Premier Royalty Inc T.NSR announced January 17 the closing of a bought-deal public offering of 15 million common shares at $2 for gross proceeds of $30 million. The company plans to use the net proceeds from the offering to fund resource royalty and stream acquisitions.
Premier Royalty’s portfolio includes a 1.5% net smelter royalty (NSR) on Newmont’sT.NMC Emigrant Springs Mine in Nevada, a 1% NSR on the Thunder Creek Deposit of Lake Shore Gold’s T.LSG Timmins West Mine in Ontario, a 1% NSR on Village Main Reef’s Buffelsfontein Mine in South Africa, a 1% NSR on AngloGold Ashanti’s MWS tailings processing facility in South Africa and a 1% NSR on Yamana’s T.YRIGualcamayo Mine in Argentina.
President/CEO Abraham Drost was interviewed by Kevin Michael Grace January 18.
RW: Your company is just over a month old, correct?
AD: Yes.
RW: Can you tell me how it came about?
AD: Premier Royalty Inc was listed for trading on the TSX December 7, basically concluding one year as a wholly owned subsidiary of Premier Gold Mines PG:CA. Starting with a nucleus royalty asset called Emigrant Springs, which is now in full production with Newmont as operator, it added four additional cashflowing properties during 2012 before going public.
RW: Is Premier Goldmines your largest shareholder?
AD: It is; they hold about 43% of our stock after the financing announced yesterday.
RW: What are the advantages of a gold-royalty company versus an explorer or miner?
AD: It is well illustrated in the indices of the various sectors. There is the bullion index, which has been climbing steadily since 2008. There is the mining index, for both seniors and juniors, and the royalty index, which more or less encompasses the big four royalty companies. If you look at the indices relative to one another, the royalty index clearly outperforms both bullion and the rest of the mining sector. Bullion, which has performed well over this timeframe, has also been mirrored by a rising cost curve. Inflation is alive, and even though it’s not reflected in the CPI, it has affected the CAPEX exposure of the operators in the mining sector, and so that sector hasn’t performed so well.
So, overall, the royalty space enjoys the benefit of topline revenue from producing mining operations without exposure to the rising cost curve, in both initial construction and sustaining capital costs.
RW: Given how difficult it is for companies to raise equity these days and given what we see in rising CAPEXs of new projects, do you think it is more likely now than previous that prospective goldminers would be looking to sell streams?
AD: Yes, access to capital is an issue in the sector, probably more so for the junior miners than the seniors. Established producers, midtier or senior, do have access to capital, although it may be at a lower share price than what they would prefer.
Presently, it’s really the company looking to make the leap from explorer to junior producer that is the candidate for metal-streaming transactions.
RW: I’m looking at a chart on your webpage that shows the Big Four: Silver WheatonT.SLW at $13 billion, Franco-Nevada T.FNV at $8.3 billion, Royal Gold T.RGL at $5.2 billion and Sandstorm T.SSL at $1.1 billion. How big is your market cap?
AD: As of yesterday, we issued 15 million new shares, and so our current market cap is $150 million.
RW: How big do you want to be?
AD: Effectively, we want to be of a scale that justifies our market cap. So at any given time, the price to NAV or cashflow needs to be in line more or less with our peers. Is bigger better? On the scale of the type of deal we can do, we’re sort of unique in this space. As the companies grow larger, of course, their scale-needs change. They need increasingly larger deals to move the needle on their valuations. Also, it’s a plain fact that in terms of management time, effort and legal expenses, it costs as much to do a $100-million deal as it does a $10-million one.
The royalty space enjoys the benefit of topline revenue from producing mining operations without exposure to the rising cost curve, in both initial construction and sustaining capital costs—Abraham Drost
So the big companies would rather do one big deal rather than a bunch of little ones, and we’re quite comfortable doing the “little deals.” Right now, that’s in the $10- to $25-million range, and there are a significant number of attractive transactions available to us. Over time, we’ll probably evolve, but we’re comfortable where we sit right now. We want to be a healthy organism, and so long as we show a reasonable level of growth going forward, we’ll be satisfied with that. If we grow more in some years than others, that’s OK too, so long as we continue to show forward progress.
RW: Tell me a little about your more prospective early-exploration contracts?
AD: I’ll give you a couple that stand out: the Red Ridge and the Rain assets in Nevada. Both are immediately adjacent to Newmont’s T.NMC producing Emigrant Springs project, on which we hold a 1.5% royalty. Now if Newmont ultimately gains control of both projects, or if Newmont grows Emigrant to the point where it makes sense for them to put Rain back into production or expand its operations into the Red Ridge Project held by McEwen Mining T.MUX, we’re Johnny on the spot in terms of being the underlying royalty holders.
We understand that the mineralization from Emigrant Springs along the favorable structure trends onto Red Ridge. In terms of the geological setting of the deposit, it is in a good place, and we’re in a good place holding a 3% royalty.
RW: After your equity offering, how much cash do you have?
AD: Around $40 million.
RW: What’s your burn rate?
AD: Net of new transactions which add to the burn—and I daresay we’ll be announcing new transactions in 2013—our expenditures are around $2 million a year, which is quite lean in this space. That incorporates all the legal fees, staffing, rent and heat and lights.
RW: Where are you looking for new contracts: what areas?
AD: We’re looking worldwide but are really focused on the Americas. Stability of land tenure is always key. Our first look at any potential opportunity is the financial model. If it passes the financial sniff test in terms of reasonable potential return on investment as far as a royalty goes, then we look at the mining culture and political history. If we’re satisfied that there is reasonable stability, then we have a potential transaction.
RW: Where do you see your company in 2015?
AD: Last year, we completed four new acquisitions, and our objective is to add to our inventory of cashflowing royalties: doing at least two significant transactions a year minimum and moving forward on that basis. With some of the deals we have and are looking at now, we have the potential to grow anywhere from 30% to 80% over the next two years.
At press time, Premier Royalty had 77.9 million shares trading at $1.98 for a market cap of $154.2 million.