Royalty and streaming companies have received plenty of attention from
investors over the past decade and for good reason. Their business model is
in many ways superior to that of a mining company. By paying an upfront fee
for a percentage of mine production, they get a steady flow of cash or
metals, upside potential from new discoveries, upside potential from rising
metals prices and downside protection with fixed costs. The benefits include:
1) Diversification –A streaming company has agreements
with multiple miners, thus spreading and mitigating any potential risk. The
larger companies have dozens of deals and multiple streams of income.
2) Unlimited Upside Potential – Since the deals they
secure are usually for a percentage of the mine’s production for life, the
streaming company stands to benefit immensely if new zones are discovered and
actual production comes in higher than originally forecasted. This occurs all
of the time in the industry, as drilling delineates new resources, either
increasing annual production or vastly extending the life of the mine.
3) Limited Downside Risk – While a miner may see
profit margins squeezed as the cost of production rises, the streaming
company typically has a contract for a percentage of the gold/silver
production, thus eliminating the issue of rising costs. Royalties are paid
out of top-line revenue before any operating expenses are accounted for. In
addition, the contracts usually contain a number of provisions protecting the
streaming company in the event of fraud, misrepresentation, etc. This is all
on top of the considerable due diliegence that is exercised before entering
into any streaming deal.
4) Favorable Tax Treatment – Streamers enjoy a
favorable tax situation courtesy of the Canadian Government. As long as they
reinvest their proceeds or pay it out as dividends, they are gifted with a
tax rate in the neighborhood of 0-8%. That’s a huge advantage when it comes
to net profit margin.
Enter the New Royalty Kid on the Block
Within their royalty portfolio, there is plenty of upside and growth
potential. Young-Davidson has a mine life of 17+ years, Fosterville recorded
production in 2014 and returned positive drills results in 2015, and the
Stawell Royalty commences on January 1st of 2016.
The share structure is reasonable with 118 million shares outstanding (123
million after acquisition of Mineral Streams). Van Eck owns 15% of the
company and Sandstorm owns 12%, after buying another 2% recently in the
$0.51 to $0.55 range.
AuRico Metals is a company to watch throughout the remainder of the year
and into 2016. As they build their royalty portfolio and gold prices begin
heading higher, we could see excellent returns for investors willing to snap
up shares in the early innings.
Disclosure: I do not currently own shares and I was not paid to write
this article. I may add shares to the GSB
model portfolio at some point in the near future.
