{"id":107744,"date":"2017-06-19T12:32:40","date_gmt":"2017-06-19T16:32:40","guid":{"rendered":"http:\/\/countingpips.com\/?p=107744"},"modified":"2017-06-19T12:32:40","modified_gmt":"2017-06-19T16:32:40","slug":"metalla-royalty-streaming-signs-blockbuster-deal","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/06\/metalla-royalty-streaming-signs-blockbuster-deal\/","title":{"rendered":"Metalla Royalty & Streaming Signs Blockbuster Deal"},"content":{"rendered":"
June 19, 2017<\/div>
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By<\/strong>\u00a0Peter Epstein, CFA \u00a0 \u00a0http:\/\/EpsteinResearch.com<\/a><\/b><\/p>\n

On June 12th\u00a0Metalla Royalty & Streaming\u00a0(CSE: MTA) (OTCQB: EXCFF) (FRANKFURT: X9CP)\u00a0announced that it had entered into a\u00a0transformational agreement<\/a>\u00a0to acquire a portfolio of 3 Royalties and 1 Streaming assets from\u00a0Coeur Mining (NYSE: CDE).\u00a0 The purchase price was US$ 13 M, consisting of common shares in Metalla that will be 19.9% of pro-forma capital structure.\u00a0 As per terms of the agreement, assuming a C$0.60 deemed conversion price, the remainder of the US$ 13 M purchase price would be a ~US$ 6.6 M unsecured convertible bond with a 5.0% coupon.<\/div>\n
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This low-coupon convertible note funding mechanism is highly attractive.\u00a0 Since Metalla will be generating meaningful cash flow, management will not need to raise equity capital in the market.\u00a0 The note will automatically convert\u00a0based on the share price at the time of the next material portfolio transaction.\u00a0 As can be seen in the chart above, the higher the deemed conversion price, the lower the pro-forma # of shares.<\/p>\n

Game-Changing Transaction, Template for Future Deals<\/h3>\n

This is a game-changer and it highlights management\u2019s capabilities in this niche sector.\u00a0 Upon closing, Metalla will be robustly cash flow positive, a remarkable achievement at this stage of the Company\u2019s short life.\u00a0 In 2018-2019, cash flow of roughly C$ 6 M\/yr.\u00a0is a reasonable expectation, bridging the gap until other promising royalties \/ streams start throwing off cash.\u00a0 On a pro-forma market cap (@C$0.60\/share), the Company is trading at about 8x Enterprise Value (\u201cEV\u201d) to Cash Flow (\u201cCF\u201d) ratio.\u00a0 Several peers, including precious metal royalty \/ streaming (\u201cR\/S\u201d) Majors\u00a0Franco Nevada\u00a0(~25x) and\u00a0Royal Gold\u00a0(~20x) are trading at or above 20x trailing 12 month CF.<\/p>\n

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Metalla has delivered\u00a0a tremendous transaction that puts the Company on the radar (on both sides of the table<\/em>) of precious metal companies of all shapes and sizes.\u00a0 The US$ 13 M acquisition is fairly complex, highlighting the skill set of Brett Heath and his expert business development \/ structuring teammates.\u00a0 Conducting business with\u00a0C$2 billion, top-10 silver producer Coeur Mining\u00a0opens the doors to others seeking sophisticated win-win transactions to monetize non-core assets\u00a0and gain partial ownership\u00a0of Metalla\u2019s high-growth R\/S platform.\u00a0 Equity participation in Metalla offers miners the diversification benefits of the Company\u2019s entire portfolio.\u00a0 And, shares of Metalla held in lieu of divested non-core assets have tangible value that is more readily appreciated by investors.<\/p>\n

The Endeavor Silver Stream<\/h3>\n

Metalla estimates that the\u00a0Endeavor Silver Stream\u00a0(\u201cESS\u201d) will generate cash flow of C$ 2.5-3.0 M for the balance of 2017 and C$5.0 \u2013 5.5 M (at an average price of US$17\/oz Ag<\/em>) in 2018.\u00a0 Based on the Endeavor mine plan delivering 987,500 ounces of Silver (\u201cAg\u201d) over the next 24 months, quarterly cash flow of ~C$1.35 M is expected through mid-2019.\u00a0 Metalla will have the right to buy 100% of Ag production for many years from the Endeavor underground zinc-lead-silver mine in New South Wales, Australia.\u00a0 However, the current mine life is 24 months.<\/p>\n

