The mining royalty and streaming sector is on a roll.
After a quiet start to 2021, April was a huge month for the sector with the average share price up a massive 9.5%. Nearly 78% of mining royalty and streaming companies saw positive share price movement in the month, as the market rallied behind the sector.
Large-tiers were the best performing sub-set of the market, up an average of 13.2%. Osisko Gold Royalties (TSE:OR) was up 4.8% over the month and 12.9% over three months, while Sandstorm Gold Ltd (TSE:SSL) rocketed 14.7% over the last month and 20.7% in three months, making them the best performing large-tier companies.
READ: Royalty Round up, April 2021: the sector is flying
With a model that promises free cash flow, it’s no surprise that investors who are new to mining are attracted to royalty companies. In reality, over the past decade or so, royalty companies have typically outperformed producers, ETFs and gold bullion, in bull and bear markets.
It’s not just the majors like Franco Nevada and Wheaton Precious Metals that are seeing a bump in share prices. “The junior end of the mining royalty and streaming market was up the lowest of all the sub-sets but with an average increase in share prices of 7.5%, it’s still been an impressive month for royalty juniors,” Proactive analyst Ryan Long wrote in a recent note.
Star Royalties Ltd (CVE:STRR), a Canadian royalty company with a portfolio of assets in Tier One jurisdictions, recently started trading on the TSX Venture Exchange with a nearly C$37 million valuation. Its CEO Alex Pernin offered some insight into the sector’s appeal.
“Some of the key attributes of the royalty sector include consistent free cash flow for dividends and reinvestment, and limited direct exposure to rising cost pressures and inflation – a constant concern for mine operators,” Pernin told Proactive. “Renewed exploration efforts by producers and developers should also bode well for new discoveries, reserve expansion and underappreciated tail upside for the royalty companies.”
DEEP DIVE: Star Royalties is pioneering a new kind of streaming model: value creation with a conscience
Currently, Star Royalties is targeting 80% of its capital allocation to precious metals, with up to 20% available for predominantly green investments – namely carbon credits, copper and nickel projects. Its longer-term portfolio allocation will target a 70% weighting in cash-flowing royalties and streams, 20% weighting towards near-term development opportunities where the development-to-cash-flow timeline is less than two years, and 10% to geologically prospective, advanced exploration targets with no cash flow.
Right now, Star Royalties has a handful of standout assets in its portfolio: the Copperstone gold stream in Arizona; Keysbrook, which is a royalty on a mineral sands mine in Western Australia, and a unique royalty on a carbon offset project in Ontario.
Although the young company has yet to see free cash flow from its portfolio of assets, its investment pipeline is more than US$100 million. The company is looking at “multiple” opportunities focusing on precious metals that are either cash flowing or have defined production visibility, according to Pernin.
“As a new entrant, we hope to capitalize on investor demand for low-risk growth opportunities by highlighting our mine finance business model and our value proposition. Now that we are publicly listed, our plan is to methodically build a low-risk, low-cost, cash flowing, dividend-paying company with a strict portfolio construction strategy of value and quality over quantity,” he added.
Targeted opportunities
The company is targeting investments ranging from US$10 to $50 million per asset. According to Pernin, the majority of the targets in that range are “non-competitive” to the company.
“Exclusivity is being driven by our team's existing relationships over the many years of capital deployment, and by the fact that most of our opportunities are underwriting situations,” Pernin said. “What this means is that Star Royalties is providing targeted and competitively-priced mine finance. Given that the smaller end of the mining industry has been capital starved for a decade, these origination-type opportunities represent a much larger investment pool for us than the existing royalty market targeted by our peers.”
The company also had around US$15 million on its balance sheet as of press time, which Pernin promised will be put to work.
“Our management team are all long-term students and admirers of the royalty model – one of the key reasons we chose to build a new, differentiated royalty company from the ground up,” Pernin said.
“The origination of bespoke royalties and streams not only directly benefits the financial health of an operator, but it also allows us to properly due diligence an investment and structure the deal terms in a mutually beneficial fashion.”
Contact Angela at angela@proactiveinvestors.com
Follow her on Twitter @AHarmantas