Gold Royalty Corp. (NYSE:GROY) Q3 2023 Earnings Conference Call November 15, 2023 11:00 AM ET
Company Participants
Joanne Jobin – IR.INC, Investor Relations
David Garofalo – Chief Executive Officer, President, Chairman and Director
Peter Behncke – Manager, Corporate Development and Investor Relations
Andrew Gubbels – Chief Financial Officer
Joanne Jobin
Good morning. I’m your host, Joanne Jobin, and I’d like to welcome you to the Gold Royalty Town Hall Forum hosted by VID Media. Today’s Town Hall will be focused on Gold Royalty’s recent quarterly announcement and will be hosted by David Garofalo and Peter Behncke, Manager, Corporate Dev and Investor Relations; and CFO, Andrew Gubbels, will join us at the end for Q&A.
After the presentation, I will be delighted to moderate submitted questions from our audience. Now a few words on the company. Gold Royalty Corp. is a precious metals-focused royalty and streaming company offering creative financing solutions to the metals and mining industry. It currently has a diversified portfolio of over 190 royalties located in mining-friendly jurisdictions throughout the Americas.
The company’s business model includes acquiring royalties, streams and similar interests at varying stages of the mine life cycle to build a balanced portfolio, offering near, medium and longer-term attractive returns for investors. [Operator Instructions] And please ensure that you fill in the short questionnaire at the end of the presentation. This really helps us and the company communicate more effectively with you in the future. And before I turn it over to the team, please note, the forward-looking statement at the beginning of this presentation.
Gentlemen, the stage is yours.
David Garofalo
Well, good morning and good afternoon as the case may be to everybody. Thank you for attending our Third Quarter Town Hall. I’m delighted to walk through our quarterly results and then hand it over to Peter to walk through the advancements on our prolific and diverse portfolio of royalties. Our operators have been very busy both on the exploration and development fronts of the stocks to talk about today.
And what’s clear from our Q3 financial results is that, we’re very much at a tipping point right now. For the first time, we were free cash flow neutral as we drove down our cash operating cost by 50%. Crystallizing synergies from the mergers we completed in the first year of our existence. There are three companies that we took over. And we went through an extensive post-merger integration period. We’ve drove in a lot of the redundant costs out of the business, and that’s why you’ve seen such an appreciable improvement in our operating cost profile.
We also saw a 48% increase in our total revenue land and agreement proceeds. And we’re poised to be significantly free cash flow positive in 2024 with the startup of Cote next year, which, when fully producing will be Canada’s second biggest producing gold mine. And as we saw during the past quarter, they reported IAMGOLD, the operator reported over 90% physical completion of the property. They expect to have about 5 million tonnes or about six months of production of broken ore at the mouth of the mill.
So they’re in an excellent position to hopefully execute on a smooth ramp-up and significant free cash flow generation — revenue generation or a royalty over the course of 2024, which represents a significant step change for us in our total revenue profile and again, drives us into free cash flow positive territory. As we stated in our presentation, our company’s operators, Agnico Eagle, i-80 Gold, Blackrock Silver, all announced material positive developments on their respective projects over the course of the quarter as well, which Peter will get into in a bit more detail in his presentation.
We’re very busy on the acquisition side as well. We continue to supplement what’s one of the most prolific and diverse portfolios, not just in the junior royalty space, but in the royalty space generally. We’re approaching over 240 royalties in the portfolio with the acquisition of 20 royalties in this past quarter, over 20 royalties, in fact. And we did it in a very creative way, recognizing the capital is scarce in the sector right now. As we’ve had to be creative in terms of where we’ve acquired it.
We acquired a producing copper silver royalty on the Cozamin mine in Mexico operated by Capstone, a large-cap copper producer based in Canada. We also acquired over 20 royalties from SOQUEM, which is the mine investment arm of the Quebec Government, and in return, SOQUEM and by extension, the Quebec Government took a strategic stake in Gold Royalty, again, expressing the confidence in the intrinsic value of our portfolio, our management team and our ability to continue to grow value, not only on an absolute basis, but on a per share basis.
And that’s going to be a very important relationship for us with SOQUEM and that, they will continue as is their investment model, to continue to invest in exploration properties in Quebec. And now we have a relationship with conduit, if you will, for any future royalty opportunities that generate from the properties they’re investing in the normal course of their business. So that’s been a very important relationship. It’s an exclusive deal. We ended up purchasing all of their royalties from their existing portfolio and return for shares in Gold Royalty Corp.
