Gold Royalty Boom: What Investors Should Know with Insider Alexandra Woodyer Sherron

Key Concepts

• Royalty: A percentage of revenue from production paid to a company.
• Net Smelter Return (NSR): A specific type of royalty based on the net revenue from smelting.
• Stream: An investment where a company provides funding to a mining operation in exchange for a percentage of the gold or silver produced, often at a discounted price.
• Prospect Generator: A company that explores for mineral deposits and generates royalties from those discoveries.
• M&A (Mergers and Acquisitions): The process of companies combining or one company taking over another.
• NAV (Net Asset Value): The net value of a company's assets.
• Cash Flow to Price Ratio: A metric used to evaluate the value of a company based on its cash flow relative to its share price.
• Deal Flow: The continuous stream of potential investment opportunities available to a company.
• Due Diligence (DD): The process of thoroughly investigating a potential investment.
• Jurisdiction: The legal authority of a country or region.
• Geopolitical Uncertainty: Risks associated with political instability and international relations.

Summary of Discussion on Gold Royalties with Alexandra Woodier Chiron, CEO of Empress Royalties

This discussion provides an in-depth look at the gold royalty and streaming sector, covering its evolution, current trends, investment strategies, and the operational aspects of companies like Empress Royalties. Alexandra Woodier Chiron, CEO and President of Empress Royalties, shares her extensive experience and insights into this specialized area of mining finance.

1. Alexandra Woodier Chiron's Background and Entry into the Industry

Alexandra Woodier Chiron details her early career, beginning in the mining industry as a teenager with Endeavor Financial. Her initial role involved extensive research, including manually contacting mining companies to gather annual reports for financial analysis. After obtaining her business degree, she joined Price Waterhouse Coopers. She later returned to Endeavor Financial as a professional analyst, working in fund management and then transitioning to project financing, where she assisted mining companies in securing banking facilities for development assets. Her career has involved working with prominent entrepreneurs and financiers in the mining sector, focusing on providing financing solutions to bring projects into production efficiently. She emphasizes her finance background over a geological one, highlighting the synergy between finance and mining for identifying and capitalizing on opportunities.

2. Understanding Royalties, NSRs, and Streams

The conversation clarifies the fundamental concepts of royalties and streams:

• Royalty: A company receives a percentage of the revenue generated from a mining operation's production.
• Net Smelter Return (NSR): A specific type of royalty calculated based on the net revenue after smelting costs.
• Stream: An investment where a company like Empress provides capital to a mining company to expand production. In return, Empress receives a percentage of the gold or silver produced, often at a predetermined discounted price (e.g., paying 20% of the spot price for 5% of the gold, resulting in an 80% discount).

The historical evolution of these models is traced from ancient land ownership fees to modern financial instruments, with Franco Nevada and Wheaton Precious Metals being key players in developing the business model and the streaming model, respectively.

3. Trends in the Royalty and Streaming Sector: Consolidation and Growth

A significant trend discussed is the ongoing consolidation within the sector, where larger companies are acquiring mid-sized and smaller players. Examples cited include:

• Gold Royalty acquiring Sandstorm.
• Triple Flag acquiring Origin.
• The recent combination of EMX and Elemental, with investment from Tether.

This consolidation leads to fewer players but often results in larger, more dominant companies. Alexandra notes that this trend can make it challenging for smaller royalty companies to grow organically, but it also presents opportunities for companies that can effectively integrate acquisitions. She highlights that different types of royalty and streaming companies exist with distinct investment theses and catalysts, and investors should recognize these differences.

4. Investor Analysis of Royalty Companies

Alexandra outlines key metrics and considerations for investors analyzing royalty stocks:

• Net Asset Value (NAV): Remains an important factor.
• Cash Flow to Price Ratio: Crucial for evaluating current value and potential torque.
• Revenue Generation: Emphasis is placed on companies generating immediate revenue, especially with the current strength in gold and silver prices. Investments in cash flow-positive or near-production assets are favored for their ability to generate returns quickly.
• Management and Deal Flow: Investors should assess management's access to capital and their ability to source new investment opportunities.

5. Differentiating Types of Royalty and Streaming Companies

The discussion breaks down the sector into distinct categories based on investment strategy and risk profile:

• Large-Cap: Established companies like Wheaton, Royal Gold, and Franco-Nevada.
• Mid-Tier: Companies that are growing through acquisitions or organic expansion.
• Junior/Micro-Cap: Smaller companies with higher risk and potential for significant upside.

Further segmentation includes:

• Prospect Generators: Focus on early-stage exploration and generating royalties from discoveries (e.g., EMX, LTS, Kirkland Lake).
• Acquirers of Existing Royalties: Companies that consolidate portfolios of existing royalties, often through competitive bidding.
• Creation/Financing Side: Companies like Empress that directly invest in mining companies, providing capital for production and expansion, often in conjunction with debt or equity. This model is more akin to Wheaton's approach but targets the junior market.

Investors can also differentiate based on:

• Commodity Focus: Pure gold and silver companies (like Empress) versus diversified portfolios including battery or critical metals.
• Geographic Focus: Companies operating in Tier 1 jurisdictions (North America, Australia) versus those with a global reach.

