{"id":105784,"date":"2017-05-09T10:00:22","date_gmt":"2017-05-09T14:00:22","guid":{"rendered":"http:\/\/countingpips.com\/?p=105784"},"modified":"2017-05-08T17:27:02","modified_gmt":"2017-05-08T21:27:02","slug":"metalla-royalty-streaming-the-next-franco-nevada","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/05\/metalla-royalty-streaming-the-next-franco-nevada\/","title":{"rendered":"Metalla Royalty & Streaming, the Next Franco-Nevada?"},"content":{"rendered":"
May 9, 2017<\/div>
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By\u00a0<\/strong>Peter Epstein, CFA, MBA \u00a0 epstein.peter4@gmail.com<\/a><\/b><\/p>\n

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Is\u00a0Metalla Royalty & Streaming Ltd. [CSE: MTA \/ OTCQB: EXCFF\u00a0\/\u00a0Frankfurt: X9CP]\u00a0<\/strong>the next\u00a0Franco-Nevada\u00a0[NYSE: FNV \/ TSX: FNV]<\/strong>?\u00a0 No.\u00a0 It\u2019s still early days.\u00a0 It has a market cap of C$21.5 M (US$16 M), just 0.12% that of Franco.<\/p>\n

Precious Metals Royalties & Streaming Business<\/span><\/h3>\n

Most people understand the basics of the precious metals royalty\/streaming (\u201cR\/S\u201d) business models, at least enough to know they can be highly profitable.\u00a0 When an experienced, well-connected management team comes together and executes on robust, accretive transactions, a company can command strong market\u00a0valuation multiples.\u00a0 A streaming company provides non-equity financing for mining companies via an upfront cash payment in exchange for the right to acquire a percentage of metals produced at apredetermined price\u00a0from a select mine or properties.\u00a0 Since deals are frequently for the life of a mine, a streaming company typically stands to benefit greatly if additional zones are mined (i.e. increasing annual production and\/or extending mine life<\/em>).<\/p>\n

Like streaming, royalties require upfront cash investment, but no further capital need be paid over the term of the agreement.\u00a0 In exchange for cash, the royalty holder receives a fixed percentage of explicitly defined revenues OR profits.\u00a0 There are several ways in which annual royalty payments can be derived, including a percentage of Gross Smelter Revenue = \u201cGSR\u201d (revenue-based<\/em>) and a percentage of Net Smelter Revenue = \u201cNSR\u201d (profit-based<\/em>).\u00a0 There are several iterations of these 2 conveyances. \u00a0NOTE: \u00a0{There\u2019s a prodigious amount of information on the R\/S business models on the websites of industry participants<\/em>}.<\/p>\n

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Strong Market Multiples, Trusted Blue-Chip Companies<\/h3>\n

An average EBITDA multiple of 21x\u00a0(trailing 12 months<\/em>), and as high as 31x, is quite impressive.\u00a0 And, industry multiples typically move higher in hot markets.\u00a0 For example, Franco-Nevada traded as high as a 30x multiple when gold was bouncing around $1,350\/oz. last summer.\u00a0 Imagine the perfect storm if gold & silver returned to $1,800\/oz. & $35\/oz., respectively, a level seen in 1H 2013?\u00a0 Industry multiples, margins & production growth would soar.\u00a0 As underlying valuations rise,\u00a0it becomes more attractive to acquire other R\/S companies than to underwrite their own streaming & royalty transactions.<\/p>\n

R\/S agreements are long-lived and unique, offering diversification benefits unavailable from single project mining juniors.\u00a0 At any given time, a successful R\/S player\u2019s\u00a0investment\u00a0portfolio\u00a0might have cash flow schedules extending 20 years (from existing cash flowing deals, plus ones expected to go cash pay in the future<\/em>).\u00a0 That\u2019s why many believe that R\/S companies are the best risk-adjusted way to play precious metals bull markets\u2026. and survive bear markets.<\/p>\n

R\/S companies invest in all stages of mining, from early-stage through production and (importantly) expansion.\u00a0 They invest with the goal of an attractive return on capital (base case), plus valuable optionality on a strong or even spectacular outcome.\u00a0 R\/S managers can fine-tune their investment portfolios based on market cycles (i.e.\u00a0enter into more bullish or more conservative transactions<\/em>).\u00a0 With new deals they can steer away from jurisdictions experiencing an increase in (geopolitical, environmental, permitting, geological, etc.<\/em>) risks.<\/p>\n

