Building the Next Large-Tier Royalty Business
Nomad Royalty is a TSX-listed precious metals-focused mining royalty and streaming business with a diversified portfolio of large cash flow and near-term cash flow generating mining assets.
The company's focus on cash flow is demonstrated by 50% of NAV currently coming from cash flow generating assets, and this is expected to increase to 85% in 2021 as additional development assets within the portfolio reaching production.
The management team driving growth at Nomad has built a major mining royalty businesses before. As the former deal team with Osisko Gold Royalties (TSE:OR), the Nomad team was fundamental in taking the business from a US$350mln market capitalisation to over US$2bn.
The high levels of royalty and streaming experience with the company mean the team has been involved in every type of royalty and streaming transaction from purchasing portfolios and single assets, structuring new streams, and taking part in more complex mining finance packages.
The team is focused on keeping its G&A costs low. This is demonstrated by management not taking any cash salary this year. The CEO and CIO of Nomad are also the two largest single shareholders in the business (2.5%) and as a result their interests are fully aligned with investors. Other major shareholders include Orion Resources Partners (76.6%) and Yamana Gold Inc (TSE:YRI) (NYSE:AUY) (12.9%).
The company has recently announced its annual dividend policy of C$0.02 per share, payable quarterly. This demonstrates the team's commitment to returning capital to shareholders. Based on the current share price, Nomad has a dividend yield of 1.18%, which is high compared to its peer group (Figure 1).
*Note: The dividend was announced post-period so is not included in Figure 1.
Strategy
Nomad is focused on providing mining-based cash flow at lower volatility through asset diversification than a typical mining business and its royalty peer group. Over the next three to four years, the company aims to have no particular asset being worth more than 5% of the total value of the portfolio.
The company is targeting mid-tier transactions, where it believes deal sizes are not large enough to attract the major royalty providers, but returns are large enough to generate significant returns for investors.
Nomad is leading the charge in creating syndicated bids for royalties and partnerships with other mid-tier and junior royalty providers. This will allow it to be able to participate in larger transactions that could as a stand-alone business.
Given the large increase in royalty companies in recent years, Nomad also plans to be an active participant in the consolidation of the royalty space and believes its major mining industry shareholders gives it a strategic advantage in doing this.
Figure 1 - Royalty and Streaming Peer Group
Source: Mining and Metals Research Corporation Ltd.
Peer Group
There are currently 20 listed royalty and streamlining-focused business that have market capitalisations that range from US$5mln to US$28bn (Figure 1). The peer group can be divided into four groups based on their market valuation and the development stage of their business.
The majors range in size from US$8.5bn to US$28bn. These are well-established businesses with annual revenues greater than c.US$500m, substantial operating cash flows over US$300mln per year and are, in general, profitable with EBITDA margins between 67% and 79% and P/E ratios between 43.3 and 155.1. The majors are all listed in North America and are focused on precious metals.
The large-tier companies range in size from US$1.3bn to US$2.2bn. These businesses generate annual revenues greater than c.US$80mln and annual operating cash flow greater than US$50mln. They have EBITDA margins between 50% and 79% and P/E Ratios between 18.2 and 169.2. The mid-tiers range in size from US$250mln to US$683mln. These businesses are a mixture of expanding, profitable businesses and companies that have created a significant royalty or streaming portfolios and are moving toward profitability in the near- to medium-term. The annual revenue levels of these businesses range from c.US$30mln to c.US$45mln, with moderate levels of operating cash flows, between c.US$20mln and c.US$mln. The mid-tiers are dominantly listed in North America, and some are diversified with assists in precious metals, bulks, base metals, battery metals and energy, while some are precious metals focused.
Finally, the juniors range in size from US$5mln to US$245mln. These businesses are not currently profitable, have limited revenues and are building portfolios of royalty and streaming assets. The juniors are also dominantly listed in North America and are more diverse in terms of their commodity exposure.
Nomad currently sits within the mid-tier category but has a portfolio of development stage projects that will help move the company into the next tier of royalty companies.
Figure 2 - Total Value of Mining Royalty Shares Traded
Source: Mining and Metals Research Corporation Ltd.
Figure 3 - Share Prices of Selected Royalty Majors
Source: Mining and Metals Research Corporation Ltd.
Figure 4 - Nomad's Portfolio
Source: Nomad Royalty Company
Sector interest
Over the past 12 months mining royalty companies have seen a substantial uptrend in the value of shares traded (Figure 2).
