The Safest Play in the Mining Space Right Now?

- June 1st, 2020

Royalty and streaming companies are often touted as a safe place for investors to put their money. But what about during a global pandemic?

Gold and silver stocks are popular among investors looking for precious metals exposure, but those new to the space are often told to look first at 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, tend to be touted as lower risk due to a variety of factors — for example, they don’t have to deal with the costs associated with mining and exploration.

But does their safe reputation hold up during a global pandemic? To find out, the Investing News Network (INN) asked market watchers and royalty and streaming company execs to share their thoughts. Keep reading to learn what they said about how this part of the precious metals space has been affected.

 

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Royalty and streaming companies react to COVID-19

As more and more countries around the world began to put COVID-19 prevention measures in place earlier this year, a variety of royalty and streaming companies were indirectly affected as their partner companies took precautions to prevent the disease from spreading.

Franco-Nevada (TSX:FNV,NYSE:FNV), the top name in the gold royalty and streaming sector, said in an early April update that many of its operators were “facing increased challenges due to COVID-19.”

At the time, the company withdrew its gold equivalent ounce sales guidance and energy revenue guidance for the year; it said in its Q1 results release about a month later that it would provide new guidance once operations in the mining and energy industries become more stable.

Franco-Nevada was not the only royalty and streaming company to take back its guidance around that time. Wheaton Precious Metals (TSX:WPM,NYSE:WPM), another major entity in the space, withdrew its production guidance for the year at the beginning of April.

Osisko Gold Royalties (TSX:OR,NYSE:OR) did the same midway through March, as did Sandstorm Gold (TSX:SSL,NYSE:SAND). Other smaller royalty and streaming companies made similar moves as well.

 

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Breaking down the impact of the coronavirus

While royalty and streaming companies were quick to react as their partners halted or slowed production, they’ve been clear that they don’t expect to be impacted significantly or for the long term.

Franco-Nevada explains as much in its April release. Speaking about its gold and gold equivalent mining assets, the company states, “Note that the majority of Franco-Nevada’s assets are top line royalties and streams which do not bear associated carrying costs. The impact to Franco-Nevada of temporarily reduced or curtailed production is essentially limited to a deferral of revenue.”

Randy Smallwood, president and CEO of Wheaton Precious Metals, made a different point, saying that royalty and streaming companies tend to have defined and fixed operating and capital costs.

“I think where the real strength comes from is the fact that our operating costs are defined and fixed, and our capital costs are also defined and fixed,” he said in conversation with INN.

For more from Smallwood, watch the full interview above. 

“That’s the real key thing — no capital cost risk, no operating cost risk. You know what our costs are going to be, they’re predictable on a go-forward basis, both on the capital and operating side. And so knowing that, we can make sure that we always maintain a good, strong balance sheet.”

Ian Ball, president and CEO of Abitibi Royalties (TSXV:RZZ), made a similar comment, telling INN that COVID-19 hasn’t been much of a problem, even though Abitibi Royalties is focused on one specific mine. That’s Canadian Malartic, owned by Agnico Eagle Mines (TSX:AEM,NYSE:AEM) and Yamana Gold (TSX:YRI,NYSE:AUY). It was forced to shut down from March 24 to April 14 due to COVID-19.

“The impact on Abitibi has been pretty, pretty minor at this point,” he said. “We’ve been very fortunate that we do have other sources of income that are beyond the royalty, so we could pay our G&A (and) pay our dividend without having to worry about whether the royalty income was coming in or not, per se.”

Aside from that, expenses are low to begin with — Ball mentioned that Abitibi Royalties has only three-and-a-half employees, and he invests all of his compensation back into the company. It also doesn’t have to deal with the same fixed costs associated with running a mine.

EB Tucker, director at Metalla Royalty & Streaming (TSXV:MTA,NYSEAMERICAN:MTA), came at the low-cost argument from a different perspective, emphasizing that that cash flow is simply not as important to royalty and streaming companies as one might think.

For more from Tucker, watch the full interview above. 

“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 to INN. That’s because in contrast to mining companies, royalty and streaming companies have relatively low operating costs.

In his opinion, it’s net asset value that matters the most. “When you look at the value based on revenue … what happens is you don’t account for the ounces that come out,” Tucker said. Net asset value, however, accounts for everything in the ground and is a better metric.

Still the safest choice for investors?

For an outside perspective on how royalty and streaming companies are weathering the COVID-19 storm, INN reached out to Adrian Day, president of Adrian Day Asset Management.

Day, who often speaks highly of the royalty and streaming model, said that although the companies have been hurt, with as much as 30 to 35 percent of their production affected, he still believes they remain the safest option for investors.

For more from Day, watch the full interview above. 

In the conversation, he brought up two main factors that he thinks are important to recognize, both of which were also mentioned by the executives interviewed by INN.

“One is … in the case of royalties, they’re not responsible for all of those additional costs,” Day said. That means they don’t have to spend money on costs associated with mine closure or care and maintenance activities, or on negotiating with the government.

Secondly, royalty companies are for the most part just having to defer their revenue. All in all, Day’s message was clear: “I think they remain the safest area in the mining space.”

He didn’t name specific companies, but did offer some general advice on picking stocks, saying investors should stick with the same principles as usual — even though gold has positive momentum behind it.

“I think what to look for is the same sort of thing as we always look for, which is good managements and good balance sheets,” Day said. “It’s the same sort of thing — you focus on the quality and good managements and good balance sheets.”

Want to learn about how gold producers have been impacted by COVID-19? Click here to find out how mine closures have affected production, and click here for an overview of top gold miners’ Q1 results.

Don’t forget to follow us @INN_Resource for real-time updates!

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.

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