Royalty companies are on track to show year-over-year growth, but a new tax reform on the horizon may impact share prices in 2024.
That’s according to analysts at Stifel GMP, who recapped a busy first half of 2023 for the major royalty companies like Franco-Nevada Corporation (TSX:FNV) and Wheaton Precious Metals Corp (LSE:WPM, TSX:WPM, NYSE:WPM).
New royalty interests in pre-production assets in Chile earned Franco-Nevada a rating upgrade to 'Buy' from Stifel analysts.
“(The company) is going back to its roots of locking in longer-term optionality on high-quality assets,” Stifel analysts wrote.
Overall, analysts noted increasing deal activity in 2Q, with Franco-Nevada (FNV), Wheaton Precious Metals (WPM), Triple Flag Precious Metals (TSX:TFPM) (TFPM), and Osisko Gold Royalties (TSX:OR) (OR) all adding royalty and streaming agreements to their respective portfolios.
The upswing in activity, while predominantly involving smaller agreements valued at less than $100 million, carries a marginally positive impact, Stifel noted.
However, the impending presence of the Global Minimum Tax (GMT) looms large on the horizon, according to Stifel. The framework, which is aimed at reforming international taxation rules, is expected to leave a tangible impact on the income structures of royalty and streaming companies come 2024.
Franco-Nevada and Wheaton PM will feel particularly pressured by income structured under their offshore subsidiaries. Although intermediate companies also have offshore subsidiary structures, they don't meet the annual revenue threshold for the global minimum tax to apply, Stifel noted.
Both FNV and WPM are anticipated to experience differential impacts on their net asset value per share (NAVPS), with the former facing a 5% impact and the latter facing an 11% hit. These estimations align with the analysts' projections that the GMT's influence will become effective in 2024.
“Valuations have come down from pandemic (and) high inflation levels, but royalty/streaming stocks remain the lower risk exposure to precious metals and current valuations present a good entry point for generalists looking at the space,” Stifel analysts wrote.
Despite the dynamic changes, Stifel’s growth outlook for intermediate royalty companies is strong. These companies, notably Osisko Royalties, Triple Flag Precious Metals (TSX:TFPM), and Sandstorm Gold (SSL) are projected to continue their streak of consecutive growth in 2023.
Noteworthy is TFPM's particularly impressive year-over-year (YoY) growth in gold equivalent ounces (GEOs), buoyed by its acquisition of Maverix Metals earlier this year. This acquisition has added to TFPM's accretive growth, reflecting a strategic maneuver to enhance revenue GEO and cash flow per share (CFPS) growth.
“(T)he uniqueness of the royalty/streaming business model provides good upside potential (metal price leverage and exploration and/or expansion optionality), while limiting risk to inflationary cost pressures and/or potentially increasing mining taxes/royalties in some geographies, in our view,” Stifel noted.
“Despite seeing inflation pressures (and margin compression) easing for the gold miners, royalty/streaming companies remain the lower risk exposure to the underlying metal.”
How did the big players fare in 2Q?
Franco-Nevada: During 2Q, Franco-Nevada displayed increased exposure to Chile through new royalty interests, including a sliding scale gold and fixed copper NSR royalty on Barrick Gold's Pascua-Lama project, Stifel noted. FNV's strategic move towards long-term optionality on high-quality assets was evident, with an additional 1.5% NSR acquired on the Valentine Gold project. Second quarter results indicated 168,500 ounces of total GEOs sold, primarily driven by Antapaccay and Cobre Panama resolving earlier issues. FNV's 2023 guidance of 640-700,000 GEOs, with 490-530,000 GEOs from precious metals, was reaffirmed. The company's revision of commodity price assumptions suggests FY GEOs likely leaning towards the lower end of guidance.
The upgrade to Buy from Hold is based on FNV's improved performance post the Cobre Panama issue, reinforced by the refreshing of the mine's concession contract. With the overhang lifted, FNV is poised for stronger GEO deliveries in the precious metals segment for the remainder of 2023, and estimates have been adjusted to account for the Global Minimum Tax, leading to a revised target price of C$215.
