While investors holding paper in gold explorers and producers have largely been disappointed recently, it has been an entirely different story for investors in gold royalty companies.
An index of royalty company’s has greatly outperformed not only a basket of producers (as represented by the Market Vectors Gold ETF) but also the spot price for the yellow metal.
“I think what we are seeing is that producers and explorers are having their valuations beaten down by rising costs, whereas royalty company’s are immune from those costs and are able to generate alpha for investors on the basis of making the best transactions,” Abraham Drost, president and CEO of Premier Royalty (NSR-T) says.
Premier’s emergence on the scene is a sign that those higher returns are drawing not only more investors, but also issuers that have built a reputation on the mining and exploration side. Premier traces its origins back to Ewan Downie, of Wolfden Resources fame.
The Northern Miner sat down with Drost in a suite in the Trump Tower overlooking the glimmering Toronto skyline away from the buzz of the Prospectors and Developers Association of Canada (PDAC) convention.
“Ewan was approached about some royalties that he had down in Nevada, and he got to thinking that if someone else wants them so bad, then perhaps he should look into the whole royalty thing a bit more,” Drost explains.
With Drost having chalked up recent success in building up the Downie connected Sabina Gold and Silver (SBB-T), which he followed up with a successful stint as president of Sandspring Resources, his selection by Downie was easy.
“The vision was Ewan’s and I executed on it,” Drost explains.
That execution has consisted of building up a portfolio of roughly 7,000 oz. of gold attributable NSRs. If the portfolio remains the same size, that number will dip slightly going into 2014 as two mines in Brazil shut down before the San Andres mine in Honduras and Emigrant Springs in Nevada provide more ounces and get the company back above 7,000 oz. heading into 2016.
With roughly $31 million in the bank, however, Premier is set to add to its totals when the right deal presents itself.
“Over the next two years we plan to get to 10,000 oz.” Drost says. “We will look at any stable jurisdiction where there is current production.”
Premier currently has royalties on mines in Nevada, South Africa, Timmins, Argentina, Honduras and Brazil. And unlike its largest investor, Sandstorm Gold (SSL-V), Premier is focusing exclusively on NSRs that are attached to producing mines.
In contrast, Standstorm has been strong in the gold stream space. The distinction between the two is that gold streams are acquired earlier in the development phase, thus providing the acquirer with greater risk but also a higher potential return to compensate for that added risk.
Drost explains that the value-add that Premier bring comes from its teams geological expertise and its ability to identify NSRs that are available on projects with the potential to add plenty of more ounces down the road.
As for competition in the royalty space, that comes from senior royalty companies such as Silver Wheaton (SLW-T, SLW-N), Franco-Nevada (FNV-T, FNV-N) and Royal Gold (RGL-T, RGLD-Q). But Drost says the royalties that those firms target are of an order of magnitude larger than what Premier is targeting.
That doesn’t mean, however, that Premier has the smaller scale royalty landscape all to itself. Drost explains that competition comes largely from senior gold producers that are looking to extinguish outstanding royalties on properties that are often held by early stage owners and prospectors.
On the flip side, however, are juniors and smaller scale producers, which may be looking to carve out a new royalty in order to finance expansion or some other higher capex project.
As for the where the current portfolio of NSRs came from: 75% of royalties are from third parties, 15% come from senior producers and the remaining 10% come from juniors with stressed operations.
And while currently all of those royalties are on gold, going forward Premier has flexibility in acquiring royalties on other metals. That is because the valuation premium that is generally afforded to gold pure plays is retained only when a company generates roughly 80% of revenues from gold, Drost says.
With Premier generating 100% of revenues from the yellow metal, it could conceivably take on 20% of revenue generation from another metal.
“Should we add other metals to the mix? I’ve seen enough to know you go to keep an open mind,” Drost says.
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