Important Factors to Consider While Evaluating Royalty Companies
It is a well-known fact that the precious metals royalty corporations offer an incredibly high rate of reward and risk in the gold market.
However, sometimes mis-pricings are caused since it is very difficult to measure the value of non-producing assets, especially for projects still in the exploration and development stage.
That’s why capital allocation and a comprehensive appraisal are so important to achieve better long-term results in this sector.
Thankfully, the low CapEx requirements and reduced operating expenses make it possible for these businesses to offer a wide upside in the bull markets and a limited downside during gold bear markets.
The precious metals (PM) royalty market is an asset-light industry i.e., for most of the royalty companies, the development and maintenance CapEx is nearly zero. There are some exceptions, of course, for the companies that work with vested interests in other companies or joint ventures.
In other words, most of the operating cash flow is available as free cash flow, making it easy to reinvest the money back in the business, repay the debt, and reward their shareholders with dividends.
Key Points to Remember
Focus on capital allocation
Every decision made by the management team reflects on the long-term returns of the business.
For example, too much dilution will reduce the cash flow per share or they could overpay for the royalties, diminishing the return on capital employed (ROCE). In order to outperform the rivals, a long-term picture of the management team is critical.
Skin in the game
Typically, decisions made by the management team are important but in the gold market, they are absolutely crucial.
Substantial ownership would mean that executive management’s interests are always aligned with those shareholders’ so make sure this is a requisite to your stock picking process.
A competitive technical team
Your emphasis should be on the long-term returns and a disciplined due diligence process is vital. A skilled and knowledgeable technical team is important because they will be responsible for dealing with at least dozens of projects for prospective royalty acquisitions every year.
A portfolio with room for growth
The diminished rate of the production must be renewed with more produced gold equivalent ounces (GEOs) from new producing royalties or from other assets. Generally speaking, the portfolio should have a large percentage of expansion stage assets with a clear path to becoming a “producing asset” in the near future. These type of assets would include projects late in the feasibility/permitting process and projects at or near producing mines.
Study the scale of the business
The market has always rewarded the lower risk of bigger companies with higher multiples. If you can pinpoint the next senior business, there is a good chance you will be rewarded with a significant return.
This article contains the author's opinions. These are not investment-related recommendations. Do not consider the article as any type of commercial solicitation or an investment product offer.
About the Company
Ely Gold Royalties Inc. is a Vancouver-based emerging royalty company with development assets focused in Nevada and the Western US. Its current portfolio includes 33 Deeded Royalties and 21 Optioned Properties. The portfolio is currently generating significant revenue.
Ely Gold’s royalty portfolio includes producing royalties, fully permitted mines, mines under construction and development projects that are being permitted for mine construction.