And also, we continue to add royalties through our royalty generator model, adding two in the current quarter with significant well-capitalized operators. Again, we generate those royalties effectively for free through the sweat equity of our team, particularly in Reno, Nevada, and, in fact, we not only get those for free, we quite often get paid for them, because not only we do we get royalties and return for those properties, we quite often get option payments and option payments have been a significant component of our revenue through the first couple of years of our existence. So, it’s a strategy not only pays for itself, but actually pays profits for us while we’re generating royalties on those properties that we stake through our exploration efforts.
So we’ve been able to demonstrate. We continue to grow through all the four major legs. There’s only four ways to grow in the royalty business. You can do it through M&A, which we’ve done quite capably when we had a much stronger currency over the course of 2021. We’ve done a few third-party royalty acquisitions. That’s the way how we acquired Cote, which represents a significant leg of growth for us going forward. We’ve done project financings as well, and we do organic royalty generation. So we do all four things we think quite capably, which is unique value proposition for the small-cap royalty universe among our competitors.
What clearly was not a highlight in the quarter, and I’m the first to admit it, is, share price performance, and it has to been very, very frustrating for investors in the gold universe to see this type of gold chart and not getting the kind of performance and leverage of the gold price they should expect in a rising gold price environment. Now, gold has been range bound over the last couple of years between $1,900 to $2,000 an ounce, but it’s held in like a champ in the face of a massive exodus of capital out of virtually every other jurisdiction in the world into the US dollar.
So that exodus of capital, that flow capital into the US dollars also gone into gold, because gold has held its value against the US dollar in spite of that flight to safety to the US dollar and US treasuries in particular. And, in fact, gold is at all-time highs and every other major currency in the world. So that’s a recognition of the intrinsic value of gold.
What we haven’t seen is the kind of performance you would expect in the share prices in a rising gold price environment. And we’ve seen a significant underperformance, particularly in the last year relative to the gold price in the GDXJ Index and that’s a smaller-cap universal where we’ve seen a 20% underperformance relative to the gold price, but we’ve also seen that in the larger-cap universe.
Many of the bellwether stocks in the industry, whether you’re looking at Agnico, Newmont, Barrick are half the value that they were a year or two ago. And that’s a reflection, I think in the producer universe of declining reserves and also increasing operating costs and capital costs, and that’s eaten into their margins even as the gold prices maintain value at about $2,000 an ounce.
So, that doesn’t really make sense in the royalty universe. So royalty companies should be doing significantly better because they provide that optimum leverage, that investment model provides you that leverage while protecting you from inflation. But what I think what’ll continue to do is drive consolidation among the producers, and we’ve seen a significant amount of consolidation among the producers over the course of the last couple of years.
In fact, going back to 2018, given the shrinking pie of reserves, shrinking production profile, you’re going to start to see and continue to see the larger-cap players in the producer universe continue to consolidate. I think inevitably, you’re going to see that kind of consolidation in the royalty universe as well, because we’re at cost to capital-driven business. And what clearly has been demonstrated in the market is, scale matters.
The biggest companies in royalty sector get the bus multiples, but the biggest companies are also challenged to grow. And we think the absence of a mid-tier company represents a significant opportunity for many of the smaller-cap royalty companies in the space, including Gold Royalty to fill that void, where we can create something that’s big enough to be institutionally relevant and attract capital, but small enough to grow, because the multiples of the seniors in the royalty space are enjoying currently, imply that they have significant growth ahead of them, but they clearly do not.
They have high-quality portfolios, but are significantly challenged to grow given their absolute scale. And that’s the opportunity the smaller-cap universe can start to create in the royalty space as they continue to consolidate and create critical mass over the course of the next little while. So I’d say watch that space over the next little while. So with that, I’d like to pass it on to Peter to walk through our portfolio, our growth plans in a bit more detail, and then we’ll have some Q&A that Andrew Gubbels, our CFO and Peter and I can answer at the end of the presentation. Thank you for your attention.
Peter Behncke
Thanks, David. So, speaking to the growth that we’ve had across the portfolio, with the pro forma closing of our recently announced SOQUEM acquisition, it brings our portfolio to over 240 royalties. That’s a 13.5 fold increase in less than three years since our IPO in March of 2021, the fastest rate of growth of any royalty and streaming company in the sector. But, so you don’t think it’s just been a focus on quantity at Gold Royalty. We really have been focused on a key metric and that’s growing the underlying net asset value per share.
As David noted, when we had a stronger currency in 2021, we were very aggressive on the growth front. And to that end, we did issue stock in the context of several acquisitions, and that has been the only context that we have issued any material quantity of shares is in growing the portfolio. To that end, we’ve grown our overall gross net asset value by 5 times in less than three years, while only increasing our underlying share count by 3.5 times over the same period.
