We revisit a small precious metals royalty company in this week's...
Resource Sector Digest
(Vol. 135 - June 3, 2019)
Setting The Scene
"In our view, the current portfolio supports a price target of C$1+.
Fast forward to present times: Metalla's share price is consolidating on target, and it seemed like a good idea to take stock and re-evaluate our thesis. And there are two distinctly different lines of thought for this re-evaluation exercise, leading to two distinctly different results:
- Bulls argument: Metalla has been able to add a number of highly attractive development-stage royalties with some highly desirable counterparties since the mentioned original valuation. These additions clearly add value to the portfolio and this should be reflected in a higher share price target.
- Bears argument: Metalla has not added any additional cash flow, and risks have increased for the cash-flowing and near-cash-flowing assets. Risks outweigh potential rewards and it's time to take profits.
We are firmly in the bears' camp here, but before we flesh out our reasons, we would like to get the following point out of the way:
- We fully agree with the bulls' view of the newly added royalties. We especially like the Santa Gertrudis royalty for which Agnico Eagle (AEM) has delivered a glowing report during the last earnings call; or the Joaquin and COSE royalties in Argentina, both with near-term development potential by Pan American Silver (PAAS). However, the acquisitions of these royalties have been paid for with new Metalla shares, and as a result, the share count has doubled over the past couple of years and the market cap has quadrupled thanks to the favorable share price performance. This expanded market cap already generously reflects the added portfolio value in our view.
Our concerns lie with the (near-term) cash flowing portion of the portfolio. We believe that risks have greatly increased for these revenue streams, and we do not see these risks reflected in the current market valuation. Here is a list:
- The lion's share of Metalla's cash flow is generated by a royalty on the Endeavour mine in the Australian Cobar district, operated by CBH Mining, a subsidiary of Japanese Toho Zinc. Reserves at this mine have been depleting, and currently only support a mine life to 2022. Publicly, CBH has been projecting optimism with regards to exploration success and potential mine life extensions; but on the other hand, we note that the company has terminated the contract with the development contractor, and on a recent visit to the area, we also spoke to local miners who painted a pessimistic picture about CBH's ability to take this mine into the future. Additionally, Cobar has been suffering from a devastating drought, raising concerns about the availability of process water for the local mining operations. Risks for this royalty are mounting, affecting ~90% of the company's current revenues.
- Metalla's remaining revenues stem from the New Luika gold mine in Tanzania. The country's struggle with Acacia Mining (OTCPK:ABGLF) and Barrick Gold (GOLD) has been well-documented here on Seeking Alpha and casts a questionable light on the current administration, supporting a view of sharply increased country risk.
- The Hoyle Pond extension royalty originally presented potential for significant additional revenues starting as early as 2021. The operator Goldcorp (GG) has since merged with Newmont Goldcorp (NEM) and management has commenced a review of the combined portfolio. We see a certain likelihood that mine development at Hoyle Pond might be delayed, or the asset spun out as a result. Circling back to our original valuation, this uncertainty relates to about 20% of Metalla's NAV computed at the time.
- The West Timmins Extension royalty formed another intrinsic part of our original valuation. This development project has since become part of Pan American Silver's portfolio after the acquisition of Tahoe Resources (TAHO) and has been put up for sale by the new owner. The development schedule for the West Timmins mine and the orebody reaching into Metalla's royalty claims will be affected by this sales process, most likely postponing cash flows from this royalty.
For the time being, cash is still flowing in and it seems the market is not really concerned about the listed risks. And granted, it's possible we are overly cautious in our view outlined above. However, even if we ignore the risks weighing on the cash flowing assets, we have one more bone to pick with Metalla. The company has initiated a dividend policy, to the tune of roughly half its inflowing cash. At the same time, the company has been paying for new royalties with new shares. We are strongly opposed to this strategy of capital allocation, and we believe the inflowing cash should have been used to pay for the new royalties, instead of the dividends. Plus, the ballooning share count now increases the financial pressures from the dividend payments impeding further organic growth.
Metalla's stated strategy of assembling an attractive portfolio and then selling itself to one of its larger peers might still work. However, at the current share price, we see limited upside in the event of a successful exit. On the other hand, we see substantial downside risks which will only be amplified by the need to cut the dividend should risks manifest themselves. From an investor's point of view, we argue that now is a good point in time to sell.