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Management believes that mine life could be extended.\u00a0 If it is extended each quarter would generate roughly C$1.35 M in cash flow (at US$17\/oz Ag) on top of C$11-$12 M expected in the stipulated 24-month period.<\/p>

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As evidenced by this quote from the website of\u00a0Cobar Operations Pty Ltd,\u00a0the operator of the Endeavor mine, there\u2019s optimism that mine life could be extended beyond 2019,<\/p>\n

\u201cExtraction of some 30 M tonnes has occurred, with remaining reserves expected to\u00a0support production out to 2019.\u00a0 The company is actively exploring with the intent of\u00a0operating the site well beyond 2019,\u00a0taking advantage of significant infrastructure\u00a0including plant & machinery with nameplate capacity > 1 Mt\/yr\u2026.. capable of supporting significantly higher production rates.\u201d<\/em><\/p>\n

The ESS\u00a0consists of five contiguous mining leases totaling 4,096 hectares.\u00a0 Incremental production from new discoveries in this area would bolster cash flow to Metalla, (there\u2019s over 12 M ounces Ag\u00a0potentially\u00a0deliverable before capping out under the terms of the streaming agreement<\/em>).<\/p>\n

Royalty on Pan American Joaquin Project<\/h3>\n

One of the 3 Royalties acquired is a 2% NSR payable by\u00a0Pan American\u00a0Silver\u00a0on minerals mined from select concessions of the\u00a0Joaquin project\u00a0in Santa Cruz Province, Argentina, 145 km from Pan American\u2019s\u00a0Manantial Espejo silver-gold mine.\u00a0 Pan American purchased Joaquin from Coeur for US$25 M.\u00a0 The project contains an estimated resource of 65.2 M Measured & Indicated ounces Ag @128.9 g\/t.\u00a0 Two percent of 65.2 M = 1.3 M ounces Ag attributable to Metalla.\u00a0 About 2\/3\u2019s of resource is understood to be near-surface, amenable to a simple open-pit operation.<\/p>\n

Management estimates a 10-year mine life could generate about C$30 M in (gross, un-discounted<\/em>) cash flow to the Company.\u00a0 Operations at Joaquin could commence as soon as 2h 2018, but to be conservative I assume 2020 will be the first full year of mining.\u00a0 A NPV(8%) on C$3 M of annual CF from 2020 to 2030 would be > C$20 M.<\/p>\n

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I mentioned that leading precious metal R\/S companies are trading at or above a 20x EV\/CF multiple.\u00a0 Another common industry metric is EV\/Net Asset Value (\u201cNAV\u201d), sometimes referred to as Price \u201c(P\u201d)\/NAV.\u00a0 Well established peers trade at 1.5x to 2.5x P\/NAV.\u00a0 The\u00a0Joaquin NSRvaluation alone at a 1.5x multiple would be worth C$30 M.<\/p>\n

Hoyle Pond [Goldcorp] Extension Properties<\/h3>\n

Aside from the Coeur deal, the Company\u2019s 2% NSR on the\u00a0Hoyle Pond extension properties<\/a>\u00a0in Timmins, Ontario potential company-maker. \u00a0Goldcorp\u00a0is likely to move onto the extension properties in the near future, but the Royalty does not kick in until a cumulative 500k ounces of Gold (\u201cAu\u201d) has been produced.\u00a0 Management is waiting for additional data from Goldcorp regarding planned exploration \/ development activities on the properties subject to the NSR.<\/p>\n

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My guestimate is that the Royalty could go cash pay\u00a0in 2021 or 2022.\u00a0 To be clear, that\u2019s my opinion only, not necessarily that of management.\u00a0 The current run-rate of 160k ounces Au\/yr., if maintained, would equate to\u00a03,200 attributable ounces of gold per year, representing considerable cash flow, perhaps on the order of C$4 \u2013 5 M\/yr.\u00a0 Discounted back at a 10% discount factor, (no matter if it\u2019s 4, 5 or 6 years away<\/em>), an estimated NPV would be in the tens of millions (CAD$).\u00a0 Without much pencil work, I feel comfortable in saying that Metalla\u2019s company-wide P\/NAV is well under 1.0x.<\/p>\n

