Streaming and Royalties
Juniors seek alternative financing options in tight financial conditions
Toronto has a robust ecosystem of companies innovating in the royalty and stream segment of mine finance. The fundamental model of these companies is useful to the mining sector because throughout history there have been many periods when capital availability was limited. The royalty sector has played an important role in terms of advancing assets and providing capital that only gets repaid when the mine does well. Unlike debt, which can be a costly burden when starting up an asset, a royalty or stream is leveraged over the life of mine, and royalty companies only do well when the miner does well.
From an investor perspective, they are also an attractive way to gain exposure to mining. This is because royalty financiers are generally able to sidestep the issue of excessive dilution, as they are insulated from the cost inflation that is commonly encountered by junior mining companies.
Franco-Nevada is a royalty and streaming company that pioneered this model under its founders Pierre Lassonde and Seymour Schulich in the 1980s and 1990s The business was subsequently involved in a three-way merger between Newmont, Normandy, and Franco-Nevada, but since Newmont decided to spin the business out at the end of 2007, Franco-Nevada has traded as its own entity. Franco-Nevada president and CEO Paul Brink explained that what changed in the ensuing period was the concept of streaming. The biggest streaming deals have all been on big copper mines, where there is a precious metal by-product. “The arbitrage in providing that sort of capital is very material and streaming has grown to be a mainstream way of financing any project that has got a precious metal component,” Brink said.
Brink highlighted that the current market is presenting royalty and streaming companies with a plethora of attractive opportunities driven by a high inflationary environment, tight equity markets and dwindling capital available from mining focused institutional investors. “A number of opportunities that we are currently working on are situations where companies have had cost overruns, they need incremental capital, and it is extremely hard to get that in the equity market at this stage. Royalty and streaming companies are well placed to provide that incremental capital,” Brink affirmed.
“Origination is the better environmental thing to do. By funding a carbon offsetting opportunity, it allows us to generate a better return with a lower risk profile relative to buying an existing stream of carbon offsets.”
Alex Pernin, CEO, Star Royalties
Newcomers Make Their Mark
A more recent entrant into the streaming and royalty business is Triple Flag Precious Metals, which had its IPO on the NYSE in 2022 after listing on the TSX one year prior. The company has achieved a 26% compound annual growth rate in GEOs over the past five years, and today, founder and CEO Shaun Usmar highlights that Triple Flag is seeing its busiest pipeline since its inception. The group is also responsible for one of the marquee transactions in 2022 when it agreed to offer US$606 million to acquire emerging gold royalty and streaming peer Maverix Metals. “It is a sensible opportunity to create greater scale, diversification, critical mass, and unlock meaningful annual synergies, resulting in an accretive transaction that continues our growth trend,” Usmar commented.
The combined entity will mean Triple Flag now oversees 228 assets in its portfolio, 93% of which being gold and silver focused by value. Of those assets, 29 are producing, and 82% lie in favorable jurisdictions like Canada, Australia, the USA and Latin America.
Despite much hype around energy transition metals, one of the hallmarks of Triple Flag’s strategy is its disciplined focus on the precious metals streaming and royalty model and commodity exposure. This is in part because Usmar sees an advantage in avoiding competition over the primary products of the companies Triple Flag finances. Fortunately, a very high proportion of ore bodies are polymetallic, and there often exists a precious metals byproduct, that is more valuable to Triple Flag investors than to the miners targeting battery or base metal exposure. “If Triple Flag is not streaming or doing a royalty on the primary product, and instead we are taking a byproduct that the mining company and its shareholders care less about, then we can provide them with a more competitive cost of funding, unlock value not otherwise realized, and help share the risk on new mine developments or acquisitions, for example. That can be highly symbiotic and unlock additional value for all stakeholders,” he concluded.
Vox Royalty Corp. was founded on the idea that there were overlooked royalty opportunities on some very attractive assets that could provide an investor with exploration upside, production expansion potential, commodity price leverage, and inflation hedge capability. The royalties that the company identifies and acquires are often 20 - 40 years old and held by the original exploration prospector. However, they are often attached to some of the world's best mining assets. Over the past decade Vox had built out the world's largest proprietary database of these mining royalties, and Vox uses its information edge to source overlooked royalty deals. “Our sweet spot is pre-production royalties between 3 and 18 months from first production that have already been materially de-risked. That is typically where we see the most value, because once the royalty holder starts receiving checks on a royalty, value expectations tend to go up materially,” Vox Royalty Corp. CIO Spencer Cole noted. Star Royalties is another Toronto-based royalty provider that has recently developed a differentiated model with the founding of Green Star Royalties. The company was created to capitalize on the numerous opportunities, limited competition, and more attractive returns associated with carbon credit royalties, and is structured as a joint venture between Star Royalties and Agnico Eagle Mines. Green Star’s carbon credit royalties in regenerative agriculture and in forestry are both the first of their kind, and function very similarly to traditional mining royalties. They look at metrics like acres of farmland, the carbon sequestration rate, carbon price, and royalty percentage. The primary difference with mining royalties, however, is understanding carbon pricing, which varies substantially across carbon markets and carbon project types. “If a mining company has a net zero goal, you can achieve that in three ways. You can stop emitting, go through an energy transition plan, or you can purchase carbon offsets. Companies are now doing a combination of the second and third option, where they have an energy transition plan in place complemented by buying premium carbon offsets,” Star Royalties CEO Alex Pernin affirmed.
Article header image courtesy of Manitou Gold