This translates into a 40% increase in the underlying net asset value per share of the business, a significant increase and a significant creation of value for Gold Royalty shareholders, albeit it has not been translated across the share price. When we look at the consensus average figures, that’s where that 0.4 times price to net asset value metric comes from.
I’d also highlight, the average price target of our seven analyst is 225% above where our current share price is. So we’ve created significant value in this business albeit it’s not being translated into market performance. But, in time, that cash flow will start to crystallize and we’ll start to see a rerating in the stock as cash flow starts to come in.
So, to that end, the overall revenue profile of the company is materially unchanged for the quarter. We saw several positive advancements on our key assets. But the big picture is really the same. Leading revenue growth within the sector, key assets well on track to enter production over the near and mid-term.
As David mentioned, expected to have 5 million tonnes of stockpile at Cote to see a smooth ramp-up in 2024, which will be a meaningful step change in our revenue profile next year. 2025 and 2026, you start to see some upside potential at the Odyssey Project, especially with the internal zones and the potential incorporation there. And then assets like Granite Creek, REN, Fenelon supplementing our revenue profile towards the end of the decade.
One thing that we found very encouraging this quarter, was the continued efforts on our cost savings, 50% year-over-year decrease in cash operating costs in Q3 2023 and that really translates well to this revenue profile chart. Every dollar that you see in revenue growth is driving towards the bottom line as we maintain that disciplined approach to our expenses.
So getting into the portfolio in a bit more granularity, as I mentioned, largely the main assets, the core assets that are driving the value of our business are on track and unchanged. We did supplement our cash flowing end of the portfolio with the addition of Cozamin this quarter. But Cote, Odyssey, REN are the true value drivers of the business over the next several years.
The SOQUEM portfolio primarily fits into the green exploration bucket, albeit with very strong operating partners and in one of the best mining jurisdictions in the world. A bit more detail on the recent acquisition. The SOQUEM portfolio is just north of 20 royalties, all located in Quebec with quality operating partners such as IAMGOLD, Agnico Eagle, Osisko Mining, Probe and several others.
Interestingly, with this portfolio, there was CAD18.2 million in associated milestone payments and buyback proceeds. So relative to our very attractive bargain purchase price of CAD1 million in Gold Royalty stock, we have the potential to benefit with multiples of that in terms of proceeds from these buybacks and milestone payments before we even consider the exploration and the optionality associated with the remaining royalty after those buybacks has been exercised.
It’s primarily a gold-focused portfolio and a few of these assets do have underlying resources. But for the most part, they are earlier exploration stage, but I’ll reiterate, they’re great operating partners, well-funded operating partners to explore these assets and then prolific mining jurisdictions, a long trend with significant assets such as the Detour Lake Mine or near Val-d’Or, near like to Canadian Malartic, Quebec and that prolific district as well.
As part of the consideration, SOQUEM is entitled for 50% of any potential buybacks or milestone payments that still leaves Gold Royalty with net CAD9.1 million in potential proceeds, again, relative to a $1 million purchase price, a very attractive tuck-in and creative way to continue to grow our portfolio.
Now moving on to the organic growth associated with the portfolio. I wanted to dive into some of the key assets and some of the advancements we saw in Q3. At Odyssey, Agnico Eagle has continued to aggressively explore the Odyssey South deposit, specifically infill drilling at the internal zones, which a majority of those are towards the north of Odyssey South, between the Odyssey North and Odyssey South deposit, which lies underneath our royalty coverage area.
So we’re very bullish on Agnico, delineating a larger resource of the internal zones, and they’ve continually emphasized that the internal zones represent upside to increase production from the underground during the transition period. The transition period being 2024 to 2028 when the Canadian Malartic complex shifts from open pit to underground, it’s currently operating as both an open pit and underground operation.
The key high-grade deposit at the Canadian Malartic complex is still East Gouldie, which does lie to the south of Gold Royalty’s royalty coverage area. However, I note that, their exploration is focused along strike to the east and west to extend that East Gouldie mineralization. To the west, they’ve seen significant drilled results near the Norrie Zone, which is actually underneath the Gold Royalty coverage area.
So we’re quite excited to see that East Gouldie style mineralization starting to appear under the Gold Royalty coverage area. To the East, albeit it is quite a bit further there, drilling towards our Midway royalty, and they have been drilling across the Midway property as well. And this is a massive, massive mineral system, and we’re very excited to see the potential for that East Gouldie style mineralization trend to the east towards our 1.5% NSR at Midway.
