Streaming and royalty financing deal flows are predicted to grow significantly over the next decade, and move beyond the precious metals market. Gold and silver now make up 96% of the royalty market share, with cobalt, palladium and copper making up 4% between them.
Despite streaming and royalty deals only making up a fraction of overall debt and equity financing in the mining industry, the current reality is that the royalty space has far outpaced the mining sector.
In 2006, streaming and royalty companies were a $5 billion space in mining, and now have grown to a $60 billion space based on the value of streams, says Frederick Bell, CEO of Elemental Royalties.
McKinsey & Company reported the sector has grown more than seven-fold over the last ten years to reach more than $15 billion, based on the value of deals signed, in 2019.
Bell, 34, a University of Edinburgh alumnus, co-founded Elemental Royalties (TSX-V: ELE) in 2016 following his role as Managing Director of gold exploration company Goldcrest Resources plc, where he assembled a portfolio of gold licenses in an unexplored gold belt in northeast Ghana to take to AIM.
Bell was also General Manager of an ASX-listed uranium company Resource Star at the age of 25. He received the ‘Young Rising Star’ Award at Mines & Money 2018 and is on the Committee of Young Mining Professionals in London.
Bell’s foray into mining came around through happenstance, he says, through junior AIM explorers he met in university while gaining general business experience. Soon after graduating, and while working as a real estate analyst, the opportunity to join ASX-listed Resource Star in Australia as General Manager came and Bell has never looked back.
“We had some really great projects, but what I learned in mining is that if you are in an early exploration stage project – it was really hard to raise money. You need an alignment of market conditions,” Bell says.
Bell began thinking critically about the mining exploration business model – the often brutal nature of the exploration space and how, no matter how good a project is – how things can fall apart with market changes affecting metals prices, or a change in government affecting permitting processes.
Based on his experience in the space, he believes one of the largest risks for an exploration junior is dilution, both to its interest in the asset through Joint Ventures and earn-ins, and also equity dilution along the 5-10 year timeline to cash-flow that most exploration projects require.
Exploration juniors are reliant on raising money to advance their projects and grow their companies, whereas royalty companies can use more creative, and often less dilutive financial instruments to acquire more royalties.
For a royalty company by contrast, the power is in the perpetuity – when you buy a 1% Net Smelter Royalty – you have it as long as the mine exists, and by leveraging the revenue across multiple assets a royalty company can become increasingly diversified.
Elemental Royalties’ management team consists of a blend of youth, and industry veterans. Its first royalty was acquired from Acacia Mining, now part of Barrick Gold again.
“I put the team together myself, it was a very small team – one of the things I realized when I was doing it, was raising risk capital for exploration in modern times, realistically, it might take you ten years to get the mine into production,” Bell remembers.
Bell wanted to continue working in mining, but wanted to set up a business model that avoids the risks and issues encountered when setting up a junior exploration company.
Elemental, which remained private until listing in July 2020, has a track record of royalty revenue from producing assets from day one.
The last deal closed in February 2021 was for a portfolio of three gold royalties in Australia from a wholly owned subsidiary of South32 Limited for $55 million with South32 becoming Elemental’s largest shareholder with just under 19% on completion. The transaction was transformative for Elemental – it adds a 2% NSR royalty over Australia’s newest gold mine, Karlawinda, which is expected to have first gold pour and start contributing cashflow from Q2 2021 and tilts the Company’s portfolio towards a Tier-1 jurisdiction in Australia.
The company’s revenue for 2020 was $5.1 million, and the projection for 2021 is approximately $7.5 million. As an $80 million market cap company, with cash-flow from multiple assets and nine different royalties with different operators on different continents, Bell says Elemental is as diversified as a $1 billion miner.
A couple of years from a start up, Elemental has exposure to five producing assets, including a 1% NSR royalty on Endeavour’s Wahgnion gold mine in Burkina Faso and a 2.25% NSR royalty on Austral Gold’s Amancaya gold mine in Chile. The latest deal with South32 adds a 2% NSR on Capricorn Metals’ Karlawinda gold project in Western Australia, targeting first gold pour in Q2 2021.
“That’s what differentiates us – and if you’re an investor, you don’t need to be an expert in the politics of a certain country, which you might if you’re investing in a single asset company. If you have a number of operators in a number of jurisdictions, you don’t have all your eggs in one basket. You have multiple chickens laying multiple eggs, and that is why the royalty model is so powerful – it’s perpetual exposure to diversified, growing assets with no ongoing costs.”
With no caps on royalties, holders get paid every time a miner produces an ounce of gold, and once invested, the payments continue for each year of production in perpetuity to the end of the life of the mine.
That is why, Bell says, the royalty companies have outperformed the mining industry.
Imagine buying an uncapped royalty stream on a 30 year producing gold mine when the gold price was $300/ounce.
The royalty model can provide financing to the mining companies themselves while the holder is not exposed to the risk of capex or operating cost increases – a win-win scenario.
“The key differentiator with Elemental was we started a royalty company that had cash flow from day one,” Bell says. “We are already unlike 99% of other companies in the mining industry. If you look at the TSX-V you’ve got maybe 2,000 companies in the mining space – it might be a 100 producing companies, but Elemental – starting out from day one we have revenue from different operating mines with quality operators.”
“We can offer all the downside protection of diversified, top line, non-diluted revenue, but we also have a big runway of growth.”
The preceding Joint-Venture Article is PROMOTED CONTENT sponsored by Elemental Royalties Corp., and produced in cooperation with MINING.com. Visit www.elementalroyalties.com for more information.