Essex Minerals Inc (CVE:ESX) is a company that’s well and truly on the move.
It has, says chief executive Paul Loudon, “a staged growth strategy.”
This involves combining Essex’s existing core competency of sourcing exploration projects and providing drilling money, with a new strand: acquiring streams and royalties through a partnership with a privately run company, Zola Minerals Inc.
Already, Zola has brought Essex its first deal, a C$4.5mln gold stream on assets that are about to be restarted in Chile.
But that’s just the start.
In due course, Essex has the option to acquire Zola’s streaming business at independent valuation if Zola decides to go public in the next year, at which point there’s likely to be a substantial capital raise to support further deals.
Loudon says if a merger was to take place, the company could raise up to C$50mln at that point, and from there on in the average streaming deal size is likely to run from between US$20mln and US$50mln.
It’s quite a step up for a company that’s currently operating as a relative minnow on the Venture Exchange, and which to date boasts just one exploration joint venture in Australia, and one streaming deal in South America.
But it’s the bringing together of the two teams that will mark the step change.
On the Essex side Loudon is a man with much deep experience both of mining finance and of running mining companies, who for many years worked out of London and who is well connected there, in Canada and in Australia.
For many years he’s also worked with geologist Patrick Harford, who’s in charge of sourcing and assessing potential exploration deals for Essex. The chief financial officer is Elena Tanzola, a Vancouver-based financial analyst, and, as non-exec, they’re joined by Meghan Lewis, a former mining analyst with Dundee.
So far that’s three highly experienced analysts and a geologist.
But add in Rod Husband and Jim Mustard on the Zola side, and the dream team really starts to take shape. Husband is well-known as a senior analyst at Cipher Research, while Mustard was one of the principal planks at Haywood for years. Perhaps even more significantly, Zola is bringing access to US capital.
After a long hiatus, the market is coming alive for mining finance, and in a big way, and Essex aims to take advantage on several levels.
The idea is to source debt from New York and plough it into streaming deals that will then offer significant returns in the current environment.
But the specific deal size that Loudon alludes to – between US$20mln and US$50mln – isn’t simply a measure of the level he thinks Essex’s financial strength and reach will get to. No, it’s far more nuanced than that.
“We want to be part of the project finance for a company, but not to be competing with the big guys on US$500mln capex deals. Our level is the mid-tier producer sweet spot.”
What should investors make of this ambitious set of aspirations?
Firstly, it would be safe to conclude that Essex won’t stay around on the Venture Exchange for too long. The size and rate of growth that is being contemplated here mitigates strongly against that, although Loudon has nothing against the exchange itself, which serves a real purpose in allowing junior and entrepreneurial companies to grow.
But secondly, and perhaps more fundamentally, it becomes an open and intriguing question as to how Essex Minerals should be valued. Streaming companies as a rule are being valued at around twenty times gross profits at the moment, as the market likes the combination of physical product and lack of execution risk when it comes to mining.
Essex itself though isn’t quite there yet, in that the ink is hardly dry on its one streaming deal, and it remains to negotiate a merger with Zola. But blink and you might miss it, because within a few months it could all be done and dusted, and the company will be a whole new proposition.
“We would be looking to create a merged vehicle with US$20mln of gross profit from streams coming out of the gate,” says Loudon.
On current equivalent and peer group valuations, that could make Essex worth between C$200mln and C$400mln in short order, with further growth to come.
The idea is that either through joint venture or merger, Loudon and Husband will negotiate the streaming deals in the future, with Harford and Mustard scouting out new exploration and streaming projects from around the world.
“One of our main areas of focus would be Australia, where there hasn’t been a lot of streams. We think that’s going to change.”
One reason is that all the Australian companies who hedged away their upside at what they previously thought were ridiculously high levels are now seeing their margin capped as gold continues on past A$2,700.
With streaming deals, that kind of limit to upside in price can be avoided. But another reason the Australian market might be ripe for development is that there’s simply so much going on over there, especially in precious metals, that it seems that all forms of potential finance are likely to be needed.
In the near-term, Essex will have newsflow of another sort from Australia, when drilling results start to come in from the KNX joint venture in the north of the country. But in the short-to medium term, expect news of a much more transformational and radical nature. It will be interesting to watch.