Alexandra stresses that "not all royalty companies are created equal," and investors must align their choices with their risk tolerance and investment objectives.

6. The Competitive Process of Securing Royalties

Alexandra describes the competitive nature of securing royalty deals. While some companies acquire existing portfolios through bankers and bidding processes, Empress focuses on direct investments through established relationships. Her team leverages their extensive network and experience, including their relationship with Endeavor Financial, to build direct connections with management teams. This approach, she argues, "re-derisks" investments by providing deep insight into the management's capabilities and operational plans.

The due diligence process at Empress is rigorous, involving:

• Technical Reports Review: Mining engineers and geologists analyze technical reports.
• Management Team Engagement: Direct meetings and assessments of management.
• Third-Party Engineering: Hiring external experts to validate development or expansion plans.
• Legal and Financial Review: Extensive examination of environmental, social, and governance (ESG) plans, permits, legal agreements, financial statements, and tax structures.

This detailed process contradicts the notion that royalty executives have a relaxed work schedule, emphasizing the intensive nature of their due diligence.

7. Empress Royalties' Strategy: Focus on Near-Term Production and Revenue Generation

Empress Royalties differentiates itself by focusing on development or near-term producing assets. Their strategy is to generate immediate revenue to redeploy for portfolio expansion without diluting shareholders. They have successfully transitioned from development assets to producing ones and are expanding existing producers. This approach is driven by their structured finance expertise, aiming to provide streaming finance solutions to the junior market, a segment often underserved by larger players.

Alexandra explains their preference for staying closer to producing or near-term producing assets, believing this creates significant upside, especially when acquiring gold and silver. She notes that the royalty sector's cash flow to price ratios are around 25x, and Empress forecasts doubling its revenue, indicating substantial potential.

8. Macro Factors Influencing Investment Decisions

Key macro factors considered by Empress include:

• Political Stability: Thorough understanding of the country's political and legal environment.
• Legal Frameworks: Ability to structure deals, repatriate funds, and secure assets.
• Commodity Prices: A steadfast focus on gold and silver, anticipating a strong bull market due to geopolitical uncertainty and other global factors.

Empress operates in diverse jurisdictions such as Peru, Mexico, Mozambique, and South Africa, leveraging their management team's international experience.

9. Empress Royalties' Financial Capacity and Growth Ambitions

As of their June financials, Empress had $4.5 million USD in gold, silver, and cash. They also have a $20 million debt facility from Nabari US. They are actively seeking opportunities in the $5-10-15-20 million range and anticipate moving towards $25 million investments as they grow. Their core concept is to provide streaming finance solutions to the junior market, a niche that has seen limited competition.

10. Valuation of Exploration Upside and the Impact of New Capital

Regarding the valuation of exploration upside on a royalty, Empress primarily focuses on the mine plan and the economics of what is already built or planned. Exploration upside is considered pure upside, not heavily leveraged in their initial valuation. An example is provided of a $3 million investment in Mozambique with a 3.5-year mine life that has already returned over $6 million, with further exploration potential.

The influx of new capital into the sector, exemplified by Tether's investment in EMX and Elemental, is seen as positive. Alexandra believes this new capital, particularly from crypto investors and generalists, will drive further acquisitions and project development. She notes a trend of increased gold holdings by high-net-worth individuals in Asia, indicating growing investor interest.

11. Risk Management and Addressing Potential Challenges

Alexandra addresses potential risks, drawing from Rick Rule's common question:

• Investment Underperformance: To mitigate this, Empress focuses on diversification across multiple assets, geographies, and management teams. They have expanded from one producing asset to four and are actively seeking new investments.
• Country Risk: This is managed through deal structuring. For instance, in Peru, they receive weekly gold credits from Metalor in Switzerland, mitigating direct country risk.
• Leverage Risk: Alexandra expresses comfort with manageable debt, drawing from her structured finance background. The priority is building treasury and cash flow to support growth without unnecessary dilution. She emphasizes that now is a critical growth period for Empress, aiming to build credit mass and achieve strategic growth.

12. Commentary on Recent M&A Transactions

Alexandra views the Royal Gold acquisition of Sandstorm and Horizon Copper as a positive, all-share acquisition that will significantly benefit Royal Gold. She believes such M&A transactions are crucial for majors and mid-tiers to achieve meaningful growth and react positively in the market, benefiting the entire sector.

13. Conclusion and Final Thoughts for Investors

Alexandra concludes by emphasizing the significant value within the royalty and streaming space. She advises investors to:

• Understand their comfort level: Determine their risk tolerance.
• Incorporate royalty and streaming exposure: Suggests that every portfolio should have an element of this sector.
• Differentiate between company types: Recognize the varying risk profiles of large-cap, mid-tier, and junior/micro-cap royalty companies.
• Identify opportunities: Look for attractive junior and micro-cap companies for speculative aspects and leverage.

She reiterates her passion for the space, highlighting it as a great way to invest in mining and an exciting time for the sector on multiple levels.