Wheaton Precious Metals: The firm engaged in significant deal activity, adding a new gold streaming agreement on the Cangrejos gold-copper project in Ecuador, reinforcing its longer-term growth prospects. Additionally, WPM amended the Blackwater Gold stream, enhancing the payable gold production attributed to WPM. Meanwhile, sales volumes surpassed expectations, driven by silver and cobalt sales, with metal sales of approximately 75,300 ounces gold, 4.4 million ounces silver, 3,400 ounces palladium, and 265,000 pounds cobalt (approximately 133,000 GEOs at realized metal prices). The timing of sales and inventory draw-down contributed to a top-line beat, Stifel noted.
WPM reconfirmed its 2023 guidance of 600-660,000 GEOs, comprising gold, silver, and other metals like palladium and cobalt. Year-to-date production represents about 46% of the midpoint guidance, assuming Peñasquito's operations resume by quarter-end. But the adjusted estimates include the Global Minimum Tax, leading to a revised target price of C$68 from C$75.
Triple Flag Precious Metals (TSX:TFPM): The firm demonstrated active deal-making in 2Q, securing a 2.5% NSR royalty on the Agbaou gold mine in Ivory Coast, bolstering its portfolio. Quarterly performance exceeded expectations as pre-reported revenue of $52.6M from 26,600 GEOs sold preceded their financial results, aided by lower-than-forecasted business development costs. TFPM maintained its 2023 guidance of 100-115,000 GEOs sold, with YoY growth driven by the Maverix Metals acquisition and stronger contribution from Northparkes.
The year-to-date performance of 53,200 GEOs represents around 50% of full-year guidance, positioning TFPM well to achieve its targets, although the Renard stream is set to be impacted in Q3 due to forest fires leading to a voluntary evacuation of personnel on-site.
Osisko Royalties: The company made strategic moves in 2Q, finalizing the CSA silver stream + copper purchase agreement, with immediate GEOs from the silver stream and copper interest set to take effect in 2024. Additionally, OR amended the Gibraltar silver stream, increasing its stake to 87.5% from 75%. Pre-reported revenue stood at $60.5M from 23,118 GEOs, with total quarterly GEOs reaching 24,645 ounces, encompassing 1,527 GEOs from the CSA silver stream (closed in the quarter), with revenue recognition expected in the third quarter of 2023.
The expectation remains for OR to meet full-year guidance, with FY GEOs estimated at 98,000 after 2Q adjustments, according to Stifel. Mantos Blancos' contribution is poised to strengthen as the concentrator project advances, and CSA silver stream deliveries are anticipated. However, lower Renard attributable GEOs are expected in 3Q, attributed to a temporary halt in operations prompted by wildfires leading to personnel evacuation in June.
What about the smaller royalty stocks?
Electric Royalties Ltd (TSX-V:ELEC, OTC:ELECF): During 2Q, the company generated revenue generation from zinc, tin, and anticipated lithium royalties, and saw positive advancements in projects across its diversified clean energy metals portfolio. New payments from the recently acquired Penouta tin-tantalum royalty and ongoing cash flow from zinc and tin royalties were the highlights of the portfolio. Notably, the Authier lithium project is poised to enhance cash flow through integration into Sayona Mining's North American Lithium facility, while Penouta and other projects showcase strong operational performance.
Empress Royalty Corp (TSX-V:EMPR, OTCQX:EMPYF): In 2Q, the company achieved a significant milestone when its Tahuehueto Silver Stream reached a production rate of 500 tonnes per day (tpd) as planned, contributing to enhanced cash flow and silver exposure. Operator Luca Mining Corp (TSX-V:LUCA, OTCQX:LUCMF)'s successful attainment of the 500 tpd milestone, coupled with a well-funded private placement, ensures their path to 1,000 tpd commercial production by late 2023. Empress anticipates revenue from Luca and progress at the Manica mine in Mozambique, where operational advancements have simplified royalty payment mechanisms. The company is actively exploring potential investments and remains committed to offering a diversified gold and silver portfolio.
TNR Gold Corp (TSX-V:TNR, OTC:TRRXF): The release of an updated preliminary economic assessment (PEA) for its copper royalty project, Los Azules, in Argentina, operated by McEwen Mining Inc (TSX:MUX, NYSE:MUX), was cause for celebration in 2Q. The PEA showcases substantial increases in copper reserves, indicating 10.9 billion pounds of indicated resources and 26.7 billion pounds of inferred resources. The project's economic viability is evident with an after-tax net present value (NPV) of $2.66 billion, an internal rate of return (IRR) of 21.2%, and a payback period of 3.2 years, assuming a copper price of $3.75 per pound. TNR Gold holds a 0.4% NSR on the project.