How do royalty companies work? They royalty company pays an upfront fee ( to help finance the development of various mines) in exchange for the right to purchase silver at approx $4/oz and gold at $450/oz (although they vary). I recommend doing ones one due diligence to get an idea between the difference between streams and royalties as royalties have multiple types including GSR(Gross Smelter Revenue), NPI (Net Profit Interest), GPR (GROSS PROCEEDS ROYALTY),CGR(CONTAINED GOLD RETURNED), (NET SMELTER ROYALTY) and SSR(SLIDING SCALE ROYALTY). They also do not need sustained capital expenditures going forward except the one time upfront payment when an acquisition is made.
First I will talk about the streamers - Silver Wheaton, Gold Wheaton, Sandstorm Resources. What's unique about them relative to pure royalties? They receive the physical metal instead of cash payments for a fixed price (as mentioned above) in addition to having a much more favorable tax situation courtesy of the Canadian Government. As long as they reinvest their proceeds or pay it out as dividends, they are stuck with a tax rate in the neighborhood of 0-8%, a huge advantage when it comes to net profit margin. I will start with Sandstorm as they made the most recent acquisition, which is a game changer in my opinion.
Sandstorm Resources (SNDXF.PK) - A gold royalty company focusing on advanced stage or producing mines. Though they have only been operating for a basically a year and a half or so, they have already completed four royalty acquisitions. This is amazing accomplishment given they are a micro/small cap company ( <200m market capitalization ). They have an amazing management team headed by CEO Nolan Watson (former CFO of Silver Wheaton). They are very well capitalized, following an acquisition in early March, with nearly 90m of cash on hand. This gives them ample room to deploy at least 60m of their cash balance off in the near term (as they have a bit over 100m in long term debt). Available funding will dramatically increase, however, over the year as three of their four royalty streams will come online, with the fourth & fifth expected in 2011. They can also revert back to more equity financing (which I personally think they should do ) as they recently moved up to top tier status on the venture exchange, thus they will attract more attention. They have made it clear they are and will continue to be very aggressive on the acquisition front going forward, recently commenting they are in several advanced stage talks with various companies.
Silver Wheaton - Has not been active on the acquisition front of late, but they are now cashed up and ready to acquire another cornerstone asset, the likes of which will be either 25-50% of the silver from the La Bodega mine (which will prove to be substantial or another cornerstone asset. With many of their liabilities paid off in the recent quarter plus 2.2m of stockpiled silver, Silver Wheaton is worth keeping an eye on. My guess would be an acquisition in the 4-6m ounce range in addition to a smaller stream in the coming year. This should bring their peak production levels to the 50m ounce market with plenty of OCF to continue their aggressive growth. I say this due to what mgmt said on the conference call (they have never been more active talking to various companies about near term of future financing). A dividend will also likely be announced towards the latter half of 2011 which in most cases act as a catalyst for stock prices due to the cash flow stream investors will receive.
Some additional information from my last post will be repeated to sum up what Silver Wheaton has accomplished throughout the year and the upside potential that still remains.
|SILVER WHEATON||$52.20||BUY ON DIPS|
|ROYAL GOLD||$84.79||BUY ON DIPS|
|GOLD WHEATON||$6.16||BUY ON DIPS|
|FRANCO-NEVADA||$38.94||HOLD UNTIL FURTHER NEWS|