By Angela
Harmantas
The
constrained availability of capital and lack of debt financing is causing grief
for all but one segment of the mining industry – royalty and streaming
companies are flourishing, consistently outperforming the gold index over the
past few years.
With traditional
financing options dwindling, mining companies are seeking royalty agreements to
help fund their exploration and eventual production. In exchange, the royalty
company gets a percentage of the producer’s revenues once it’s in production
and avoids any operational or capital risk associated with getting the ore out
of the ground. It’s about as close to a safety net an individual can get in the
high-risk world of mining investment.
Unsurprisingly,
the business model is attracting serious attention from investors. Frank
Holmes, CEO and Chief Investment Officer at U.S. Global Investors singled out
the three main royalty companies – Franco-Nevada
(TSX:
FNV), Royal Gold (TSX:
RGL) and Silver Wheaton (TSX:
SLW) – as stocks to watch in an interview
with SmallCapPower.com. “If you look at the gold index for the past three
years, it’s down, but these royalty companies have outperformed the index,” he
said. “It’s a high-margin business, robust with intellectual capital.”
Following an
April 2014 joint takeover by Yamana Gold and Agnico Eagle Mines, Osisko Gold Royalties (TSX:
OR) transitioned from a production company into a royalty model, retaining
a 5% net smelter return (NSR) royalty on the massive Malartic gold mine in
Quebec, which had previously been an Osisko Gold-owned and operated project.
The company also owns a small royalty on Goldcorp’s Éléonore mine in
Ontario and has a handful of other royalties throughout Canada.
Given the superior
performance of these stocks over the past few years, a number of junior companies
are banking on a similar model. Names like Altius
Minerals (TSX:
ALS), Abitibi Royalties (TSXV:
RZZ) and Sandstorm Gold (TSX:
SSL) have adopted the royalty model and are succeeding at much smaller
share prices.
Junior
royalty companies looking to acquire a profitable asset at a decent price face
the daunting task of going up against the FNVs and RGLs, which inevitably have
more access to capital and can easily outbid its rivals. Instead of going head
to head with the royalty giants, Abitibi Royalties recently launched The
Royalty Search, an online site where companies and prospectors can submit their
existing claims to be evaluated by Abitibi’s management, in the hopes that
Abitibi will pay the claim fee in exchange for a royalty agreement.
According to
Ian Ball, Abitibi’s president, the company is offering an alternative source of
financing to a market badly in need of creative funding options. “Rather than
dropping the project or having to joint venture, we are offering an alternative
source of financing that we believe has never been done before,” he said in an interview
with SmallCapPower.com. “Instead of contacting people one on one, we’re
offering it through the Web, which we think is a very easy interface to do
business.”
The company
recently entered into a letter of intent with Golden Valley Mines to acquire a
2% NSR on the Smokehead Prospect, about 1KM south of Malartic in Quebec.
Abitibi’s main asset is its 3% NSR royalty on a new discovery called Odyssey
North on the Malartic property, which is jointly owned by Agnico Eagle and
Yamana Gold.
Ball is a
relative newcomer to the royalty space, having worked for many years at
Goldcorp and McEwen Mining before taking the reins at Abitibi. “When I worked
at McEwen Mining and Goldcorp, the idea was that you had to go out and build a
gold mining company on your own,” he said. “We needed a different model than
what traditional mining had to offer, which is moving rock. How can you get the
upside of exploration but without the need to keep issuing more and more shares?
The royalty model seemed like the best way to do that, but it had to be on an
interesting discovery.”
While
royalty companies are using the constricted financing options facing junior
miners to pick up quality assets, an early-stage producer may not be so eager
to sell a portion of their production in perpetuity. But as Abitibi’s Ball
explained, it could be the best option available in order to remain in
business. “Most companies don’t want to issue 10-20% of their capital just to
exist, and royalty companies are filling a need right now that’s much needed in
the mining sector,” he said. “They’re providing a source of financing that’s an
alternative to bank and equity financing.”