This increased interest has driven mining royalty companies' share prices up by an average of 66% in a year.
Royalty and streaming majors have performed very strongly recently with Franco Nevada Corp (NYSE:FNV) up 66% since September 2019, Wheaton Precious Metals Corp (NYSE: WPM) up 114% and Royal Gold, Inc. (TSE:RGL, NASDAQ:RGLD) up 82% (Figure 3).
The royalty and streaming companies have benefited from high-precious metal prices, but are also gaining traction with investors as they represent a lower-risk opportunity to gain exposure to the mining sector compared to directly taking a position in mining companies.
Nomad's Portfolio
Nomad is a precious metals-focused royalty company, so all its assets are in gold or silver.
Of the eleven principal assets, two of them are gold streams and two are silver streams, one is a gold loan, one is a commercial production and a royalty payment, and five are net smelter return royalties. This gives Nomad diverse exposure.
Nomad also has a geographically diversified portfolio with assets in North America, South America, Africa and Australia (Figure 4).
The main assets within the portfolio are operated by a mixture of mid-tier and junior miners and developers.
Six of the royalties are on projects that are in production or are generating cash flow, two royalties are on projects that are in commissioning, two are on projects that are in development, one royalty is on a project that is at a pre-feasibility study stage.
As part of Nomad's recent proposed C$45.8mln acquisition of Coral Gold Resources (CVE:CLH)(OTCQB:CLHRF), it will hold a portfolio of strategically-located exploration projects in the Battle Mountain/Cortez Trend.
Nomad believes that diversification is a key factor in reducing volatility within its portfolio and plans to ensure that no asset makes up over 5% of the portfolios' value.
Figure 5 - RDM Location
Source: Equinox Gold
Figure 6 - RDM
Source: Equinox Gold
Figure 7 - RDM Reserves
Source: Equinox Gold
Figure 8 - RDM Resources
Source: Equinox Gold
Riacho dos Machadoa (RDM) 1% NSR Gold Royalty
The RDM Gold Mine is located in Minas Gerais State, Brazil, 560 kilometres north of the state capital city of Belo Horizonte (Figure 5). A 360 tour of the mine can be found using this link. The open-pit mine (Figure 6) is operated by Equinox Gold Corp (CVE:EQX) and covers an area of approximately 22,600 ha.
RDM has a NI 43-101 complaint mineral reserve estimate of 789,000 ounces of gold at a grade of 1.0 g/t Au (Figure 7). The mine has a NI 43-101 compliant mineral resource estimate of 1,661,000 ounces of gold at a grade of 1.1 g/t Au (Figure 8).
RDM is expected to produce between 60,000-75,000 oz of gold in 2020 and estimates that there is at least six years' of mine life remaining with one to two years of lower-grade stockpile that can also be processed once the mine has closed.
Deal
Nomad holds a 1% net smelter royalty on all gold production from the RDM Gold Mine. The royalty was acquired as part of Nomad's US$65mln acquisition of a portfolio of royalties from Yamana Gold Inc (TSE:YRI, NYSE:AUY).
Revenue
Assuming a gold price of US$1,500/oz over the life of mine, we estimate that the RDM royalty could return pre-tax revenue of around US$1mln per annum for Nomad for the next seven years. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$8.7 m could be returned to Nomad.
Assuming a gold price of US$2,000/oz over the life of mine, we estimate that the RDM royalty could return pre-tax revenue of around US$1.4mln per annum for Nomad for the next seven years. Over the assumed life-of-royalty we estimate that US$11.5mln in pre-tax revenue could be returned to Nomad.
Figure 9 - Moss Location
Source: Northern Vertex Mining Corp
Figure 10 - Moss
Source: Northern Vertex Mining Corp
Figure 11 - Moss Resources
Source: Northern Vertex Mining Corp
Moss Variable NSR Gold Royalty
The Moss Gold Mine is located in the historically significant Oatman Mining District (>2 moz Au) of Mohave County, Arizona, USA, approximately 15 kilometres by road to the east of Bullhead City (Figure 9). A video of the project can be found using this link and a virtual tour can be found using this link.
The open-pit, heap leach mine (Figure 10) is operated by Northern Vertex Mining (CVE:NEE, OTCQX:NHVCF) and has been in commercial production since September 2018 with over 65,000 ounces of gold and over 350,000 ounces of silver produced. The project covers a total area of 4,030.8 hectares of mining claims and leases that are centred on the Moss Vein.
