Metalla Royalty & Streaming (CSE: MTA; US-OTC: EXCFF) is buying three royalties and one stream — two of which are on producing mines — from Coeur Mining (NYSE: CDE) in a deal worth US$13 million.
In exchange, Coeur will receive 19.9% of the junior’s shares. The balance of the purchase price will come from an unsecured convertible debenture bearing interest at 5% a year.
The assets in Australia, Argentina, Ecuador and Chile are owned by CBH Resources, Pan American Silver (TSX: PAA; NASDAQ: PAAS), Dynasty Metals & Mining (TSX: DMM; US-OTC: DMMIF) and Regulus Resources (TSXV: REG).
Metalla’s strategy is to target smaller royalties and stream to avoid competing with larger companies, such as Franco-Nevada (TSX: FNV; NYSE: FNV), Silver Wheaton (TSX: SLW; NYSE: SLW), Royal Gold (NASDAQ: RGLD), Osisko Gold Royalties (TSX: OR; NYSE: OR) and Sandstorm Gold (TSX: SSL; NYSE: SAND).
“There was an opportunity we saw in cultivating the smaller assets in the space — typically transactions with a value per asset of less than $10 million,” Metalla’s president Brett Heath says. “By focusing on the more accretive transactions on the smaller end, we can build out a diversified portfolio of royalties and streams with much more attractive returns, without competing with the majors. This will allow us to return more value to shareholders.”
The portfolio Metalla is acquiring from Coeur consists of a silver stream from the producing Endeavor zinc-lead-silver mine, owned by CBH Resources in Australia; a 1.5% net smelter return royalty (NSR) on Dynasty’s Zaruma gold mine in southern Ecuador; a 2% NSR on Pan American Silver’s Joaquin project in Argentina; and a 1.5% NSR on Regulus’ Puchuldiza project in northern Chile.
Heath expects the silver stream from the Endeavor mine in New South Wales will generate cash flow of US$2 to US$2.5 million in 2017 and US$3.8 to US$4.2 million in 2018, based on an average silver price of US$17 per ounce. The forecast is based on the underground zinc, lead and silver mine delivering 987,500 oz. silver over the next 24 months.
Metalla has the right to buy 100% of the silver produced, up to 20 million ounces. Endeavor has a mine life extending to 2019.
“The Endeavor mine is a short mine life, and we were OK with that because so much of our portfolio is future growth, so we needed something that was a near-term way to get cash flow with exposure to gold and silver, and this fit perfectly,” Heath says. “If the mine had had a 15-year mine life, that would probably have been a purchase of more than $100 million, and would have gone to one of the bigger companies.”
“The deal works great for Coeur because they can monetize non-core assets while holding on to all the upside as a Metalla shareholder.”
Heath also likes the 2% NSR on Pan American Silver’s Joaquin project, which Pan American recently bought from Coeur for US$25 million. The project in Argentina’s Santa Cruz province is 145 km from Pan American’s Manantial Espejo silver-gold mine. The Joaquin project has measured and indicated resources of 15.7 million tonnes grading 128.9 grams silver per tonne and 0.12 gram gold per tonne for 65.2 million contained oz. silver and 61,100 contained oz. gold.
The project “looks to be in development in a year or two,” Heath says. “It’s a near-surface, open-pittable deposit that is within trucking distance to the plant at Manantial Espejo, so the timing and economics to put the Joaquin project into production should be attractive to Pan American.”
Dynasty’s Zaruma gold mine, 3 km north of the town of Zaruma in southern Ecuador, has a measured and indicated resource of 2.6 million tonnes grading 12.97 grams gold per tonne for 1.09 million contained oz. gold, and an inferred resource of 3.7 million tonnes grading 12.2 grams gold for 1.45 million contained oz. gold.
“The resource and grade of Zaruma allows for the potential of a long-life asset,” Heath says. “The new management is working through the issues the company previously had, and so far it looks positive.” The mine produced 72,430 oz. gold and 152,292 oz. silver between 2012 and 2014. Dynasty has recently restructured and is trial mining at lower levels, Metalla says.
Finally, Regulus’ Puchuldiza project in the Andean Plateau in Chile has an inferred resource of 30.07 million tonnes grading 0.71 gram gold for 686,000 contained oz. gold.
The Puchuldiza royalty is subject to a right of first refusal and is capped at US$5 million.
“The Coeur transaction was great for us and Coeur,” Heath says.
Before the Coeur deal, Metalla had already built up a number of other royalties and streams.
The company has a 2% NSR on Goldcorp’s (TSX: G; NYSE: GG) Hoyle Pond Extension properties that include the leased mining rights in Hoyle township, east of the Hoyle Pond gold mine. The royalty is payable after meeting the initial 500,000 equivalent oz. gold threshold.
Metalla also has a 1.5% NSR on the West Timmins extension properties, owned by Tahoe Resources (TSX: THO; NYSE: TAHOE). The royalty is on the Wallingford claim, which lies on the extension of the Timmins deposit, which is part of the West Timmins mine. Tahoe acquired the mine from Lake Shore Gold in April 2016.
In addition, Metalla has a 15% stake in Silverback, a private company that owns 100% of a silver stream on the New Luika gold mine in southwestern Tanzania. Silverback bought the silver stream to provide the operator with construction financing.
Under Silverback’s streaming agreement, silver is bought at 10% of the spot price, and the stream continues until 2026. The streaming agreement covers 100% of monthly silver production up to 11,250 oz. and 80% of silver production thereafter. The mine has produced since 2012. As of April, Metalla had received its first delivery of 8,008 oz. silver for production between October 2016 and March 2017.
“We’re expecting a significant amount of cash flow from the Endeavor operation and the New Luika gold mine stream, so this will make the company cash-flow positive and provide more capital to buy more streams and royalties,” Heath says, estimating cash flow in 2018 of up to $6 million.
Heath notes that in the current market there are many opportunities to make deals that are too small to be of interest to the larger royalty and streaming companies, but are just right for Metalla’s more humble aspirations.
“You’re going to see more deals in the future that are similar to this,” Heath says of the Coeur transaction. “We don’t want to grow in deal size and compete with lower and lower returns at the higher end. If you look at what the bigger deals are costing the bigger royalty and streaming companies, the internal rates of return are normally in the single digits.”
Heath notes that eventually the company wants to pay out half of its cash to shareholders as dividends and spend the rest on acquiring new assets, of which there are many, he says.
“If we can consolidate 10, 15 or 20 of these royalties and streams, we’ll have a portfolio of assets that will be very attractive for a bigger company to consolidate all of them. In the meantime, we will work towards our goal of paying a dividend to create a company that has a real yield to gold and silver prices.”