At Cote, David mentioned, construction as of September 30th was approximately 92% complete, targeting 5 million tonnes of stockpile by the end of the year and on track for initial production in early 2024. Our 0.75% NSR, as a reminder to everyone, covers the southern edge of the Cote pit. Importantly, the southern portion of the Cote pit is where the high-grade mineralization is occurring near surface. This means, that we expect to have increased attributable coverage at Cote over the early years of the mine life, where IAMGOLD is focused on that high-grade portion of mineralization. And we do expect to see our coverage taper off towards the end of the mine life.
However, this increased coverage in the early years increases our expected revenue and cash flows from Cote starting immediately next year. Based on estimates of the technical production — technical report production schedule at Cote, consensus commodity prices and our estimate of coverage there, we can expect between $3 million and $4 million in revenue from Cote immediately next year, which will directly translate to bottom line cash flow growth.
The REN project is continuing to be highlighted by Barrick as the future of the Carlin Complex. They had updated press release in September of this year, outlining all of the growth opportunities across Barrick’s vast portfolio and REN was highlighted as a potential opportunity to supplement the 10-year mine plan at Carlin. They outlined a potential doubling in the current resource of 1.6 million ounces, bringing over 3 million ounces in total, potentially next year. And they’re targeting an advanced mining study of pre-feasibility study over the next two years.
Fenelon, in June of this year, we saw an inaugural PEA on the project with a 12.3-year mine life and annual production of 212,000 ounces. Our 2% NSR covers all mineralization that’s incorporated in that mine plan. The company has continued their drilling and exploration efforts across the project and recently appointed Brian Penny as their Interim CEO. We’re encouraged by the continued advancement of the project. They’re not immune to the difficulties that most small-cap advanced exploration companies have faced, but that really does not discredit the technical merits of Fenelon and the jurisdiction that it’s located in just 70 kilometers the east of the Detour Lake mine.
The last two projects here, Cozamin, our most recent acquisition. We had our initial revenue recognized from the Cozamin mine in the quarter, included in our total revenue and option proceeds adjusted figure and they’re looking to continue their exploration efforts, specifically at the Footwall Zone, which is directly underneath our royalty coverage area. So we’re quite encouraged by the continued strong performance at Cozamin, which is currently planned out till 2030 based on reserves alone, but also for the potential for this asset to grow, and they’re expected to publish an updated resource estimate in early 2024.
Finally, the Granite Creek Mine project, i-80 provided an operational update on the assets earlier this fall on October 11th. The focus here has been ramping up the underground production from the Granite Creek Mine underground. It achieved 592 tonnes per day of mineralized material production, but they’re targeting closer to 1,000 tonnes per day in 2024.
A key area of upside and continued exploration success is the South Pacific Zone, which is currently free resource and we’re excited to see the South Pacific Zone have a resource delineated on it and be included as the mines may rise in 2024 for development and potential future production.
Beyond those six core assets, we now have or expect to have over 240 royalties across the portfolio, and there are various other advancements and exciting catalysts, but those were some of the key material pieces of progress that we saw in the Gold Royalty portfolio in Q3.
As a reminder, we had 700,000 meters of drilling in 2022 and expect to see over 600,000 meters of drilling across the portfolio in 2023, all at no cost to both Royalty Corp. We don’t see the immediate benefit of a lot of that drilling and translates into growing resources derisking of these assets. But it’s that type of investment that will continue to grow our portfolio throughout the remainder of the decade.
Finally, a comment on our commitment to sustainability. I think as represented in our most recent acquisitions, we’ve placed a strong emphasis on our ESG-related due diligence and our sustainability-focused due diligence. Cozamin, an established operation with good social license and Capstone, a reputable operator that has a track record of the same commitment to sustainability that Gold Royalty has. And the SOQUEM portfolio really does fit our core strategy, aligning with partners or vendors that have those same views as us and SOQUEM is a perfect example of that.
So, with that, I’d pass it back to Dave to wrap things up, we’ve had a great quarter, and we can open things up for Q&A as well to address your questions.
David Garofalo
Thanks very much, Peter. So, just to wrap up, as Peter said, significant intrinsic value in the portfolio, the target price on the stock across the seven analysts that cover us, and that’s a remarkable sell-side research coverage for a relatively young company, is about $4.25, $4.25 per share. Our consensus net asset value is about $3.30 per share, so more than double where our current share price is currently.
So significant intrinsic value in a sector that’s facing cost pressures. And I’m talking among the producers, significant capital expenditure pressures, significant operating cost pressures, declining reserves and production, which has driven M&A, which I think has demonstrated over time, that’s a zero-sum game. It doesn’t create value in the sector. It just maintains current production and reserve profiles, but doesn’t create per share value.
