaker than previously expected given potential disruptions at the Joaquim and COSE mines but considers the balance sheet adequate to sustain any extended mining suspension. From the press release:
"While we expect near-term cash flow on Metalla’s royalties on these assets to be lighter than previously anticipated, we believe the Company’s balance sheet is more than adequate to sustain any extended suspension at the COSE and Joaquin mines. While Metalla has not received any notification of closures at any of the other mine sites on which we hold royalties, we believe it is reasonable to expect that actions taken to reduce the spread of the COVID19 pandemic will affect global mining production levels during 2020. Metalla will continue to monitor the situation and update the market if additional information is available."
Analysis and Forward-Looking Commentary
Metalla stands out as the smallest publicly-traded precious metals royalty and streaming company. With a market cap of just $195 million, MTA is less than half the size of the next smallest company being Maverix Metals with a market cap of $522 million. For reference, Franco-Nevada and Wheaton Precious Metals Corp. as the majors have a market cap of $24.5 billion and $17.2 billion, respectively.
Investors in MTA are getting exposure to trends in gold and silver based on the present value of expected future cash flows. The characteristics of Metalla's asset portfolio and current fundamentals with limited cash flows makes valuing the stock difficult by traditional measures. The attraction in MTA is its unique deal portfolio with significant exposure to development and exploration stage assets that have the potential to represent a significant upside in value should future discoveries or production exceed initial estimates.
Considering revenues of about $3.4 million over the past year, the stock is trading at a price to sales multiple of 56x and well above the peer group compared to Franco-Nevada at 27x and Wheaton Precious Metals at 19x. The optionality associated with the development stage and exploration assets justifies the apparent premium. Investors are essentially pricing the stock for the expected future growth of the asset portfolio.
According to Metalla's most recently reported balance sheet, the book value of the royalty and streaming assets is currently measured at C$57 million or approximately $42 million in U.S. Dollars. By this measure, the stock is trading at 4.3x price to book which is between Franco-Nevada at 5.0x and Royal Gold at 3.5x. The key here is that 81% of Metalla's book value is in development and exploration stage assets in contrast with the majors that have a higher proportion of assets in production-stage interests.
Data by YCharts
The other consideration here is that Metalla maintains a policy of distributing 50% of operating cash flows as a monthly dividend. While the current per-share amount of C$0.004 and a yield of 0.6% is modest, it's expected the payout can grow over time as more of the streaming and royalty assets enter the production stage over time.
One of the most interesting stats we found is that Metalla is up 72% over the past year, outperforming not only all the steaming and royalty peers mentioned above but also the broader VanEck Vectors Gold Miners ETF (GDX) which is up 43%. This point highlights the value in the stock that is leveraged to the upside in the commodity price of gold and silver.
Data by YCharts
The outlook for precious metals is positive considering the uncertain macro environment amid a worldwide recession. Aggressive stimulus measures by governments coupled with a dovish monetary policy from global central banks have driven down interest rates to record low levels supporting bullish trends in gold and silver as a store of value and flight to safety trade. Silver has gained momentum more recently and gold is within 10% of an all-time high. Metalla as a high-beta name with exposure to both commodities is well-positioned to benefit in this scenario.
Verdict
Recognizing the speculative nature of the stock and risks associated with the underlying asset portfolio, we rate shares of MTA as a buy with a price target of $7.20, representing a market value of $250 million. The main risk to consider here is that Metalla is still a micro-cap company with its revenue-generating assets concentrated in just 3 mining projects. The potential that the bullish sentiment in precious metals reverses with a breakdown in the gold and silver mining sector would force a reassessment of the long-term value in the Metalla asset portfolio. Tactically, we're looking at $4.50 per share as an important support level for the stock to hold to maintain bullish momentum.
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