Building a High-Growth Investment Platform<\/h3>\n

Subject to closing the deal this summer, management has pulled off a blockbuster acquisition of a valuable portfolio of assets.\u00a0 US$ 13 M would have been too large a check to write, so management funded it in an innovative way; roughly half & half unsecured convertible note and newly issued shares in the Company.\u00a0 Coeur is poised to become a 19.9% shareholder of a much larger and diversified Metalla Royalty enterprise.\u00a0 Moving forward, management is committed to closing at least one, and possibly two, more acquisitions by year-end.<\/p>\n

Near-term cash flowing assets will continue to be the focus for the next few deals.\u00a0 If more deal(s) come to fruition, annual cash flow from 2018 on could grow to about C$8 M.\u00a0 Management\u2019s stated goal is to reinvest 50% of free cash flow and pay 50% in dividends.\u00a0 I don\u2019t expect to see dividends this year, but based on potential cash flow, a C$0.01 quarterly dividend commencing sometime next year seems possible (my opinion only<\/em>).<\/p>\n

Conclusion<\/h3>\n

Metalla Royalty & Streaming\u00a0(CSE: MTA) (OTCQB: EXCFF) (FRANKFURT: X9CP)\u00a0has made remarkable progress in a short period of time.\u00a0 Upon closing the Coeur transaction the Company will already compare favorably to peers on both an EV\/CF and P\/NAV basis.\u00a0 Even more impressive, Metalla\u2019s pipeline of deals and its small relative size means it will probably be the highest growth precious metals R\/S company in North America.\u00a0 The Company is still small and largely unknown, but that\u2019s changing.\u00a0 It\u2019s a question of when, not if, Metalla will begin to be valued inline with peers, I think that time is fast approaching.<\/p>\n

Disclosures: \u00a0The content of this article is for illustrative and informational purposes only.\u00a0 Readers fully understand and agree that\u00a0nothing\u00a0contained herein,\u00a0written\u00a0by Peter Epstein of\u00a0<\/em>Epstein Research<\/a>,\u00a0<\/em>[ER]\u00a0<\/em>including but not limited to, commentary, opinions, views, assumptions, reported facts, estimates, calculations, etc. is to be considered implicit or explicit, investment advice. Further,\u00a0nothing\u00a0contained herein is a recommendation\u00a0or solicitation to buy or sell any security.\u00a0 Mr. Epstein and\u00a0<\/em>[ER]\u00a0are not\u00a0responsible for investment actions taken by the reader.\u00a0 Mr. Epstein and\u00a0<\/em>[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. Mr. Epstein and\u00a0<\/em>[ER]\u00a0are not\u00a0directly\u00a0employed by any company, group, organization, party or person. Shares of\u00a0<\/i>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 consult with their own licensed or registered financial advisors before making investment decisions.<\/em><\/p>\n

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At the time this article was posted, Peter Epstein owned shares in\u00a0<\/em>Metalla Royalty\u00a0<\/em>and the Company was an advertiser on<\/em>\u00a0[ER]. \u00a0By virtue of ownership of the Company\u2019s shares and it being an advertiser on [ER], Peter Epstein could be viewed as biased in his views on the Company.<\/em>Readers understand and agree that they must conduct their own research, above and beyond reading this article. While the author believes he\u2019s diligent in screening out companies that are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful.\u00a0Mr. Epstein &\u00a0<\/em>[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. Mr. Epstein &\u00a0<\/em>[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<\/em>[ER]\u00a0are not experts in any company, industry sector or investment topic.<\/em><\/p>\n<\/div>\n<\/div>\n

 <\/p>\n<\/section>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

By\u00a0Peter Epstein, CFA \u00a0 \u00a0http:\/\/EpsteinResearch.com On June 12th\u00a0Metalla Royalty & Streaming\u00a0(CSE: MTA) (OTCQB: EXCFF) (FRANKFURT: X9CP)\u00a0announced that it had entered into a\u00a0transformational agreement\u00a0to acquire a portfolio of 3 Royalties and 1 Streaming assets from\u00a0Coeur Mining (NYSE: CDE).\u00a0 The purchase price was US$ 13 M, consisting of common shares in Metalla that will be 19.9% of […]<\/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-107744","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/107744","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=107744"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/107744\/revisions"}],"predecessor-version":[{"id":107745,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/107744\/revisions\/107745"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=107744"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=107744"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=107744"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}