We’re very much focused on going through multiple means, as I said, through M&A, through project financing, through third-party royalty acquisition and royalty generation organically as well, which delivers value on a per share basis. Providing leverage to the gold price, while protecting you from inflation, leverage to the exploration success of our underlying operating partners who are investing north of $200 million per year on our portfolio to which we’re contributing nothing.
So, optimum leverage of the gold price, significant intrinsic value, significant value, because frankly, the royalty companies have been tarred with the same brush as the operating companies. And there’s been an exodus of capital out of the gold sector that’s resulted in significant underperformance of equities to the gold price, but I think it’s well overdone in the royalty sector, where I think there’s significant value, and in particular, in the Gold Royalty stock.
So, with that, we’ll be happy to take any Q&A, Joanne.
Joanne Jobin
Excellent. Thank you very much for that update, gentlemen. That was fantastic. We’ve got a lot of people online, and there’s lots of questions to be asked. So, let’s go to our first one and it’s regarding expenses. Can you hold expenses in 2024, a big part of the stock price underperformance may be the small-cap nature of the stock and the lack of profitability, what kind of profitability can you drive next year if you meet your revenue targets?
Andrew Gubbels
Thanks, Joanne, I could take that one.
Joanne Jobin
Yeah.
Andrew Gubbels
So look, with respect to holding cash or operating expenses from this year, we are tracking towards our guidance of recurring cash operating expenses for 2023. We’ve seen subsequent decreases quarter-over-quarter, and that’s really eliminating redundancies connected with prior corporate transactions, there’s been disciplined use of consultants, professional services, et cetera, there may be some additional refining of contracts as we go into 2024.
That being said, I look to sustain roughly consistent operating costs. I’ll have to assess how 2024 is looking and see where the cost profile will fall out. But we’ve reduced our costs really to be consistent with a number of companies in the sector, which is an achievement.
With respect to profitability going forward in the future, as Dave mentioned at the outset, we have reached a point where free cash flow neutrality is being reached on a monthly basis. In the quarter, we are very close this past quarter. And I suspect in future quarters, certainly through 2024, we will be free cash flow positive, which I think is great for profitability.
Now, we don’t put out guidance for revenue beyond this year, we’ll assess what we do next year. All I can comment on is, what is in the public domain that the Street puts out there for revenue forecast and based on what I’ve seen for 2024 and 2025, based on revenue.
And if we do keep a consistent operating cost base, we will generate profitability next year, depending on what analyst you pick, depending on the cash — gold price they have — assumption they have, it will be a variation on what that profitability is. But certainly, we’ve turned the corner and we’ll join the ranks of profitable free cash flow generating royalty companies in 2024.
Joanne Jobin
Excellent, that’s a great milestone. And going back to the cash costs, are there any further cost reductions expected? Like, is there any way you can squeeze some more margin out of there? We have a lot of questions on that. That’s why I’m coming back to it.
Andrew Gubbels
Yeah. Look, there’s — we’ve taken a fairly conservative approach to our budgeting through 2023, and we’ll do it again in 2024. I mean, there are some fundamental costs in our company that are difficult to avoid.
For instance, we have certain insurance costs that are associated with structures in management as well as general insurance that is somewhat contingent on the fact that we IPO-ed in 2021, and it takes a track record before some of those costs start to decrease, we are having a track record over the last couple of years. Also the fact that we’re only listed in New York, has an impact on our regulatory and listing fees being listed only in New York is a relatively fixed cost as well.
So when you look at our company compared to other Canadian listed companies or foreign listed companies, we do have some fundamental costs that are difficult to decrease. And that’s really the benefit also to scale, is that, you can spread those costs across a larger base as companies get bigger, it’s a good rationale for consolidation going forward.
Can we bring more costs out of the system? That’s going to be a function of where we get to in some of those fixed costs like insurance for one thing in 2024, which we don’t renew until next year, as well as just generally looking at our vendor selection is the ways we can trim down the costs a little more materially in different areas. But I suspect we’ll have to look at the budget next year and where we can start picking away. But I think we got to a stage where we’re much more similar to where our peers are now.
Joanne Jobin
Okay. So let’s move on to the portfolio before we go back to more financing questions. Do you see Cote entering production next year? And will it impact your bottom line?
Peter Behncke
Yeah. Absolutely, yeah at 92% complete construction as of September 30th, targeting 5 million tonnes of stockpile ready to go in early 2024. We expect initial production in Q1 and a smooth ramp-up through next year. Impact on the bottom line is close to 500,000 ounces of annual production next year, reporting in and translating close to 2,000 GEOs for Gold Royalty Corp., next year alone, a meaningful increase in our overall attributable production revenue and a direct impact on the bottom line cash flow.
