Metalla Royalty (MTA) – It’s Just a Little Bit Different

Metalla Royalty & Streaming Ltd
  • Shares Outstanding: 35M
  • Share price C$7.10 (07.07.2020)
  • Market Cap: C$249M

E.B. Tucker, Non Exec. Director of Metalla Royalty and Streaming (TSX-V, NYSE: MTA)

I really like royalty companies. They can expose investors to many of the exciting rewards that exploration can offer whilst possessing a significantly reduced risk profile. They are a compelling value proposition and investment package. We spoke to EB Tucker a few weeks ago, when he explained that gold mining equities and ETFs are heading for a downfall, while physical gold and royalty companies are investment classes that are rising to prominence. This week, he’s here to talk about the company he works for, Metalla Royalty & Streaming.

Metalla Royalty is a precious metals royalty company based in BC. Founded in 1983, the company was constructed to generate leveraged precious metal exposure for shareholders via royalties and streams. The aim is to add accretive value for investors by consolidating a diversified portfolio of royalties and streams. The company secures royalties from the third-party market. The current portfolio is varied in terms of its developmental phase, with some churning off the cash and some looking towards future prosperity. The highly-experienced management team aims to take Metalla Royalty into the next commodities cycle as one of the leading gold-silver royalty companies.

Matthew Gordon talks to E.B. Tucker, 6th July 2020

After touching on the immense change created by inflation and quantitative easing, Tucker tucks into Metalla Royalty. Impressively, the company has royalties on many major companies including Pan American Silver, Goldcorp, Newmont (now a part of Goldcorp), Barrick Gold and Agnico Eagle. how does a relative minnow of a royalty company swing with the big hitters?

I’m impressed with this business model. It’s unusual, unique and smart. The proposal that Metalla Royalty has used to formulate its business strategy involves an innovative pitch. When looking to acquire royalties from a royalty-owners, rather than breaking out the cheque book, Metalla Royalty offers shares. The long-term view is that Metalla will accumulate a portfolio of royalties and streams of the same size, making shares in Metalla Royalty a much more attractive proposition than cash. Companies have access to a vast, diversified portfolio of meaningful royalties rather than clinging on to one 100%-owned royalty with a major. This argument has been so compelling that Metalla Royalty has managed to be one of the most active royalty company amongst its peers, making 18 transactions and acquiring c. 50 royalties. These results are consistent. The strategy is paying dividends, literally; and the share price is up nearly 700%.

Another component to the strategy is the kind of royalties that Metalla Royalty focusses on. The company chose a precious metals emphasis in 2016 because it rightly believed that the gold market was on the verge of a major upturn. Interestingly, Metalla Royalty prefers royalties on development stage assets rather than producers. It acquires some explorers too, but these are more of a happy accident than anything else.

Why does Metalla opt for development-stage assets when one would think production stage assets would add cash flow right here, right now? Tucker’s answer was very impressive. When a project is in a development phase, every time a new resource is published, Metalla Royalty gains value because of the additional uncovered ounces. Moreover, by picking up royalties with majors, the company can have a high degree of confidence that these resources will be fully and successfully developed; the majors are not reliant on an equity financing and are not suffering from any other potential barricade to production. There are hundreds of thousands of ounces yet to come out of the ground as the gold price moves, and these will push Metalla Royalty’s share price even higher. It’s about pulling the future produced ounces back into today. These are straight royalty net stakes, and Metalla Royalty has a free, non-operating carried interest on the production of the property. This is essentially risk-free cash that insulates investors from market volatility.

However, year-on-year, Metalla Royalty’s revenue is actually down 50% and year-on-year losses are up. Is this something to be concerned about? Tucker claims setting up the company for long-term growth is a much more astute strategy than “losing” ounces from a production company. This is because every time a producing company drills ounces out of the ground, these ounces are lost, and Metalla Royalty would need to replace them or lose value. However, development-stage projects are 24-36 months from production and are working extremely hard to prove as many ounces as it possibly can, while leaving all of the ounces in the ground. Every single ounce is underground and therefore every single ounce adds value to Metalla, especially as the gold price creeps up. “The best royalty investment is one that has development assets that are close in the pipeline.”

Metalla Royalty is able to make these deals when none of its peers seem able to because of its diligent purchasing strategy, using a sensible number of shares rather than stacks of cash. As these assets stack up, the exponential potential for Metalla Royalty becomes clear. The company appears to have a much higher ceiling for growth than the larger royalty companies. Metalla usually offers a smaller amount of cash, with the majority of the deal being comprised of shares. Each time a company deals with Metalla, they decide what sort of ratio they want; after all, they wouldn’t be talking to Metalla unless they wanted stock. The message is clear: selling stock to keep the lights on is dilution. Selling stock to reach a 12% internal rate of return is accretion.

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Metalla Royalty had to conduct a 4:1 share consideration in order to list on the NYSE in January. Tucker states that the trading volume increased significantly; the US volume is now “quite a bit more” than the Canadian volume. In order to get access to some of the large North American funds, this was a necessary step.

Metalla Royalty will be taking a separate vessel public in the Autumn. This company will focus on base metals like nickel, copper and zinc. Why did this need to be made separate? Tucker states it is important to keep a rigorous focus on precious metals for Metalla, or else the market can punish the company with a lower valuation. In fact, as seen in the Scotiabank monthly reports, precious metals royalties trade at twice the net asset value multiple to base metals. Base metals appear to damage precious metal royalties.

Tucker thinks the current approach of aggressive dealmaking will help the company reach its inflection point in the near future as it looks to push its value up meaningfully. When the company reaches a certain level of diversity with its assets, he expects there to be a “pop,” and the market will apply a higher multiple. If Metalla can de-risk its portfolio to the point where it would be able to cope if certain assets go offline, institutional investors will start paying a premium. Tucker expects the gold price to rise over US$1,900oz by the end of the year “like a magnet” before people finally wake up to the dwindling supply, generated by the smaller number of exploration projects after the gold lean years of 2015/16. He expects a “tremendous Canadian bull market” for these stocks, and every man and their dog will jump into the space. Capital will be hurtling at the gold space with a complete disregard for risk. His advice for investors? KEEP YOUR HEAD.

Metalla Royalty currently pays dividends. Would it be better off putting this money into projects? The philosophy is for Metalla to give 50% of operating cash flow back to shareholders, even if it’s only a penny, because it is shareholder money. It’s a refreshing, old-school mentality.

Should investors buy physical gold or invest in a royalty company? Tucker states that investors should own physical gold to protect their wealth, but the reality is that the multiplying effect of wealth in royalty company shares is more dramatic. It seems clear which option could make investors more money.

What did you make of EB Tucker and Metalla Royalty?

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