Since the start of the year, the average share price for a mining royalty and streaming company has fallen by 5.5%, with 60% of companies experiencing a negative share price movement.
The lower market valuations have led to an uptick in consolidation, which we highlighted as our key theme for 2022 back in January of this year.
Two noteworthy companies that have made transformational acquisitions/mergers include Sandstorm Gold Ltd (TSX:SAND) and Elemental Royalties Corp (TSX-V:ELE).
Sandstorm > Nomad and BaseCore
Sandstorm is currently up 5.96% since the start of the year and has used this momentum to its advantage by commencing the friendly acquisition of Nomad Royalty (TSX:NSR) company Ltd for US$590 million and BaseCore Metals LP for total consideration of US$525 million.
Nomad holds a portfolio of 20 royalty and streaming assets of which seven currently produce cash flow. In 2021 the portfolio generated US$27 million in revenue and produced 16,000 gold equivalent ounces (GEOs). Based on Nomad's existing assets the portfolio is expected to grow to produce 40,000 GEOs by 2025.
BaseCore is an entity equally owned by affiliates of Glencore PLC (LSE:GLEN) and Ontario Teachers’ Pension Plan Board that holds a long-life portfolio that includes 10 royalty and streaming assets, of which three are currently producing assets. BaseCore’s existing portfolio is expected to produce 15,000 GEOs per annum by 2025.
Based on our estimates these combined deals are expected to add an additional c. 217,000 GEOs and revenue of US$390 million, using a US$1,800/oz gold price, to Sandstorm’s portfolio over the next five years, but the majority of these assets have a much longer lifespan. This would be around a 36% increase in its production profile over the next five years and will make the company one of the largest Mid-Tier mining royalty and streaming companies.
The Nomad acquisition and BaseCore deals are expected to close in the second half of 2022 and by the third quarter of 2022, respectively.
Sandstorm < Sandbox Royalties Corp.
In addition to the acquisitions, Sandstorm is making a US$32.1 million divestment, as part of the creation of a new royalty company, Sandbox Royalties Corp. The entity will also acquire a portfolio of royalties from Equinox Gold (TSX:EQX) for consideration of US$28.4 million.
On closing of the transaction, Sandbox will hold a portfolio of 23 metals royalties across a range of assets and jurisdictions. Post-completion of the transaction, Sandbox intends to seek a public listing on a Canadian stock exchange.
Elemental - Altus
Elemental Royalties Corp (TSX-V:ELE) is down 21.6% since the start of the year, but during this period it achieved some very important milestones. The first was successfully defending the all-share hostile takeover bid made by Gold Royalty Corp (NYSE-A:GROY)., which valued Elemental at just C$1.51 per share.
The second is the proposed merger with Altus Strategies PLC (AIM:ALS, TSX-V:ALTS, OTCQX:ALTUF) to create Elemental Altus Group (TSX:AIF). The proposed merger will create a combined portfolio of 69 assets across 13 jurisdictions, of which 11 are in production, and 46 are development stage. The combined portfolio will be primarily focused on gold – 75%, with 22% in copper assets.
Elemental Altus Group (TSX:AIF) is expected to generate revenues of US$19.6 million in 2022, increasing to US$24.6 million in 2023. This expected revenue will make it the largest revenue generator of any of the other 14 Junior mining royalty and streaming companies, and positions the company to make the transition to Mid-Tier with further acquisitions. The average revenue per annum for a Mid-Tier mining royalty and streaming company in 2021 was US$58.2 million, with the lowest being US$27 million.
Completion of the merger is targeted by Q3 2022, subject to necessary legal and regulatory requirements.
Metrics - where’s the value?
Given the negative trajectory of the sector during the first half of the year, understanding where the value can be found in the mining royalty space is really important. Below we examine a number of metrics to assess how companies' relative market values compare.
Net Profit Margins
Mining royalty and streaming businesses are generally considered to be high-margin businesses but the net profit margin (NPM) between these businesses in 2021 varied considerably.
High iron ore prices during 2021 meant that bulk royalty businesses such as Labrador Iron Ore Royalty Corp and Deterra Royalties Limited were the highest margin businesses, with NPM of 66% and 65%, respectively (Figure 1). Given that iron ore prices are lower than they were during the first part of 2021, we would expect to see these businesses have lower margins in 2022.