Joanne Jobin
Great. Thanks, Peter. And can you comment on the news regarding Fenelon and Tonopah West projects, and what other catalysts should we be looking forward to such as Granite Creek, Odyssey, Cote, all of these completions, which I know you went through in the presentation, but maybe you can —
Peter Behncke
Yeah I know I think I spoke to Granite Creek, Odyssey and Cote at some length. But Fenelon and Tonopah West are great examples of some of the advanced exploration assets within our portfolio. Tonopah West had over a 100% increase in its underlying mineral resource, really attractive high-grade silver deposit down in Nevada. Similarly, Fenelon, an asset that’s now published its initial economics, and they continue to look for ways to grow and expand that production profile.
These are catalysts across our portfolio that, we really don’t get much value attributed to as there’s potential cash flow that’s 8, 10-plus years away, albeit does create meaningful value across the portfolio. And just a couple of examples of the 20 some odd advanced exploration assets on the 170-plus early-stage exploration assets, all of which are having some kind of work or many of which are having some kind of work across the portfolio.
Joanne Jobin
Okay. As you can imagine, there’s lots of questions on the SOQUEM deal. So, how did it come about? And was there a bidding process? Can you get a little more granular with that deal for us?
David Garofalo
Yeah, I’m happy to. Look, time and again, since our IPO in 2021, we’ve been able to demonstrate that leveraging the relationship that our Board and Management have with collectively 400 years of industry experience, has led to significant growth. Virtually every deal that we’ve done since our origination has been on an exclusive basis. And so it’s leveraging a relationship that a couple of our Management and Board members had with the Executives at SOQUEM.
You’ll remember, I was in Northwestern Quebec for many, many years with Agnico Eagle. So I have relationships within the Quebec institutions as well. And that was meaningful in terms of getting this exclusively negotiated with SOQUEM. But, I think more meaningfully, it opens us up for future deals with SOQUEM.
Now that we’ve established this relationship, we have a formal commercial arrangement as they continue to invest in the normal course in exploration in Quebec, which is fundamental to their mandate, they’re going to generate more royalties and they’re going to look for a way to monetize those royalties within a vehicle, a public vehicle like Gold Royalty.
So hopefully, I can’t guarantee it will be exclusive going forward, but hopefully, now that we’ve established the structure is something that we can leverage, time and again, through that strong fundamental relationship with SOQUEM.
Joanne Jobin
Okay. And I guess the question that I keep getting asked here is like, why wouldn’t they just keep the $1 million and take the proceeds from the royalties? Why did they parcel off or spin out their royalties?
David Garofalo
SOQUEM’s mandate is not to hold on to these assets forever. Their mandate is to incentivize exploration in the ground in Quebec, make those investments to catalyze growth in reserves and resources across a broad spectrum of metals, not just precious metals, and ultimately exit those positions over time and recycle that capital into new exploration opportunities.
So holding on to those royalties forever, doesn’t really fit their mandate. They’re looking to put new capital back to work out in the ground and this will provide them some capital they can use over time to reinvest back into exploration in Quebec, which is, again, fundamental to their mandate.
Joanne Jobin
Okay. And the last question on SOQUEM is, clearly it’s hard to model at this early stage, but do you have any metrics of how this deal actually looks and shakes out in the end for Gold Royalty?
David Garofalo
There’s a couple of ways to look at it. Peter talked about the $18 million of buy downs within the royalty contracts, of which, we will get 50%. So, in a very aggressive scenario, assuming all those got bought down, we will get 9 times our money back in just cash. So that’s excluding any option value fundamental to those royalties.
The other way of looking at it is, we got 20 royalties for the equivalent of US$600,000, so that’s about $30,000 of royalty. It’s comparable to what our royalty generator model costs in terms of staking, claims, the salaries of our people down in Reno. So very comparable to generating royalties organically in terms of the entry cost. So very, very cost-effective way to add additional royalty optionality into the portfolio.
Joanne Jobin
Okay. And let’s talk about focused on precious metals in North America, and I’m going to combine this with another question from someone regarding platinum pricing and gold is nearing the cheapest valuations ever. Are we entering the platinum streams in royalty contracts?
David Garofalo
Yeah. Look, we’re going to stay focused on LME-traded metals ones that are quite liquid. If you look at our Board and Management, including myself, I’ve spent equal amounts of time in my career based on precious, I’ve built copper, zinc, silver, and gold mines over the course of my career, nickel, those metals are ones that we understand where we think we add value.
Some of the more exotic, less liquid metals are something that you really wouldn’t see I said. If it’s in context of a polymetallic deposit, that has those core minerals in them. That’s certainly something that we would look at. But, we’re going to be precious metal focused with some diversification into some of those LME metals.
