Precious metals royalty and streaming companies represent a very interesting sub-industry of the precious metals mining industry. They provide some leverage to the growing metals prices, similar to the typical mining companies; however, they are less risky in comparison to them. Their incomes are derived from royalty and streaming agreements. Under a metal streaming agreement, the streaming company provides an upfront payment to acquire the right to future deliveries of a predefined percentage of metal production of a mining operation.
The streaming company also pays some ongoing payments that are usually well below the market price of the metal. They can be set as a fixed sum (e.g., $300/toz gold) or as a percentage (e.g., 20% of the prevailing gold price), or a combination of both (e.g., the lower of a) $300/toz gold and b) 20% of the prevailing gold price). The royalties usually apply to a small fraction of the mining project production (usually 1-3%), and they are not connected with ongoing payments. They can have various forms, but the most common is a small percentage of the net smelter return (“NSR”). The NSR is calculated as revenues from the sale of the mined products minus transportation and refining costs.
To better track the overall performance of the whole sub-industry, I created a capitalization-weighted index (the Precious Metals Royalty and Streaming Index) consisting of 11 companies (in June 2020 expanded to 13, by adding Nomad Royalty and Vox Royalty). Later, based on the inquiries of readers, I also introduced an equal-weighted version of the index. Both indices include the same companies and are calculated back to January 2019.
The previous editions of the monthly report can be found here: May 2019, June 2019, July 2019, August 2019, September 2019, October 2019, November 2019, December 2019, January 2020, February 2020, March 2020, April 2020, May 2020, June 2020, July 2020.
No major changes occurred in the structure of the precious metals royalty & streaming industry. Franco-Nevada (FNV), Wheaton Precious Metals (WPM), and Royal Gold (RGLD) create more than 91% of the market capitalization-weighted index. The smallest companies of the whole group, Vox Royalty (OTC:VOXCF) and Sailfish Royalty Corp. (OTCQX:SROYF) maintain their weight at approximately 0.1%.
After an impressive July, the precious metals royalty & streaming sector did much worse. In the month of August, only 4 out of the 12 companies recorded positive returns. However, the majority of huge July gains were maintained. For the second consecutive month, the best performance was recorded by Metalla Royalty & Streaming (MTA). Its share price grew by 15%, and the majority of gains were recorded at the very beginning of the month, as a result of the positive sentiment ignited by the acquisition of Fosterville mine royalty and the increase of the convertible debt facility in late July. The biggest company, Franco-Nevada, did quite poorly in August, recording a 5.89% share price decline. But the worst results were recorded by Maverix Metals (MMX). Its share price declined by 8.78%.
The gold price remained almost flat in August. The share price of SPDR Gold Trust ETF (GLD) declined by 0.32%. On the other hand, silver did much better and the iShares Silver Trust ETF (SLV) grew by 15.81%. Also the precious metals mining industry remained almost flat. The share price of the VanEck Vectors Gold Miners ETF (GDX) declined by 1.56% and the share price of the VanEck Vectors Junior Gold Miners ETF (GDXJ) declined by 0.41%. Also the precious metals royalty and streaming sector recorded negative returns. The Precious Metals R&S Index declined by 3.36%. However, the Precious Metals R&S Equally Weighted Index declined only by 0.5%, as Franco-Nevada’s 5.89% share price decline had a lower weight.
The August News
The majority of news was related to the Q2 earnings season. All the important players, except for Sandstorm Gold (SAND), released their quarterly results in August. However, also some smaller deals, made by the smaller companies, were announced.
Franco-Nevada released its Q2 financial results. The volume of gold equivalent sold declined to 104,330 toz. Revenues declined to $195.4 million and operating cash flow to $150.2 million. The net income equaled $94.4 million. The financial results worsened due to the negative impacts of the coronavirus; however, they should improve notably in Q3, as the mines returned to production, and the gold price increased to the $2,000/toz level. (An article focused on Franco-Nevada’s Q2 can be found here)
Wheaton Precious Metals released its Q2 financial results too. Wheaton didn’t record such a steep decline in the sales volumes, as there is a meaningful lag between the time of actual production and delivery of the metals. Therefore, the Q2 production disruptions will be felt more in Q3. In Q2, Wheaton sold 156,188 toz of gold equivalent and recorded revenues of $248 million, operating cash flow of $151.8 million, and net income of $105.8 million. The Q3 dividend was set at $0.1 per share. (An article focused on Wheaton Precious Metals’ Q2 can be found here)
Royal Gold felt the negative impacts on its Q4 financial results (calendar Q2) more. Its gold equivalent sales declined to 70,100 toz. Revenues declined to $120 million and operating cash flow to $91.6 million. On the other hand, the net income increased to $49 million. The company set its Q4 dividend at $0.28 per share. (An article focused on Royal Gold’s Q4 can be found here)
Osisko Gold Royalties’ (OR) gold equivalent sales declined by approximately 1/3, to 12,386 toz, in Q2. The revenues declined to $30.7 million and operating cash flow to $11.6 million. However, the net income increased to $9.8 million, the highest level in more than two years. The Q3 dividend was set at C$0.05 ($0.038) per share. (An article focused on Osisko Gold Royalties’ Q2 can be found here)
On August 12, Osisko announced the acquisition of an additional 15% stake on a portfolio of 28 royalties, for C$15 million ($11.5 million). Osisko acquired the 85% stake on the royalties back in 2015 from Teck (TECK). Now, it owns 100%.
