EB Tucker discusses what makes royalty and streaming companies a strong investment both in general and in today’s market specifically.
With mines around the world forced into production halts and slowdowns due to COVID-19, what happens to royalty and streaming companies?
These companies, which receive either a percentage of revenue (a royalty agreement) or a percentage of production (a streaming deal) from producing mines, have seen indirect effects from the pandemic as the companies they are associated with take precautions to prevent the disease from spreading.
Speaking to the Investing News Network, EB Tucker, director at Metalla Royalty & Streaming (TSXV:MTA,NYSEAMERICAN:MTA), explained that the situation isn’t as worrying as it might seem.
“I’m going to tell you a secret that is going to enrage all the message board people that are chatting about stocks on all the favorite message boards … cash flow in the royalty business is of very little importance,” he said. Instead, it’s net asset value that matters the most.
“The royalty business is a unique and amazing business because you get leverage … a gold royalty company is a leverage tool a million miles long,” Tucker continued. He noted that gold royalty and streaming companies have hundreds, and in some cases millions, of ounces of the yellow metal buried in the ground, and their value goes up as the price of gold rises.
At the same time, these companies are protected from disruptions like the ones seen this year.
“If Pan American Silver (TSX:PAAS,NASDAQ:PAAS) has to pause production in a country because of the coronavirus, the royalty company doesn’t have to contribute to the care and maintenance shutdown (or) to … getting the workers out,” he said. “The royalty company doesn’t worry about that.”
Tucker explained that the right way to value this type of company is to look at their net asset value.
“When you look at the value based on revenue … what happens is you don’t account for the ounces that come out,” he said. In contrast, net asset value accounts for everything in the ground.
Addressing the question of what happens during situations where a royalty and streaming company isn’t getting any cash flow — as might be the case during a situation like COVID-19 — Tucker said it matters less than one might think.
“I’m not going to say it’s irrelevant, because that would be somewhat flippant. But it has such a lower amount of relevance for a royalty company than it does for a mining company, because a mining company has tremendous operating costs — tremendous,” he said. In contrast, a royalty and streaming company would have relatively low operating costs.
Watch the video above to learn more about how Metalla is operating in today’s environment, including what its latest acquisition means for the company. You can also click here to watch part one of the interview, where Tucker discusses gold’s recent and future price activity.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.