Peter Behncke
David, I would just expand on that looking at the platinum and palladium commodities. We do see the argument there as including that within the precious metals bucket. But, with that said, the quantity of opportunities we see in that space relative to the much larger gold, silver, copper commodity space is much smaller.
We’ve looked at over 300 opportunities since we went public, and only executed on a handful of those. I’d note, of those 300-plus opportunities, the vast majority were gold, silver, and then some copper opportunities as well. So we’ll look at high-quality opportunities across the commodity spectrum, but consistently, we’re seeing what we’ve been able to close on.
Joanne Jobin
Okay. Let’s go back to your portfolio. How much of your revenue is expected to be generated or come from Odyssey next year? And what does the ramp look like over the next several years in terms of expected revenue?
David Garofalo
Peter, do you want to answer?
Peter Behncke
Yeah. So from Canadian Malartic in 2023, our attributable production was primarily expected to come from Barnat Pit. Now that has been — we have seen less production from the Barnat Pit just to the sequencing at Canadian Malartic. We expect most of that to be caught up in 2024 and targeting closer to 30,000 ounces of total production reporting into our 3% NSR from the pit.
We are awaiting on any specific guidance across the Odyssey South and internal zones, as I noted, they are still delineating that internal zones resource and our focus on incorporating that into the mine plan as soon as next year. But it’s really a key metric and something we can speak to certainly about.
Where we see the most clarity is towards the end of the decade, with assets such as Odyssey North and East Malartic on a combined basis, reporting closer to 200,000 ounces of total production reporting into our 3% NSR by the end of the decade, and that really starts to ramp-up through ‘27 and ‘28.
Joanne Jobin
Okay. And how many assets do you think we’ll be producing by 2024, ‘25?
Peter Behncke
Yeah. So by the end of next year, we currently have our four producing assets, we’re excited to see Cote enter production and the potential for the Odyssey underground to also supplement that. So we’re looking at six royalties producing by the end of 2024. And then by the end of 2025, we have a handful of smaller royalties in Nevada that could supplement that number of producing royalties upwards of eight by the end of 2025.
Joanne Jobin
Okay. I have a couple of questions here that I’m going to try put into one, and it has to do really with royalty companies. And maybe David, you can answer this. What are your thoughts? Do you think there’s going to be more mergers among royalty companies next year? And — I know you touched on this a little bit, but why are they performing so badly in the markets or underperforming at this point?
David Garofalo
Yeah, there actually has been quite a bit of M&A activities since our IPO. So, we IPO-ed in March of 2021, there was no consolidation occurring. We instigated the consolidation by merging with three of our peer companies, Ely, Golden Valley and Abitibi over the course of 2021. And then we saw a lot of other M&A activity. In fact, six other royalty companies that disappeared. And you know some of the mavericks and nomad, ultra strategies, et cetera. There’s the number them that have disappeared over the course of last couple of years.
So there has been meaningful consolidation with the objective of trying to achieve scale quickly, drive down cost of capital. That hasn’t been borne out, honestly. We’ve seen some consolidation, but what we haven’t seen is the rerate you would have expected from that consolidation, because there’s been a massive exodus to capital out of gold equities generally, not just in the royalty streaming universe.
And that, again, what’s driving that exodus to capital has been cost inflation. So among the producers, growing operating capital costs that has shrunk margins in a stable cost — stable low-price environment gold has been range bound between $1,800 and $2,000 an ounce over the last couple of years. So gold price hasn’t grown meaningfully, but the costs had.
And I think that’s resulted along with shrinking reserves and production profiles and a significant cycle of M&A activity among the producers has seen capital kind of disappear from the space and unfortunately the royalty and streaming companies have been tarred with same brush in spite of the fact that we provide cost installation. There’s been a baby with a bathwater type of a reaction in the gold sector and that’s obviously disappointing to gold investors who are looking for leverage to, was an increase in gold price globally.
Again, gold has hit all-time highs in every other major currency, it has held and sold against the US dollar, but we haven’t seen the royalty and streaming companies perform. But they will, inevitably because they do provide that optimum leverage to the gold price and exploration, while protecting from inflation.
And I think as we start to see general as money come back into the space inevitably, it will, as we see a rotation out of other general equity markets into natural resources and precious metals, in particular, you’re going to see those first dollars go into the royalty and streaming companies, because they provide a much less risky proposition, risky exposure and better leverage to the gold price than the producers and developers do.
Joanne Jobin
And, David, do you actually have a plan in place if someone were to approach you either on a hostile bid or a proposed merger? I guess, the question is, where do you see yourselves in three to five years from now?