Nomad Royalty (OTCQX:NSRXF) reported Q2 sales of 3,534 toz of gold equivalent. The revenues equaled $6.038 million and adjusted net income $2.3 million. Nomad also introduced a dividend program. The dividends of C$0.005 ($0.0038) per share will be paid quarterly.
On August 24, Nomad announced the acquisition of Valkyrie Royalty, a private royalty company holding a 0.5-3% NSR royalty on the Arizona-located Moss Gold mine. The Moss mine is owned by Northern Vertex Mining (OTCPK:NHVCF) and its monthly production rate is around 4,000 toz gold and 35,000 toz silver. Nomad acquired Valkyrie for $7.6 million.
Also on August 24, Nomad announced the acquisition of Coral Gold Resources (OTCQX:CLHRF) for $45.8 million (in cash, shares, and warrants). Nomad acquired Coral due to its 1-2.25% NSR royalty on Nevada Gold Mines’ Robertson property. According to a historical resource estimate, the property contains inferred resources of 2.7 million toz gold.
Maverix Metals recorded gold equivalent sales of 6,412 toz in Q2. The revenues increased to $11 million, cash flow to $8.5 million, and net income to $3.1 million.
Metalla Royalty & Streaming announced the conversion of the C$6 million convertible debt and acceleration of warrants expiration. On August 21, Metalla released the financial results for its financial year that ended in May. The company sold 178,624 toz silver, recording revenues of C$3.6 million ($2.76 million).
EMX Royalty (EMX) recorded revenues of C$2.35 million ($1.8 million) in Q2. The net loss equaled C$3.281 million ($2.51 million). As of the end of Q2, EMX held cash of C$58.194 million ($44.55 million) and investments and loans receivable worth C$20.093 million ($15.38 million).
On August 11, EMX optioned three Scandinavian properties to New Dimension Resources (OTC:NWDMF) for $25,000 and 3 million New Dimension shares. If New Dimension exercises the option to acquire the properties, it will have to issue EMX new shares that will increase EMX’s equity interest in New Dimension to 9.9%. EMX will also retain a 2.5% NSR royalty on the properties.
On August 27, EMX optioned two Norwegian projects to Sienna Resources (OTCPK:SNNAF). Sienna will have an option to acquire the projects for 2 million shares. EMX will retain a 3% NSR royalty and will be eligible for annual payments worth up to $75,000 for each property.
Abitibi Royalties (OTC:ATBYF) optioned its Hammond Reef South project to Victory Resources (OTC:VRCFF). Over the next two years, Victory will pay Abitibi C$275,000 ($210,500) and 2.75 million shares. Abitibi will retain a 2% NSR royalty on the property.
ELY Gold Royalties (OTCQX:ELYGF) announced the acquisition of 0.33% NSR royalty on the Sleeper Mine, 1% NSR royalty on the Lincoln Hill Property, and 1% NSR royalty on the Mt. Hamilton Project, for $350,000.
Vox Royalty announced the acquisition of a 0.5% gross sales royalty on the Brauna Diamond Mine, the biggest diamond mine in South America. Vox paid C$165,000 ($126,000) in cash and C$165,000 in shares.
On August 11, Vox Royalty announced that Karora Resources (OTCQX:KRRGD) started mining operations at the Hidden Secret deposit. Vox owns a royalty of A$0.12 per gram of gold per dry metric tonne of royalty ore. According to Vox, at the current gold prices, it equals approximately 0.85% NSR royalty.
The September Outlook
The earnings season is over and the news flow will be probably much weaker in September. Some deals should be announced, but probably only small ones, just like over the recent months. The main driving factor should be the gold and silver price. After peaking in early August, both precious metals started a consolidation. The sideways movement will probably come to an end during September. But whether a breakout to the upside or to the downside will follow is only to be seen. Right now, the downside breakout looks more probable.
Disclosure: I am/we are long KRRGD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha