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Dramatic uplift in market interest in royalty companies

The mining royalty sector is heating up with the average share price for a listed mining royalty company up 31% in the past twelve months

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Mining royalty companies have seen a substantial uptrend in the value of shares traded over the past twelve months, doubling in a relatively short space of time (see Figure 1). This increased interest has driven share prices up by an average of 31% in a year - the average excludes one outlier; including the outlier, the average is 78%.

Mining royalty shares

 Figure 1: Total value of Royalty Company shares traded over 12 months.

Mining and Metals Research Corporation Ltd.

Alongside this dramatic uplift in market interest, there has also been a series of new entrants, including Nomad Royalty Company Ltd (TSE: NSR), Vox Royalty Corp (CVE: VOX) and Trident Royalties PLC (LON: TRR) all going public during the past twelve months. Elemental Royalties (private) is poised to be the next new player in the space and is in the process of a proposed RTO after raising C$24mln.

Royalty and streaming majors have performed very strongly with Franco Nevada Corp (NYSE:FNV) up 71% in 12 months, Wheaton Precious Metals Corp (NYSE: WPM) up 95% and Sandstorm Gold Ltd (NYSE: SAND) up 71% (see Figure 2).

Figure 2: Share Price Chart of Selected Royalty and Streaming Majors

Mining and Metals Research Corporation Ltd.

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.

A royalty agreement typically involves the holder providing upfront finance to the mine or project and in return, the holder of a royalty is entitled to receive payments that can be based on a number of operational or financial metrics. The holder of the royalty has no ongoing liability to the mine, or owner of the mine, and is therefore exposed to the positive cash flow from the operation without any additional negative cash flow beyond that originally outlaid.

Royalties can also be created in return for consideration in a corporate transaction, from the sale of a mineral property, as a backstop to a dilution clause in a joint venture arrangement, or as an adjunct to a debt or equity financing arrangement.

Streams are agreements to buy a product from the mine at a substantial discount to the mineral or metal prices prevailing at the time the stream agreement is entered into, giving the holder significant upside to any uplift in the streamed metal. Streams are often focused on a by-product of mining such as silver produced from a base metal mine.

The holder of the stream will normally make an upfront payment to assist in the development or expansion of a project, reducing the amount of debt and equity the projects owners require to advance the asset.

As a result of their structure, mining royalties and streams have a number of advantages when compared to traditional equity investments, including ranking senior in the capital structure; no exposure to increases in capital cost or operating costs of the mine; exploration expense and capital investment made by the owner of the operation add value to the holder of the royalty at no cost or dilution; they provide direct exposure to commodity prices; increased scale and diversification of the royalties further enhance value; ability to increase returns through low-cost leverage.

It’s not that long ago that royalty and streaming-based financings were considered “alternative financing” but the attractiveness of the model for both the vendor and the purchaser means it is now a much more mainstream method of financing a mining development project.

When you consider that the operating margins of royalty and streaming companies are typically three or four times larger than those of mining businesses it’s not surprising that royalty and streaming companies tend to trade at very attractive underlying earnings (15-30x) and net asset value (1.25-2.0x) multiples.

Quick facts: Wheaton Precious Metals

Price: 64.79 CAD

TSX:WPM
Market: TSX
Market Cap: $29.09 billion
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