The most lucrative streams Question: Should we invest in Baja mining?
Our most profitable stream to date is the second, $7 million investment in Donner.
For a $7 million investment (and provision of a $2 million loan facility, which we'll ignore), we increased our cash flow by 50% for the DON stream, with an IRR on the investment of about 63% (most of our other IRR's range from ~15% to 30%). Higher IRR's = more money faster = better for SND.
Based on the DON NI 43-101 and SND website, we should net about 5.5 million lb's of copper from DON under the new terms. Under the old stream, it was about 3.9 million lb's. At $2.20 copper (i.e. $3.00 or $2.75 copper price), that translates to about $12 million cash flow, at current spot prices of $3.69, that is about $16 million cash flow.
The reason the second $7 million investment was our most "lucrative" stream (defining lucative as highest IRR) is because, after our investment, time to production was ~6 months, whereas the initial investment was about 2 years prior to production.
The biggest issue with the streaming model is the amount of time it takes to get into production. All of the streams SND has entered into (except perhaps TBD), we expect to earn somewhere from 30% - 60% of our initial investment about 1.5 - 2 years from the date we make our investment, which is an INCREDIBLE return on investment for a royalty company. For example, if we invested $10 million today, we'd expect to earn $3 - $6 million / year once the stream is in production. Take the first investment in DON for example, ~$20 million investment that would earn us ~$12 million, or about 60% of the investment. Most precious metals streamers are looking at a 4-6 year payout. SSL for example, at spot prices, I think is expecting about a 4.9 year payback on the recent Mutiny stream at spot prices.
So, the recent DON deal is an interesting situation. DON ran out of cash due to their inability to obtain additional financing without suffering serious dilution as a result of a soft market for juniors. Which made it a no-brainer to do another deal with SND.
Which brings me back to my initial question, should SND be investing in Baja mining, or other miners that are half done their projects and need that last little bit to complete construction, similar to DON? That's what we've done for CSI and DON, which are arguably our two most lucrative streams. By providing the last tranche of financing (instead of the first), we have a couple things in our favor: the company is desperate for money meaning we can get a deal done on more favorable terms (their share price has probably already tumbled when they went to the investment bankers for cash), and there is a shorter period of time to production.
Tough question to answer. Clearly there are two sides to this coin. A company that is running out of cash during construction has likely mismanaged funds to some extent. Do we want to be involved with a management team like that?
But the upside could be tremendous. Baja previously owned 70% of the Boleo project which was expected to produce hundreds of millions of pounds of copper (Bracemac Mcleod, on the other hand, is only producing ~20 million), and their current market cap is $35 million. Is this a situation where SND should step in? Probably not, but who knows.
Over the next few years there may be a few more Baja's. It will be interesting to see if Nolan chooses to step in.