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Time For The Royals to Get Married?

Paul Farrugia
Posted Nov 17, 2017

There have been a number of new royalty companies that have launched over the past few years, but did you know that there are less publicly traded mining companies on the TSX and TSX Venture. Did you know there is more money available from royalty & streaming companies because there are more of them? Is it time to see some mergers in the mining royalty space?

The Boom of Royalty & Streaming Company

Canada is the leader in publicly listed royalty and streaming companies focused on the natural resources. Over the past few years 2014-2017, we saw 4 “new” mining royalty companies created via spinoff’s, reverse-takeovers, and start-up firms created to bring the current list of publicly traded royalty companies to 12 companies. This is a 50% increase in new royalty companies. This doesn’t include the private royalty that have started that we identified, and a number of companies owned by private equity firms, and mining companies that own portfolios of royalties.

The number of listed companies is down:

Did you know that the TSX exchanges (TSX & TSXV) have more mining companies listed than any other exchange in the world? When we look at the number of listed mining companies in June 30, 2015 there were 1,421 mining companies listed on both the TSX & TSX Venture. Now in September 30, 2017, there are only 1,214 mining companies listed on the TSX & TSX Venture. Which means, there are 15% less mining companies to do transactions with on properties than there were in 2015. It is difficult to say how many properties are seeking funds for exploration or development and how many have royalties available. But what is certain with less companies, less capital going around to fewer properties.
So lets just get this straight, we have less mining companies since 2015, and yet more royalty companies going during the same time Period? Yes.

Why we need consolidation:

Given the recent equity capital raising many mining companies have been completed since the rise of gold prices. Returns for streams in particular will continue to fall with increased competition. By consolidating the sector, it will improve returns that the royalty and streamer companies that obtain on the contracts because it will consolidate the sector. Some of the royalty companies have posted strong returns for 2017 and 2016, setting record high share prices. Some of them have failed to keep up.

It now becomes more attractive to merge these businesses, particularly while gold and silver prices have bottomed. Then reap the optionality benefits of the acquisition once gold prices are higher, while extracting the cash flows today into the bottom line. The smart CEOs will pick up the value now. Buy-low, Sell-high.

The Deals Are Getting Started

Just last week, Centerra Gold purchased AuRico Metals for a 38% premium. Centerra Gold picked up the property to get access to AuRico’s Kemess property, AuRico had a collection of royalties in the portfolio. It will be interesting to see if Centerra Gold keeps the royalty package or sells it off to another company.

Glencore announced that it is planning to spinoff its royalty portfolio, with the expected acquirer, possibly to a pension fund or sovereign wealth. It is possible we could see one of the major royalty and streaming companies step in, because the deal activity has slowed royalty and streams since the 2015-2016 period.

The Commodities Industry Has Bottomed

When we look at the FMC Commodity Hype cycle for gold and silver, we have bottomed and are working through the first and second phase of the cycle. Slowly, enthusiasm is coming back into the commodities markets again. The Rare-Earths, cobalt, nickel, lithium are all gaining attention again. But the overall market is not paying much attention to the area where the royalty companies primarily play in (gold and silver).

The 3G vs. The Contenders

When you match up the 3 Goliath’s (3G): Franco-Nevada, Wheaton Precious Metals, and Royal Gold. They have a market cap of $40.1 billion USD. Then when you count, the Contenders, the publicly traded royalty and streaming companies below $5 billion USD in market cap, they have a combined market cap that is less than $5 billion USD.

Scenario 1: The Bolt-On Acquisitions by the 3G

The three Goliath’s have cash, and credit facilities capacity to buy many of these businesses outright in their portfolio. In 2009, Franco-Nevada made a bid for International Royalty for $640 million USD, this was when Franco-Nevada was a $4.8 billion company. In the end, Royal Gold end up purchasing it. At the time, the International Royalty purchase was 13% of the market cap Franco-Nevada. Simplistically, with a similar ratio of 13% of Franco-Nevada’s market value today, would put a purchase of $2 billion. Everyone of the Contenders will fall within that threshold. Probability 40%

Scenario 2: Merger of Equals

We could see mergers between our contender companies, as it will give the CEO more ability to do the larger deals, where primarily only the 3G would compete in. Royalty and Streaming companies are in the business of doing deals, they may decide with less good projects available to finance, a merger of equals is better. Not all of the CEOs want to run the business forever, some have an exit strategy to sell to a larger player.  Probability 45%

Scenario 3: A merger between the 3G?

It is entirely possible to see Franco-Nevada make a bid for Royal Gold or Wheaton Precious Metals. Particularly Wheaton Precious Metals that is up only 4% year-to-date (YTD), while Franco-Nevada is up 41% YTD. Alternatively you could see Royal Gold merger with Franco-Nevada or Wheaton Precious Metals at $5.6 market of Franco-Nevada. Probability 10%

Scenario 4: Nothing Happens

The mining companies will be able to continue to get better terms on their royalty or streaming contracts. Probability 10% chance because the CEOs that run these companies are in the business of doing deals, shaking hands. If they can’t find a deal with the miners, why not do a deal with themselves? Probability 5%.

With having gold bottomed in 2016, the silver and gold sector is starting to turn around. This is bringing back enthusiasm for royalty and streaming companies. But with the number of publicly traded mining companies down since 2015; the likelihood more M&A activity occurring over the next 12-24 months between royalty and stream companies is starting to brighten. Where do you think the M&A activity is going to occur in the resource sector?


Paul Farrugia
email: paul@firstmacrocapital.com
website: www.firstmacrocapital.com

Paul Farrugia is the President & CEO of First Macro Capital. He helps his readers identify mining stocks that can you can hold for the long-term. He provides a checklist of how to find winning mining producer stocks.

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