It's been a brutal start to the year for the Gold Juniors Index (GDXJ), and even past high-flyers haven't been spared, with Metalla Royalty & Streaming (NYSE:MTA) sliding more than 30% in just two months. This significant underperformance to start the year is likely because the stock entered 2021 with a tech-bubble-like valuation, briefly trading above 140x sales. While the recent correction has helped cool off this valuation a little, Metalla is still trading at a market cap of roughly C$470~ million with less than C$10 million in trailing-twelve-month revenue. After 8 weeks down in a row, a bounce is certainly possible, but I don't see any safety margin for investing at current levels.
Just over two months ago, I wrote on Metalla Royalty & Streaming, warning that the stock was trading at an insane valuation, regardless of the busy year the company had in terms of completed transactions. This is because the stock was sitting at nearly 150x sales vs. a median price to sales ratio of 15.14 for its peers in the royalty/streaming group. This revenue multiple not only dwarfed its peer group, but it dwarfed many of the priciest revenue multiples in the tech sector, with tech stocks rarely trading at more than 50x sales, let alone 150x sales. Not surprisingly, the stock has come under some pressure after being priced for near perfection in a sector that's clearly out of favor. Before digging into the updated valuation, let's take a look at recent developments in Metalla's royalty/streaming portfolio:
Metalla had a very busy year in 2020, ending the year with 62 total assets, with an industry-leading 20 transactions since its inception. This compares favorably to Franco Nevada Gold (FNV) with 15 transactions, an average of closer to 10 transactions for royalty/streaming companies since 2016. Several deals were notable, but the biggest in terms of immediate benefits to Metalla was the acquisition of a 1.0% royalty interest on Coeur Mining's (CDE) Wharf Mine. This mine had a solid performance in FY2020, with production up 11% to 93,100~ ounces, which should contribute to roughly 900~ GEOs per year for Metalla. This is significant, given that as of fiscal Q1 2021, Metalla had an annualized production rate of just 1,008 gold-equivalent ounces [GEOs].
Elsewhere in Metalla's portfolio, the company made a major move by picking up a 2.5% net-smelter-royalty on claims surrounding Kirkland Lake Gold's (KL) Fosterville Mine. While I wasn't elated about the deal at the time because it cost over C$5 million and would not generate any immediate revenue, this could end up being a smart move for Metalla. This is because Kirkland Lake has ramped up its exploration expenditures at Fosterville to $90 million this year in the search for another Swan Zone or additional high-grade reserves to support its mine life past 2025. A budget of $90 million equates to over 400,000 meters of drilling in FY2021 alone, and it's possible that the company could step out at Robbin's Hill or Harrier if drill results are encouraging at these two targets.
Elsewhere in Metalla's portfolio, the company also scooped up a 27.5% price participation royalty interest on Karora's (OTCQX:KRRGF) Higginsville Gold Operations [HGO] and a 3.0% net smelter return on St. Barbara's (OTCPK:STBMF) Plenty deposit at Fifteen Mile Stream. Finally, Metalla acquired a 1.0% net smelter return on Minera Alamos' (OTCQX:MAIFF) advanced-stage La Fortuna Project and a strategic Nevada royalty portfolio with land on the Cortez Trend near Barrick's world-class Fourmile and Gold Rush deposits. These deals are quite transformative, and with some success, Metalla certainly has a path to more than 10,000 GEOs per year combined from Fosterville, Plenty, and the strategic Nevada royalty portfolio if we see these assets head into production at some point.
However, as it stands currently, Metalla only has four producing operations tied to its partners, which should all see higher production this year. The major changes will be the addition of a full year from Wharf, a full year of contribution from Higginsville, and more normal contributions from Pan American's (PAAS) COSE and Joaquin Mines, which struggled in FY2020 due to COVID-19 related headwinds. This means that Metalla could generate more than C$11 million in revenue in the next four quarters, based on annual GEO production more than doubling with higher metals prices. In terms of the company's near-term portfolio, there's nothing else coming up immediately in FY2021 or FY2022, unless Sandfire can restart the Endeavor Mine, which contributed more than 600 GEOs for Metalla in FY2019 before being placed on care & maintenance.
Assuming revenue can more than double year-over-year from C$3.9 million on a trailing-twelve-month basis, Metalla would have one of the strongest revenue growth rates in the sectors. This is because few companies are growing annual attributable GEO production materially in the royalty/streaming space, which differentiates Metalla from its peers. In addition, the massive pipeline of 58 assets outside of those in production gives investors massive optionality on the company's portfolio. However, even if we assume that Metalla does C$11 million in revenue the next twelve months and growth that's more than 180% above its trailing-twelve-month revenue of C$3.9 million, it's still trading at more than 42x sales. This is based on the company's market cap of C$471 million at C$10.90 per share.
If we look at the chart below, the average trailing-twelve-month revenue multiple for royalty/streaming peers (ex-Metalla) is 16.97 currently, and the median revenue multiple is 12.96. This is on a trailing-twelve-month basis, while Metalla is trading at between 40x to 50x revenue on a forward twelve-month basis, assuming it increases revenue by more than 150% year-over-year with its new assets coming online. So, while the stock might be down over 35% from its highs, which would suggest that the stock is cheap, this isn't the case. In fact, Metalla is still the most expensive way to play the royalty/streaming space, so investors are paying up significantly to get access to the organic growth that it currently offers on a long-term basis. I have shown Metalla against all royalty/streamers and also against smaller royalty/streamers to show that this premium multiple is not just relative to larger and lower-growth peers.
So, what's the good news?
Currently, Metalla is down 8 weeks in a row and is set to test its long-term moving average, which has been a support area in the past. Given that Metalla is down 8 weeks in a row into this support area, it is possible that we could see a bounce here. However, with the stock approaching this moving average at a more than 200% premium to many of its peer's revenue multiples, I do not see this as a low-risk buying opportunity for investors. This does not rule out a bounce in the stock, and there's an outside chance that the stock might bottom here. Still, from a margin of safety standpoint, it's hard to justify buying Metalla more than 40x forward sales.
Metalla had a transformational year by adding several key assets to its portfolio, and FY2021 should look much different than FY2020 with three new assets offsetting lost production from the Endeavor Mine. However, even if we assume a more than 180% revenue growth rate, the stock is still trading at a massive premium to its royalty/streaming peers. As noted previously, this doesn't mean that the stock can't find some support here after a free-fall of more than 8 weeks into this moving average. However, from an investment standpoint where I'm looking to buy great companies at exceptional valuations, I think there is much better value to be had elsewhere in the sector currently.