ROYALTIES - NOT JUST AS GOOD AS GOLD, BETTER THAN GOLD!
There's no doubt about it! Royalty companies are the best way to gain exposure to gold... a picture is worth a thousand words (and maybe your dollars, too!)
You could easily buy all 6+/- gold royalty companies and do very well as evidenced by the chart above. There aren't many players in the royalty space and for good reason. c/o 31Floors on SiliconInvestor:
"There are significant barriers to entry or there'd be 50 today not less than 10. To paraphrase Bill if flubian was the hot commodity today you'd have 200 flubian exploration companies on the Venture next week. Why is there less than 10 royalty companies? Because its tough to get a package together esp now."
Given that the pond is small, the big fish huge and the little fish tiny. Does size matter?
I've recently observed a trend amongst the major royalty companies. The reality is as Lassonde (FNV) says, there aren't any notable deposits of both quality and size to be found. Without those kinds of projects there just aren't many mega deals to be had - deals large enough to tip the scales for these already richly valued royalty companies. The only really profitable deals out there are in the smaller deposits. The aforementioned trend I've observed is that larger, lumbering royalty players are trying to re-capture momentum by gaining exposure through smaller players that can take advantage of the growing small market segment - in the $XX million per deal range. Lassonde's Franco-Nevada (FNV) has allied itself with Gold Royalty Corp (GRO) in a $15m royalty acquisition partnership while Sandstorm Gold (SSL) has purchased a controlling interest in new-comer Premier Royalty (NSR). Royal Gold recently raised $325m and may be positioning itself to partner with a smaller royalty company, just like competitors FNV and SSL.
I think Nolan Watson stated clearly what they want with this strategic relationship:
“Premier Royalty has a base of existing royalties and a strong team that is capable of growth through accretive acquisitions. Owning a significant interest in Premier Royalty gives Sandstorm continued exposure to smaller stream and royalty acquisitions, allowing Sandstorm’s team to focus on transactions that are material to our shareholders. Today’s acquisition is the beginning of a strategic relationship between Sandstorm and Premier Royalty, one that we believe will be beneficial to shareholders of both companies.”
These developments are worth pondering - it's very instructive of where the growth will be concentrated in the royalty sector.
Enter AMERICAS (GOLD) BULLION ROYALTY, formerly GOLDEN PREDATOR (T.GPD).
AMB owns a portfolio of 34 high quality royalties, nearly all of which are located in the United States with the bulk of the royalties gross, payable in-kind (gold not paper), and with no buy back provisions. Operators are also of the highest quality, including Barrick and Midway.
Better Than Gold Royalty Corp (GRO)
GRO's two largest royalties - 0.5% NSR on Metanor's Bachelor Lake and a 1% GSR on Victoria's Eagle. The Bachelor Lake NSR was originally 1%, half was recently bought back demonstrating the importance of having no buy-back provisions in place. My feeling is that GRO is being very optimistic if they expect VIT to be mining gold by 2015. VIT will be lucky if Yukon Energy creates the capacity to support Eagle by 2016. If this company intends to hang it's hat on those two royalties, Good Luck! In any event, I rather generously reflected GRO's 2015 production expectations on the charts that follow.
Better Than Premier Royalty Inc. (NSR)
Over 60% of NSR's royalties are paid in rapidly inflating Argentine Pesos/South African Rands! Venezuela just devalued their currency by over a third and Argentina/SA are in no better of a position. This currency exposure will prove to be a real drag on NSR's balance sheet as AMB's continues to improve, thanks to the in-kind royalties paid on their high quality North American properties. The charts that follow also clearly show NSR with the richest valuation of the three newcomers, further limiting upside.
AMB is set up to provide exceptionally low risk exposure to gold with the most upside. It's not even close!!!
AMB's flagship royalties include a 1% GSR on Barrick's Bald Mountain, 4% GPR on Barricks Duke-Trapper-Royale, as well as a 4% GPR on Midway's Pan and Gold Rock properties, respectively. All of which are takeable in-kind, from projects located in Nevada, with access to infrastructure, a skilled labor-force and well advanced towards production.
I am assuming that AMB's entire EV of $55m is being attributed to just the top 4 royalties with no value given to GPD's high quality exploration or development assets - which features near-term producer Brewery Creek and including the largest land position in the Yukon. I also attribute zero value to the over thirty other royalties in the pipeline.
MOST AGGRESSIVE GROWTH PROFILE
BEST VALUE PROPOSITION
Using EV/attributable oz as a simple measure of relative value. GPD is currently being valued at about $17,000 per 2014 attributable oz vs. NSR's $21,000. The difference is clearer the further out you project. GPD is currently being valued at about $7,000 per 2016 attributable oz vs. NSR's $17,000.
Jennings Capital analyst Kwong-Mun Achong Low
"Given this scarcity and strong investor interest in the royalty space, we do not expect Golden Predator to remain undervalued for long," he concludes, adding that now is a good time to get into the stock before the wider investor base realizes the value of the company's new focus"
Data as of 2/8/2013.