This week’s series on gold royalty companies started with a look at original King of Royalties Franco Nevada (TSX: FNV) (NYSE: FNV), and moved on to developing, high-action royalty story Ely Gold (TSXV: ELY). Today, we move further down the risk curve to examine the recent consistent volume and a steady price climb from Metalla Royalty and Streaming Ltd. (TSXV: MTA).
Following a 1 for 4 rollback in December, Metalla has managed to make the most of the US exposure generated by a listing on the NYSE American.
Metalla’s price is up +18% since the consolidation an +8% since the NYSE American listing, and continues to look very healthy as it tracks the gold trend.
Metalla presently draws income from two silver streams and holds royalty interests in various in-development and exploration-stage precious metals projects. “Streaming” is a type of royalty that pays off the investment of project backers in whole metal (or cash equivalent), often with a metal secondary to the main part of the pay grade at the time the streaming deal is made. Metals streaming was popularized as a model for public companies beginning in 2004 when Wheaton Precious Metals (TSX: WPM) (NYSE: WPM) (previously Silver Wheaton) pioneered the model as a method of financing mines while giving investors more direct exposure to specific metals prices.
Metalla’s Australian and African-based silver streams produced $729,000 in gross profit this past quarter on $2.1 million revenue to create a 35% top line margin, placing the company firmly in the early development category. The silver streams are the ones paying, but the asset value here consists mostly of net smelter return (NSR) interests in various different precious metals projects all over the Americas.
The short story on types of royalties is that NSRs are the ones worth having, and net profits interests (NPIs) are the ones that aren’t. Generally speaking, NSRs are a percentage paid on the returns that the mining company is paid by a smelter, based on the tonnage it receives from the mine. An NSR holder gets paid “off the top.” By contrast, net profits interests are exactly what they sound like: an interest paid after the mining company’s costs are deducted, and mining companies have no trouble coming up with costs to be deducted, whether they belong to the project they’re paying an interest in or not.
Net profits interests are commonly used by Hollywood studios to take advantage of collaborators. Typically, a studio offers a writer who believes in their work a reduced up-front fee and an interest in the picture’s net profits at the box office, “net” being the operative word. By the time the picture is making money, the studio is able to generate paper costs in the project’s accounting such that it’s showing a net-loss on paper, and there is no royalty payable, effectively daring the royalty-holder to sue for it. This type of “Hollywood accounting” was used infamously by Paramount Pictures, who has avoided having to make any payments under a 3% NPI due to novelist Winston Groom, the creator of Forrest Gump.
Metalla has demonstrated an ability to keep their cost of capital low, borrowing from various debt facilities between 5% and 8% per annum, and sometimes acquiring royalties for stock. A portfolio of royalties they dealt for in the spring cost them a 2 million share (post consolidation) payment to Alamos Gold (TSX: AGI), who are up double on their trade at the moment, with more than enough liquidity to unload some if they choose to.
Much of the Metalla portfolio consists of royalties in early-stage exploration assets, but there is also a strong contingent of development-stage assets operated by brand-name companies like Agnico Eagle (TSX: AEM) (NYSE: AEM) and Newmont (TSX: NGT) (NYSE: NEM). A strong precious metals market puts a tailwind behind the earlier-stage projects and brings them closer to relevance. There’s a good chance that increased capital markets promotion among the juniors increases the rate at which Metalla’s name comes up for serious equities researchers. Metalla counts long-time Newsletter writer Lawrence Roulson among its directors. Look for Roulston to use his connections to make Metalla more of a brand name as the gold trade moves further into the mainstream.
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