The Moss Mine has a total NI 43-101 compliant mineral resource estimate of 489,000 ounces of gold at a grade of 0.5 g/t Au and 5.8 moz of silver at a grade of 5.6 g/t Ag (Figure 11).
There is plenty of scope for Northern Vertex to increase the size of the deposit and extend the life of the mine beyond 10 years. Two rigs currently on-site as part of an 18,000-metre infill and exploration drill programme.
Northern Vertex produced 22,970 ounces of Au and 185,863 ounces Ag in FY20, but is targeting 55,000 ounces to 60,000 ounces of gold equivalent per annum. Production levels appear to be increasing with 10,530 ounces Au produced in Q121 (period end-June 2020) and 4,218 ounces produced in July 2020.
Deal
Nomad is in the process of acquiring Valkyrie Royalty Inc for a total consideration of US$7.6mln, payable in Nomad shares. Valkyrie owned the variable net smelter return (NSR) royalty over the Moss Gold Mine.
The NSR has a variable rate of 0.5% to 3% on all metals and minerals produced from the area. A rate of 0.5% is payable on all production derived from certain patented load claims with other royalty interests on the claim. A rate of 1% is payable on certain patented lode claims with no other royalty interests on the claim. A rate of 3% is payable on all production derived from 63 unpatented lode claims within the property and on public lands within a mile of the property's perimeter.
Mining is expected to focus on the patented claims until the end of 2023, after which time the unpatented claims will be mined, and a higher royalty will be payable to Nomad.
Revenue
Assuming a gold price of US$1,500/oz, we estimate that the Moss royalty could return pre-tax revenue of around US$1.1mln per annum for Nomad for the next three years and US$2.5mln per annum for the following five years. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$15mln could be returned to Nomad.
Assuming a gold price of US$2,000/oz over the life of mine, we estimate that the Moss royalty could return pre-tax revenue of around US$1.1mln per annum for Nomad for the next three years and US$3.3mln per annum for the following five years. Over the assumed life-of-royalty we estimate that US$20mln in pre-tax revenue could be returned to Nomad.
Figure 12 - Mercedes Location
Source: Premier Gold Mines
Figure 13 - Mercedes
Source: Premier Gold Mines
Figure 14 - Mercedes Reserves
Source: Premier Gold Mines
Figure 15 - Mercedes Resources
Source: Premier Gold Mines
Mercedes and South-Arturo Silver Stream
Mecedes Gold-Silver Mine
The Mercedes Gold-Silver Mine is located in the State of Sonora in northern Mexico (Figure 12), around 50 kilometres northeast of Hermosillo and 300 kilometres south of Tucson, Arizona.
The underground mine (Figure 13) is operated by Premier Gold Mines (TSE:PG). Production commenced in 2011 and, as of June 2020, the operation has produced 753,000 ounces of gold and 7,163,000 ounces of silver. The Mercedes property consists of 43 mining concessions covering an area of 69,285 ha.
The Mercedes Mine has a total NI 43-101 compliant mineral reserve estimate of 395,000 ounces of gold at a grade of 3.6 g/t Au and 2.7mln ounces of silver at a grade of 25.1 g/t Ag (Figure 14). The mine has a total NI 43-101-compliant mineral resource estimate of 587,000 ounces of gold at a grade of 3.7 g/t Au and 6mln ounces of silver at a grade of 37.4 g/t Ag (Figure 15).
In addition to the reserves and resources defined in 2018, there are several exploration targets that have the potential to extend mine life. These targets are a mixture that are close to existing infrastructure on the property and targets along the several kilometres of the unexplored main northwest vein systems and other regional targets. District-wide studies suggest that approximately 45 kilomtres of untested structures have the potential for hosting additional low-sulphidation gold-silver bearing vein systems.
Production at Mercedes was suspended for two months due to the COVID-19 Pandemic but operations restarted in June 2020.
South-Alturo Gold-Silver Mine
The South-Arturo Gold-Silver Mine is located in the Carlin Trend, 25 miles northwest of the town of Carlin, in Elko County, Nevada (Figure 16).
The underground mine (Figure 17) is operated by Nevada Gold Mines, a joint venture between Barrick Gold Corp (TSE:ABX, NYSE:GOLD) and Newmont Corporation (NYSE:NEM, TSE:NGT), which owns 60% of the project and Premier Gold Mines holds 40%. Nomad's silver stream is over Premier's 40% interest in the project.
