EMX Royalty (EMX, Financial) is a prospect generator growing organically into a royalty company structure. Instead of acquiring royalties through deals, it is building up a portfolio through prospecting work. Occasionally it also buys royalties but believes these are hard to find at a reasonable price.
Financial strength
The balance sheet is already very strong as is often the case with small royalty upstarts. But the latest financials do not reflect several key events.
- The company received $65 million in cash tied to the IG Copper sale. It will receive another $4 million that is now tied up in escrow.
- In addition it paid back $5 million of its senior secured to Sprott Inc. (SII)
This effectively means it has virtually no substantial liabilities and a substantial amount of net liquidity.I estimate adjusted net asset value should amount to more than $60 million. With a market cap of $120 million, that means this royalty company and prospector is trading around 2x net asset value. That is not an unusual value for a royalty company. It is on the high end of the range for a mature royalty company but makes sense as EMX is brimming with growth.
Management
The management team looks quite impressive. I am a big fan of the royalty space as a subsector within the mining space (think Wheaton Precious (WPM, Financial), Royalty Gold (RGLD, Financial) and Franco Nevada (FNV, Financial) as examples of a few category-defining names). Often management teams in this sector have strong backgrounds. EMX Royalty is certainly no exception. I’m always happy to see strong insider ownership, and management owns about 8% of the company, which translates into roughly $16 million worth of equity.
David Cole is CEO and has over 30 years of industry experience. He used to be at Newmont Mining Corp. (NEM, Financial). At Newmont, he held management but also geologic positions. Because of EMX’s business model, which is geared at prospecting to acquire royalties, a strong geological team is very important, and that is present here. Cole worked at Newmont on the Carlin Trend, which is now a key contributor to EMX's earnings.
At a royalty company, the legal officer plays an important role. Royalty companies don’t have to deal with as many liabilities and lawsuits as general mining companies, but they are constantly dealmaking and entering into contracts. You don’t want to be too dependent on outside investment bankers in your core business.
Jan Steiert brings 30 years of experience in mining and natural resources law. She used to be at Electrum Ltd., a private global gold exploration company founded by the well-known resource investor Thomas Kaplan (see Forbes profile). She used to work on Apex Silver (another one of his ventures). She also worked on Royal Gold projects, which is a major royalty company.
Then there is Eric Jensen, who acts as the general manager of exploration and who has over 17 years of industry experience including positions as mine geologist, mine-site exploration geologist, grassroots exploration geologist, and as a consultant major mining companies. Dr. Jensen is also a co-founder of Bronco Creek Exploration. Ultimately great geologists can do best with small companies that they found or where they own substantial equity.
As chief geologist, there is Dr. David Johnson, who also brings 18 years of industry experience (few newbies here apparently) in generative exploration and consulting to majors. He is also a co-founder of Bronco Creek Exploration.
Valuation
Because EMX Royalty has its roots in prospecting, it still generates very little revenue. Royalty revenue tends to be extremely high margin if you can get to scale. EMX has a lot of potential to expand its revenue from royalties, but it is not there yet.
I find the best way to value prospecting and early stage royalty companies is akin to valuing Silicon Valley startups. I evaluate the team (strong to very strong), the balance sheet (extremely strong), the potential for future cash flow (strong) and key shareholders (strong). In this case, management owns stock, Sprott Inc. (a resource specialist) owns stock, Newmont Mining likely sold equity in return of a royalty, but also the lesser-known Stephens Group, which has a set of values that I like, owns stock as well.
On the downside you are protected somewhat by the net asset value, which is at least 50% of the market cap but is likely to be highly conservative. This amounts to a situation where the downside is to lose about half of an initial investment, but there is clearly upside for this company to increase its market cap tenfold over a period of many years. Peers such as Royal Gold and Wheaton Precious metals ultimately became companies with billions of dollars in market cap.
Risks
Revenues are still very concentrated. Revenues are likey to fluctuate depending on future production and the price of gold. There is the risk that Newmont will move mining away from the area where the company owns a royalty. That could mean revenue would disappear until Newmont returns to these areas.
The carrying value of royalty and stream interests could become impaired.
The company operates on a global base and may at some point encounter difficulty enforcing its contractual rights at challenged royalty or stream interests
U.S. investors should be aware that based on current business plans and financial expectations, EMX expects that it will be classified as a passive foreign investment company (PFIC) for 2018. This can be disadvantageous to U.S. investors. On the flipside it may also explain why certain shareholders are ignoring this interesting company.
Outlook
EMX Royalty needs revenue and it needs scale. The company already owns an impressive list of royalties, and I expect revenue will ramp up very quickly as some additional projects come online.
Continued:
In addition, the company has a large net cash position. I expect the company will seek to reinvest this cash in a mix of early stage and productive royalties. As long as it isn’t break even or even cash flow positive (on an operating basis), it is likely to retain cash at hand to burn at a controlled rate.
Disclosure: Author is long EMX.