The gold price (GLD) has performed very well indeed over the past week or two. Don't be fooled into buying too aggressively right now. Summer doldrums are upon us, and the Dollar hasn't budged (yet).
News Release of the Week
News release of the week goes to Gold Fields (GFI) for taking profits on its Maverix Metals (OTCQX:MACIF) investment. The gold miner had originally exchanged a portfolio of revenues for a 19.9% stake in the royalty company, and has now sold its stake to several institutional investors. The sales price was not disclosed, but must have amounted to well over $100M given the size of the stake and the current share price. Well played, Gold Fields, we say.
Drill Result Summary
- Osisko Mining (OTCPK:OBNNF) has discovered yet another gold zone at its Urban Barry gold project in Quebec, Canada. The discovery hole sports 2.8m at 16.7g/t.
- Royal Nickel (OTCQX:RNKLF) has made another bonanza-grade discovery at its Beta Hunt gold mine in Western Australia. To quote from the news release: "An estimated 987oz of coarse gold has been recovered in 238kg of rock from a series of veins".
- GoGold Resources (OTC:GLGDF) has been busy drilling at its new Los Ricos project in Jalisco, Mexico. The latest set of drill holes included 18.5m at 3.07g/t.
- Marathon Gold (OTCQX:MGDPF) continues to de-risk its Valentine gold project in Newfoundland. The latest news release reported drill results from the Leprechaun deposit which further confirmed continuity of the deposit's high-grade core.
- SEMAFO (OTCPK:SEMFF) reported a new discovery in the Hounde belt, hot on the heels of the Savary Gold (OTC:SVVYF) acquisition. 43 holes were reported so far, and the 2019 exploration budget for the combined Bantou-Karankasso was increased to C$11M.
Wheelings and Dealings
Seabridge Gold (SA) seems to be shifting its focus to Nevada. The acquisition of the Goldstorm property adds to the company's growing landholding on the Northern Nevada Rift where Seabridge is exploring for low-sulfidation high grade epithermal deposits.
Nighthawk Gold (OTCQX:MIMZF) continues to find capital to fund exploration and development at its Indin Lake project in the Northwest Territories. Gross proceeds from the latest round of flow-through shares amounted to C$12.6M.
Treasury Metals (OTCQX:TSRMF) has closed a C$3.5M financing in order to advance its Goliath project, and to support "general corporate purposes". We wonder if the latter includes talks with First Mining Gold (OTCQX:FFMGF) with regards to combining the Goliath with the Goldlund project.
Pan American Silver has terminated its option to earn into Kootenay Silver's (OTC:KOOYF) Promotorio and La Negra projects. This is certainly a setback for the junior, but also for Pan American Silver which had entertained high hopes to generate synergies with its own operations nearby.
Lithium Americas (LAC) has moved one step closer to selling another 12.5% stake of its Caucharí-Olaroz lithium brine project in Argentina to its JV partner Ganfeng Lithium of China for a consideration of $160M. According to the latest news release, Ganfeng has received all the necessary regulatory approvals, and the company's lenders have also agreed to the deal. Closure of the transaction is expected in Q3.
Generation Mining (OTCPK:GENMF) has completed a C$8M financing to pay the remaining portion of the purchase price, and to fund exploration and development at its Marathon PGM project in Ontario. We are curious to see how Generation Mining will succeed where Stillwater has failed.
Lydian International (OTC:LYDIF) has replaced its CEO, while the blockade of the company's Amulsar mine is still ongoing. The task of digging the company out of its hole has been handed to Mr. Edward Sellers on an interim basis.
Hecla Mining (HL) announced spending cuts at its Nevada operations and elsewhere. Apparently, the company "has a strong commitment to operate within cash flow". How this will work in Nevada with AISC now guided to $1,700/oz remains anyone's guess.
Tinka Resources (OTCPK:TKRFF) reported results from metallurgical testing of ore from its Ayawilca project in Peru. Recoveries were in line with high expectations, as was the anticipated penalty for iron content in the concentrate. The PEA is scheduled for release within the next couple of weeks.
And right before we go, we would like to point to Sandspring Resources (OTCQX:SSPXF) which released PEA results for its Toroparu project in Guyana. Don't bother reading the details unless you are still interested after reading this post by Rude Otto. And here is to hope to see youse all next week again for the next issue of this newsletter.
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Disclosure: I am/we are long AEM, NEM, TSRMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.