Premier's attributable total NI 43-101 compliant mineral reserve estimate of 269,800 ounces of gold at a grade of 3.2 g/t Au and 1.1mln ounces of silver at a grade of 15.9 g/t Ag (Figure 18). The mine has a total NI 43-101-compliant mineral resource estimate of 317,100 ounces of gold at a grade of 1.2 g/t Au and 1.5mln ounces of silver at a grade of 6.2 g/t Ag (Figure 19).
The partners are contemplating additional development opportunities at South-Artuto, including Phase 1 and Phase 3 open pit projects that include the potential for an on-site heap leach facility to process a large percentage of the ore produced. Ore from South-Arturo is primarily processed at Nevada Gold Mines Goldstrike Mine at present.
Premier expects to complete an updated compliant technical report for South-Arturo during Q320 with the goal of providing a long-term view of the opportunity provided by this project. This would add further upside to the value of Nomad's silver stream over the project.
Figure 16 - South-Arturo Location
Source: Barrick Gold Corp
Figure 17 - South-Alturo
Source: Premier Gold Mines
Figure 18 - South-Alturo Reserves
Source: Premier Gold Mines
Figure 19 - South-Alturo Resources
Source: Premier Gold Mines
Deal
Nomad acquired the Mercedes and South-Arturo Silver Stream as part of the deal with the Orion Portfolio Assets from the Orion Group for a total consideration of US$268 million, satisfied through the issue of Nomad shares.
The silver stream covers delivery of 100% on the silver production from the Mercedes Mine and 100% on the silver production from the South Arturo Mine attributable to Premier Gold (40% attribution) until a total of 3.75mln ounces of refined silver have been delivered.
After a total of 3.75mln ounces of refined silver have been delivered, the delivery will be reduced to 30%.
There is a minimum annual delivery of 300,000 ounces of refined silver until the cumulative delivery of 2.1mln ounces (c. six years). ·
Subject to an ongoing cash purchase price by Orion equal to 20% of the prevailing silver market price.
Revenue
Assuming a Silver price of US$15/oz, we estimate that the Mercedes and South-Alturo royalty could return pre-tax revenue of around US$4.5mln per annum for Nomad for the next six years. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$29.1mln could be returned to Nomad.
Assuming a Silver price of US$25/oz, we estimate that the Mercedes and South-Alturo royalty could return pre-tax revenue of around US$7.5mln per annum for Nomad for the next six years. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$48.5 m could be returned to Nomad.
Figure 20 - Troilus Location
Source: Troilus Gold Corp.
Figure 21 - Troilus
Source: Troilus Gold Corp.
Figure 22 - Troilus Resources
Source: Troilus Gold Corp.
Troilus 1% NSR Gold-Silver-Copper Royalty
The Troilus Gold-Silver-Copper Mine is located northeast of the Val-d'Or district of Quebec (Figure 20). A video of the project can be found using this link and a virtual tour can be found using this link.
The project is owned by Troilus Gold Corp. (OTCQB:CHXMF, TSX:TLG). The project, which was previously operational between 1996 and 2010 producing 2mln ounces of gold and almost 70,000 tonnes of copper from several open pits (Figure 21), benefits from having over US$350mln worth of infrastructure already on site.
The Troilus Project has a total NI 43-101-compliant mineral resource estimate of 7mln ounces of gold at a grade of 0.7 g/t Au, 10.5mln ounces of silver at a grade of 1.1 g/t Ag and 512mln pounds of copper at a grade of 0.1% Cu (Figure 22).
A preliminary economic assessment completed in August 2020 returned a post-tax NPV5 of US$915mln and a post-tax IRR of 32.2%, using a gold price of US$1,730/oz Au. Troilus expects the mine to produce around 246,000 ounces of gold for the first fourteen years.
The first eight years of mine life will focus on an open pit and then a combined open pit and underground operation for six years, with an additional eight years of mine life as an underground operation.
Deal
Nomad acquired the Troilus 1% net smelter royalty on the production of all metals from the 81 mineral claims and one mining lease that make up the project for a total consideration of US$7.5mln in July 2020 from a private vendor. Of the total consideration, US$1.9mln was paid in cash and the balance in Nomad shares and warrants.
Revenue
Assuming a gold price of US$1,500/oz, silver price of US$15/oz Ag and copper price of US$2.5/lbs Cu we estimate that the Troilus royalty could return pre-tax revenue of around US$3.7mln per annum for Nomad for the first fourteen years of mine life and US$1.7mln per annum for the following six years. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$56.4mln could be returned to Nomad.