\"\"<\/p>\n

Much of the Upside of a Junior Miner, With Less Risk & Volatility<\/h3>\n

Expertly structured transactions can yield outsized returns without the need of major discoveries.\u00a0 Instead, a meaningful expansion of an existing project can do the trick.\u00a0 Even if an expansion project experiences cost-overruns, R\/S companies receive the benefits of increased production.\u00a0 Essentially, portfolio company margins don\u2019t matter much, a luxury in an otherwise cyclical industry!\u00a0 Also avoided, closing & reclamation\u00a0costs\u2026. which can be significant, and might entail off-balance sheet debt.\u00a0 In addition to risk avoidance, the absence of these functions means low overhead and high margins.<\/p>\n

The list goes on and on; R\/S companies have limited to no risk exposures to key factors including; operations, legal issues, labor negotiations, taxes, environmental & permitting challenges.\u00a0 Anything that happens before or after actual production is largely irrelevant to a R\/S company.\u00a0 This frees management to focus on new opportunities and jurisdictions, making new contacts, structuring and (if necessary<\/em>) funding operations.\u00a0 Consider this, a real eye-opener for me, Franco-Nevada reportedly has something like 30 full-time employees,\u00a0Newmont Mining\u00a0[NYSE: NEM]\u00a0has closer to 30,000!<\/p>\n

With this in mind, an emerging R\/S company,\u00a0Metalla Royalty & Streaming Ltd. \u00a0[CSE: MTA\u00a0\/\u00a0OTCQB: EXCFF\u00a0\/\u00a0Frankfurt: X9CP]\u00a0<\/strong>should be on investor\u2019s radar screens.\u00a0 Make no mistake, Metalla is a highly speculative investment, not an industry bellwether company.\u00a0 As a newcomer, it\u2019s not widely followed, but it has a strong management team, {see mgmt. bios below<\/em>} great industry contacts and A LOT going on behind the scenes.\u00a0 NOTE: \u00a0{I will leave for my next article the\u00a0<\/em>news of yesterday<\/a>, May 4th, except to say that this transaction of multiple NSRs looks very attractive, and was a positive surprise<\/em>}<\/p>\n

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On April 28th, Metalla announced the imminent closing of its first currently cash paying\u00a0precious metal stream<\/a>.\u00a0 The Company is investing US$1.86 M (net of initial streaming cash flow of US$138,136<\/em>), in exchange for\u00a015%\u00a0of the silver (\u201cAg\u201d) produced at the\u00a0New\u00a0Luika<\/span><\/span><\/span>\u00a0Gold\u00a0Mine<\/span>\u00a0in Tanzania,\u00a0successfully operated by\u00a0Shanta Gold Ltd.\u00a0since 2012.\u00a0 Metalla management estimates the stream will generate between 19k-22k ounces of silver per year through 2026.\u00a0 The Company is required to pay ten percent\u00a0(10%)\u00a0of the prevailing spot price for each ounce produced.<\/p>\n

Management is paying US$1.86 M (C$2.48 M) for an annual\u00a0(un-discounted<\/em>)\u00a0cash flow stream of roughly US$325k (C$430k), assuming $18\/oz Ag and 20k ounces\/yr.\u00a0\u00a0However, Metalla has considerable upside in the form of higher prices and increased production.\u00a0 For example, if\u00a0both\u00a0production and the Ag price were to increase just\u00a03%\u00a0per year, ending in 2026 at ~26,000 ounces produced, net to Metalla, (on an Ag price of ~$23.5\/oz<\/em>), un-discounted cash flow in 2026 would be about US$550k (C$735k).<\/p>\n

As a frame of reference, if silver were to increase 12% per year, it would reach ~$48\/oz, equal to the high tick of 2011, generating cash flow of ~US$1.1 M (C$1.5 M) in 2026. \u00a0NOTE: \u00a0{the<\/em>\u00a0all-time, inflation-adjusted high tick on silver was about $150\/oz in 1980!<\/em>} \u00a0I don\u2019t mean to suggest that this particular deal is a company maker, I\u2019m merely pointing out the tremendous upside (a valuable call option<\/em>) on precious metal prices embedded in properly structured agreements.<\/p>\n

\"\"<\/p>\n

Two things come to mind.\u00a0 First, C$430k per year nearly covers the cash burn of the Company, affording management the flexibility and breathing room to cherry pick the best opportunities.\u00a0 Second, a 10-20x cash flow multiple on C$430k suggests C$4.3 to C$8.6 M in market value.\u00a0 That\u2019s from just one modest-sized stream.\u00a0 The Company fully expects to execute 2 \u2013 4 R\/S deals per year, in the\u00a0US$2 \u2013 $10 M zip code.\u00a0 Not all will be cash flowing from day 1.\u00a0 Notably, small R\/S players have an advantage in terms of deal flow, their opportunity sets are much larger than mutli-billion dollar giants that can only look at transaction sizes in the hundreds of millions.<\/p>\n

That\u2019s on top of 3 other prominent assets, royalties on 2 mines and a development project in Timmins, Ontario. \u00a0NOTE: \u00a0{On May 4th, Metalla signed a\u00a0<\/em>definitive agreement<\/a>\u00a0to acquire additional NSR royalties, not included below<\/em>}.<\/p>\n