David Garofalo
Look, I think consolidation among the other half a dozen to 10 other royalty and streaming companies is inevitable, because there is a significant void in the sector, there isn’t a meaningful mid-tier royalty and streaming company to compete for capital and opportunities with the big guys.
And as I said earlier on, the big guys are getting multiples that imply that they have significant growth ahead of them and they don’t — they can’t. There’s no conceivable way for them to grow given how big they are. Their quality plays are very liquid. And so it’s a good place for many specialist funds in the precious metals sector kind of park their capital while they wait for the generalist to come out and play as well.
But invariably, when we start to see the generalist come back into the space, the specialist will be looking for the growth vehicles that provide better leverage. And I think if we create that mid-tier company amongst the rest of us, I think we’re going to be — something that’s going to be coveted in the space, because we can provide that growth while providing trading liquidity and institutional relevance. That’s what’s absent in the space right now. I think invariably, you’re going to see these remaining smaller-cap players start to consolidate.
What I can predict for you, Joanne or for any of our shareholders on the phone, is the sequencing of that, who takes over whom. It’s too difficult to predict at this stage. But it’s been kind of quite over the last year or so because virtually everybody in the royalty and streaming space in the smaller-cap universe have been planning 52 equals, tough to have those kind of conversations when everybody is discounted severely to their net asset values.
Joanne Jobin
Excellent. And just a few more questions. We are at the top of the hour. At what cash rate does it make sense to spin off the contracts that are not to be producing for years? I guess like what value do you hold?
David Garofalo
Look, I’ve heard that argument before. But the reality is, we’re not getting paid for that option value in the small-cap company like ourselves, $200 million market cap, arguably larger end of the spectrum in terms of smaller-caps, why would it get a better valuation, even a smaller vehicle, with no cash flow.
In fact, it gets less valuation. There’s no economic rationale for spinning it out to a separate vehicle that doesn’t cash flow. And I think, in fact, what small value we get for those long-dated options would get effectively zero in that kind of vehicle. And it would just create additional G&A costs, because public companies as we see have a fixed not associated with them, you can’t avoid listing fees and insurance and whatnot. Why duplicate that? We’ve been going in the other direction and realizing synergies through consolidation. So deconsolidating just introduces those costs back into the system.
Andrew Gubbels
I think I’ll also add that. Investors sometimes forget that their core assets within the portfolios of companies like Royal Gold and Franco-Nevada that we’re at point in time exploration assets with no production. So, holding on to some of these more long-dated options if they don’t have a whole lot of value to spin off now could have a lot of value in the future.
David Garofalo
It’s an excellent point, Andrew, because guess what, they’re bought and paid for. They don’t eat. They don’t decay, they just sit there and wait. And eventually, there’s going to be value realization, not on all of them, clearly, but that’s the beauty of our model is, there’s no limit to diversification we can achieve. We can have 2,000 royalties the same G&A footprint that we have right now, and they don’t waste, they don’t occupy our time. They just wait. They provide infinite optionality to the shareholders at effectively zero cost.
Joanne Jobin
Okay. So the final question of the day is, do we — I love it when shareholders say, do we have a certain valuation or multiple that we monitor to determine if and when it would make financial sense to introduce buyback of our own shares? And, multiple barrels of question here. And what about other publicly-traded RT stream companies? If the price hits those levels, do we have a plan on buying back at those levels?
David Garofalo
Yeah. What’s clear to me is that, when we start to get into sustainable free cash flow next year, we’re going to have to reintroduce the concept of returning capital to shareholders in whatever form. And that’s something that I’m looking forward to having a discussion with my Board on next year once we do reach that tipping point that we’ve advertised with Cote coming on, with the continual ramp-up of Odyssey, with REN coming on in several years as well.
We have a nice profile, almost hockey-stick profile in our revenue growth over the course of the next little while, while our cost structure is now been quite well stabilized under Andrew’s stewardship over the last year since he took over as CFO. So, I’m very happy about the position we’re in, where we can sit down with our Board next year and say how — what’s the most effective way to start to share some of that return — free cash flow return with our shareholders? Is it dividends? Is it buybacks? Are there other forms of returning capital to shareholders that helps our share price go up?
Joanne Jobin
Excellent. So I was going to ask you if you’d like to say a few more words to your shareholders before we sign off, but what you just answered is quite valuable, and I think shareholders appreciate your stance on everything.
Great management team, great presentation as usual. We are now at the top of the hour. So we will end our Town Hall Forum. Thanks, everyone for tuning in. It’s been a pleasure to host you and we will see you on the next VID Town Hall Forum. Thank you very much, everyone.
Question-and-Answer Session
End of Q&A
Read the full article here