Margins for precious metal-focused royalty business varied from 63% for Wheaton Precious Metals Corp (LSE:WPM, TSX:WPM, NYSE:WPM) to 24% for Sandstorm Gold Ltd (TSX:SAND), while diversified royalty companies, such as Altius Minerals Corporation (TSX:ALS) and Anglo Pacific Group PLC (LSE:APF, TSX:APY, OTC:AGPIF) had NPMs of 47% to 44%, respectively.
Only one Large-Tier, Osisko Gold Royalties (TSX:OR), and one Mid-Tier, Nomad Royalty (TSX:NSR) company Ltd, made losses during 2021. All the Majors were profitable, while all the Juniors made a loss.
Figure 1: Net Profit Margins
Source: MMRC, priced 21/06/2022
Price-to-Sales Ratio
The price-to-sales ratio demonstrates how the market values every dollar of a company's revenue. The lower the ratio the more attractive the company’s market value is relative to the revenue it generated.
The Majors have price-to-sales ratios, based on full-year 2021 (FY21) results and current share prices, that vary from 10.9 for Royal Gold, Inc. (TSX:RGL) to 20.6 for Franco-Nevada Corporation (TSX:FNV) (Figure 2).
Large Tiers have price-to-sales ratios that vary between 3.4 for Labrador Iron Ore Royalty Corp and 15 for Deterra Royalties Limited.
For the Mid-Tiers, the ratio varies from 4.5 for Anglo Pacific Group PLC (LSE:APF, TSX:APY, OTC:AGPIF) and 17.2 for Nomad Royalty company Ltd.
For the Juniors the ratio varies widely. Two companies didn’t generate any revenue in 2021, Uranium Royalty Corp and Electric Royalties Ltd (TSX-V:ELEC, OTC:ELECF). Of those that did generate some level of revenue the ratio varies from 11.9 for Elemental Royalties Corp to 2,240.8 for Gold Royalty Corp (NYSE-A:GROY).
Figure 2: Price-to-Sales Ratio
Source: MMRC, priced 21/06/2022
P/NAV Ratio
The P/NAV ratio demonstrates how much investors are prepared to pay per for each dollar of net assets on the balance sheet. The lower the ratio the more attractive the company’s market value is relative to the book value of its net assets, though if a company has over-inflated the book value of its net assets the ratio will be artificially low. This data comes from each company's latest set of results and the current share price.
The P/NAV ratio for the Majors varies from 2.7 for Royal Gold Inc. and Wheaton Precious Metals Corp (LSE:WPM, TSX:WPM, NYSE:WPM) to 4.3 for Franco-Nevada Corporation (TSX:FNV) (Figure 3).
For the Large-Tiers it varies from 1.2 for Osisko Gold Royalties (TSX:OR) and 32.1 for Deterra Royalties Limited.
The ratio for the Mid-Tiers varies from 1.1 for Anglo Pacific Group PLC and 1.9 for Maverix Metals Inc (TSX:MMX).
Once again there is a large variability for the Junior royalty companies, with the ratio varying from 0.7 for Gold Royalty Corp. to 6.3 for Morien Resources (TSX-V:MOX).
Figure 3: P/NAV Ratio
Source: MMRC, priced 21/06/2022
Forward-looking Yields
The forward-looking yield for FY22, based on current prices and guided dividend distributions, is the last metric we examine in this article. The majority of yields are relatively low at present but there are some exceptions for investors looking for cash flow from their investments to examine.
Labrador Iron Ore Royalty Corp is currently the highest yielding mining royalty company and Large-Tier with a forward-looking yield of 6.43%, Anglo Pacific Group PLC is also standing out from its Mid-Tier peers on a yield of 4.73% (Figure 4).
Of the Majors, Wheaton Precious Metals Corp is the highest yielding stock at 1.56%, while Gold Royalty Corp. is the only Junior in the sector paying a dividend and is currently trading on a yield of 1.48%.
Figure 4: Yields
Source: MMRC, priced 21/06/2022