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  1. A\u00a01% NSR\u00a0on\u00a0Goldcorp\u2019s\u00a0[NYSE: GG]\u00a0Hoyle Pond Extension properties east of the producing Hoyle Pond Gold Mine, (in production since 1985<\/em>).\u00a0 And, a\u00a01% NSR on\u00a0Glencore\u2019s\u00a0[LSE: GLEN]\u00a0\u201cBint Property<\/em>\u201d also east of the Hoyle Pond Mine.\u00a0 This royalty is on a\u00a0non-producing portion\u00a0of an operating mine (no cash flow to Metalla yet<\/em>).<\/li>\n
  2. A\u00a01.5% NSR\u00a0on the West Timmins extension properties owned by\u00a0Tahoe Resources [NYSE: TAHO \/ TSX: THO], (subject to a buyback of 0.75% for $750,000<\/em>).\u00a0 This royalty is on a\u00a0non-producing portion\u00a0of an operating mine (no cash flow to Metalla yet<\/em>).<\/li>\n
  3. A\u00a01.5% NSR\u00a0on the Desantis properties, owned by\u00a0Osisko Mining [TSE: OSK],\u00a0(subject to a buyback of 0.5% for $1 million<\/em>).\u00a0 This is a development-stage project.<\/li>\n<\/ol>\n

    While it\u2019s difficult to value non-cash generating Royalties & Streams, transactions written on, \u201cextension projects\u201d are lower risk than development projects.\u00a0 Blue Chip counter-parties like [Goldcorp, Glencore, Tahoe, Osisko and\u00a0Detour Gold\u00a0<\/em>[TSE: DGC]\u00a0add credibility and a \u201cvote of confidence<\/em>\u201d in the above mentioned properties of interest to Metalla.\u00a0 The Timmins gold camp in\u00a0one of the world\u2019s most prolific gold belts.<\/p>\n

    Management Bios<\/h3>\n

    \"\"<\/p>\n

    Disclosures<\/u>: The content of this article is for information purposes only. Readers fully understand and agree that\u00a0nothing\u00a0contained herein,\u00a0written\u00a0by Peter Epstein, about\u00a0<\/em>Metalla Royalty & Streaming,\u00a0<\/em>including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered, in any way whatsoever, implicit or explicit investment advice. Further,\u00a0nothing\u00a0contained herein is a recommendation\u00a0or solicitation to buy, hold or sell any security. The content contained herein is not directed at any\u00a0individual or group. Peter Epstein and\u00a0<\/em>Epstein Research<\/a>\u00a0[ER]\u00a0are not\u00a0responsible, under any circumstances whatsoever, for investment actions taken by the reader.\u00a0Peter Epstein and \u00a0[ER]\u00a0have never been, and are not currently, a registered or licensed financial advisor or broker\/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and they\u00a0do not\u00a0perform market making activities. Peter Epstein and\u00a0[ER]\u00a0are not\u00a0directly\u00a0employed by any company, group, organization, party or person.\u00a0The shares of\u00a0<\/em>Metalla Royalty\u00a0are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks\u00a0can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.<\/em><\/p>\n

    At the time this article was posted, Peter Epstein owned shares and stock options of\u00a0<\/em>Metalla Royalty\u00a0<\/em>and the Company was a sponsor of\u00a0<\/em>Epstein Research<\/a>.\u00a0Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he\u2019s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful.\u00a0Mr. Epstein &\u00a0[ER]\u00a0are not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. Mr. Epstein &\u00a0[ER]\u00a0are\u00a0not expected or required to subsequently follow or cover events & news, or write about any particular company or topic.\u00a0Mr. Epstein and\u00a0[ER]\u00a0are not experts in any company, industry sector or investment topic.\u00a0<\/em><\/p>\n<\/div>\n

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    \n","protected":false},"excerpt":{"rendered":"

    By\u00a0Peter Epstein, CFA, MBA \u00a0 epstein.peter4@gmail.com Is\u00a0Metalla Royalty & Streaming Ltd. [CSE: MTA \/ OTCQB: EXCFF\u00a0\/\u00a0Frankfurt: X9CP]\u00a0the next\u00a0Franco-Nevada\u00a0[NYSE: FNV \/ TSX: FNV]?\u00a0 No.\u00a0 It\u2019s still early days.\u00a0 It has a market cap of C$21.5 M (US$16 M), just 0.12% that of Franco. Precious Metals Royalties & Streaming Business Most people understand the basics of the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-105784","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105784","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=105784"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105784\/revisions"}],"predecessor-version":[{"id":105785,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105784\/revisions\/105785"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=105784"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=105784"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=105784"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}