Assuming a gold price of US$2,000/oz, silver price of US$25/oz Ag and copper price of US$3/lbs Cu, we estimate that the Troilus royalty could return pre-tax revenue of around US$4.9mln per annum for Nomad for the first fourteen years of mine life and US$2.3mln per annum for the following six years. Over the assumed life-of-royalty we estimate that pre-tax revenue of US$74.4mln could be returned to Nomad.
Figure 23 - Robertson Location
Source: Barrick Gold Corp
Figure 24 - Robertson Resources (NC)
Source: Coral Gold Resources
Figure 25 - Robertson Infrastructure
Source: Nomad Royalty Company
Figure 26 - Robertson NSR Scale
Source: Nomad Royalty Company
Robertson Variable NSR Gold Royalty
The Robertson Gold Mine is located in the Cortez Region, eastern Lander County, Nevada, 60 miles southwest of Elko (Figure 23). The project covers an area of 7,300 acres.
The mine is 100% owned by Nevada Gold Mines (a joint venture between Barrick Gold Corp and Newmont Corporation). A preliminary economic assessment for the project was completed in 2012 by Coral Gold Resources (CVE:CLH, OTCBB:CLHRF).
The project has a historic mineral resource estimate (non-compliant) of 2.7mln ounces Au at a grade of 0.45 g/t Au (Figure 24). This resource has been shown to occur within the Upper Plate, which contains clusters of smaller siliciclastic hosted gold deposits.
A 2007 scout drill programme intercepted deeper Lower Plate gold mineralsiation within limestones below the Upper Plate. The Lower Plate has been demonstrated to contain significant high-grade gold deposits in the area, including the 12.2mln ounces at a grade of 9.1 g/t Au at the Goldrush Deposit, located just c.11 miles to the south-east. The Lower Plate is a key exploration target that could add significant value to Nomad's Royalty with further exploration.
What makes the project particularly attractive is its proximity to existing infrastructure owned by Nevada Gold Mines. Robertson is three miles from the Cortez Mill, four miles from the Pipeline Mine, nine miles from the Cortez Mine and 12 miles from the Cortez Hills Mine (Figure 25).
Deal
Nomad is in the process of acquiring Coral for a total consideration of US$45.8mln, payable in shares; however, it is worth noting that Coral currently has C$11.5mln (US$8.72mln) in cash and no debt on its balance sheet. The transaction is expected to close in on November 6.
In addition to the Robertson Royalty, Coral also owns a portfolio of strategically-located exploration projects near Nevada Gold Mines' Pipeline and Cortez Mines.
The Robertson net smelter royalty is uncapped and has a sliding-scale of 1% to 2.25%, depending on the prevailing gold price during the quarter (Figure 26).
Revenue
Given the large resource estimate and the significant mining infrastructure present in the area that is also owned by Nevada Gold Mines we believe it is reasonable to expect production levels of around 200,000 ounces of gold per annum from the project.
At a gold price of US$1,500/oz we estimate that the Robertson royalty could return US$4.5mln per annum for 10 years totalling US$45mln.
At a gold price of US$2,000/oz we estimate that the Robertson royalty could return US$10 m per annum for 10 years totalling US$100mln.
While there is no detail regarding the timing of potential production from Robertson, the royalty has minimum non-refundable advance royalty payments of US$0.5 m per year for 10 years which commences in 2025, which offers some downside protection if the project is not advanced into production before 2025.
Figure 27 - Share Price and Volume Chart
Source: Yahoo Finance
Funding
As part of its RTO, which closed in May 2020, Nomad raised C$13.3mln at a price of C$0.90/share.
In June 2020 Nomad signed a US$50mln revolving credit facility that has the option to be increased to US$75mln. The agreement is currently subject to due diligence but is expected to complete in Q320.
The facility is with the Bank of Nova Scotia, Canadian Imperial Bank of Commerce and the Royal Bank of Canada.
This facility has an 18-month term, though it is extendable by mutual agreement between the parties
Capital Structure
Nomad currently has 517mln shares outstanding and 9.9mln options. Assuming that all the acquisitions that are currently in progress close, the company would have 564.5mln shares, 22.9mln warrants and 12mln options outstanding.
Share Price Performance
Nomad completed its RTO in May at a price of C$0.90/share (Figure 27). Immediately after the RTO the share price rose to C$1.41 in early June, before leveling off at around C$1.31 in early July. Between early July and early August the shares were in an uptrend reaching a high of C$1.65. During early- to late-August the share price was in a downtrend reaching a low of C$1.30, before tending up to its current level of C$1.70.