The coronavirus (COVID-19) pandemic and accompanying economic uncertainty has sparked a rise in precious metals prices in 2020, which has naturally been positive for some in the mining industry.
But a related sector where investor interest has also rocketed in recent months is the mining royalty space - an alternative way to invest in the diggers. The sector had a total market cap of around just US$2 billion 15 years ago but is now thought to be worth a total of about US$75 billion.
Investors like royalty firms because they are perceived to offer exposure to growth but in a less risky way than traditional mining firms. Such companies acquire streams and royalties on mining assets, often precious metals projects like gold and silver mines or exploration projects.
"Royalty companies offer all of the good and less of the bad" is how Vincent Metcalfe puts it. He is the CEO of rapidly growing new firm Nomad Royalty Company Ltd (TSE:NSR) (OTCQX:NSRXF), which listed in Toronto in May this year, and whose shares have increased 87% since then.
The company, which has a market cap of around C$900 million, was established after a reverse takeover, which saw it acquire the royalty portfolio of Yamana Gold and streaming assets from Orion Resource Partners.
Nomad offers investors exposure to 11 mining assets in its portfolio - it is also in the process of buying two more - and five of them are on producing mines. It expects to generate around US$20 million of cash flow this year at 77% margins.
Metcalfe explains that Nomad offers investors exposure to, for example, the gold price - which is certainly going in the right direction - along with companies' growing resources across a wide portfolio but there is no exposure to a specific asset or country risk ie. when a mine is suddenly shut down by a government.
"It gives you all the upside on the gold price and resource growth, because we don't pay for that once we've got our royalty or stream, but we have no exposure to the capital structure per se because we are paid right from the top line," he says.
Nomad Royalty's margins are also very stable, he adds, unlike the operators of such assets because production costs per ounce can vary. Metcalfe says margins for Nomad are "generally 99% plus for a royalty" and between 65% and 85% for a stream "depending on how the deal is structured", while the royalty firm always benefits from precious metals price rises.
So what are royalties and streams? Typically, a royalty firm pays to receive a royalty on the underlying precious metal sold by an operator, or in the case of a precious metal stream, the right to purchase an agreed-upon amount of the metal, at a significant discount to the spot price.
The holder of the royalty has no ongoing liability to the mine, or owner of the mine, and is therefore exposed to the positive cash flow from the operation without any additional negative cash flow beyond that originally paid out.
Royalties can also be used in return for consideration in a corporate deal, or from the sale of a project or as an adjunct to a debt or equity financing arrangement. In other words, as alternative financing.
Nomad Royalty may be a new company but its management is highly experienced at successfully closing royalty deals.
The trio of Metcalfe, chief investment officer (CIO) Joseph de la Plante and chief financial officer (CFO) Elif Lévesque have worked together 'on and off' for six years and made up the 'deal team' at Osisko Gold Royalties.
That company grew from a market cap of $350 million back in 2014 when it was formed after the acquisition of Osisko Mining Corp by Agnico Eagle and Yamana Gold to a $2bn vehicle and the small team wants to repeat the trick with Nomad.
"We don't want to stay sub $1 billion for the next five years," says Metcalfe who sees their experience of structuring royalty deals as a real boon to Nomad's future growth.
"We've seen what works and what doesn't ... we've been on the inside, we know how to structure these deals," he says, pointing to Nomad's recent deal to buy Coral Gold Resources (CVE:CLH) for US$45.8 million.
The purchase gives Nomad a net smelter return (NSR) royalty on Nevada Gold Mines' Robertson property - Corals' main asset and a top tier Nevada asset - which is part of the greater Cortez & Pipeline mining complex, of between 1% and 2.25%.
Metcalfe suggests an asset like Robertson would normally be found in the hands of a major royalty group like Franco-Nevada Corp (NYSE:FNV) but that never happened and the Nomad team had the patience and experience to liaise with management to finalize the deal.
What is striking about the deal is the exploration upside and drilling currently underway located in close proximity to the Cortez mill. The royalty comes with downside protection as Coral must pay US$0.5 million a year for 10 years beginning in 2025 if the mine doesn't go into production.
In its maiden second-quarter results statement to June 30, 2020, Nomad posted an impressive net income of US$2.3 million and a cash operating margin of US$5.8 million or 96%.
And in August, the firm outlined its inaugural dividend policy, declaring a first quarterly payment of C$0.005 per share, payable on October 15 this year, signalling its intent to return capital to investors, and with a yield of about 1.2% it currently represents double the peer average in the sector.
To emphasise the direction of travel, Metcalfe points out that the aims the firm had for the six to 12 months since listing were achieved in just three months - listing on the OTCQX in New York, bagging a revolving credit facility - now worth up to C$75 million - and announcing three acquisitions.
Metcalfe expects the next few months to be similarly very busy as the group strikes more deals in a bid to re-rate the Nomad story to multiples that are closer to those of the seniors in the sector.
As the name suggests, Nomad has no intention of standing still.
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