RE:RE:RE:RE:RE:RE:RE:RE:Spincos Coming Soon? RookieMining, you clearly do not understand the royalties business model.
Royalty companies have a much lower cost of capital, thanks to their higher capital efficiency and reduced exposure to risk -- There is low overhead, no need to spend on exploration, no need for expensive economic or environmental studies. Thus the business model is basically an arbitrage between the cost of capital for explorers/developers and the cost of capital for a royalty company. It most cases, it makes lots of sense for an explorer or developer to sell equity at the project level via a royalty as opposed to the enterprise level via equity financing.
Though a royalty on Arrow would clearly be the crown jewel, why would that preclude NexGen from acquiring future royalties on other uranium (or even lithium) projects? As long as they are able to properly evaluate projects, it would make sense to accumulate royalties.
Royalties provide more than just optionality to price, they also provide optionality to future resource growth, production growth, and most importantly, new discoveries. This is where most people get it wrong.
For the benefit of your continuing education, below is an exerpt from an interview with Pierre Lassonde, Co-Founder of Franco Nevada. He does a good job of explaining the optionality of royalties:
About your business model at Franco-Nevada: you spent $2 million in ‘83 on a deal that has generated over $800 million. You’ve acquired many more royalties since then. How were you able to make deals with miners that gave you such impressive upside?
As a matter of fact, over its lifetime, cash flows from that deal will probably be around $1.2 billion total. Here’s the thing – why the Franco business model is so incredibly powerful – and very few people understand this. None of our competitors do. They don’t understand what we have when we create a royalty. I’m not talking about a stream; I’m talking about a royalty -- like the GoldStrike royalty or the Detour royalty. We get a free perpetual option on the discoveries made on the land by the operators, and we get a free perpetual option on the price of gold. Think about this – if someone hands you a free perpetual option on 6 million acres of land, and you don’t have to put up a penny, don’t you think that at some point, you’re going to get lucky?
That’s what it is. We have put together a land package by purchasing and creating royalties where we end up with a free perpetual option. It’s the optionality value of the land, the value of the operator spending money on our land, and the optionality to higher gold prices. And that is worth so much money. And yet, when the analysts calculate an NAV, none of them ever look at the optionality that we have in our portfolio. Frankly, it’s what’s worth the most. It’s absolutely what’s worth the most, and it’s what’s given us the GoldStrike billion dollar royalty, the Detour billion dollar royalty, the Tasiast royalty, and so on.
When you buy a stream, on the other hand, you get price optionality. You’re buying, say, 100,000 ounces of gold for the next 25 years. So you get optionality on the price of the commodity, but you don’t get much optionality on the land. In the case of Cobre Panama streaming deal, they’re going to start milling around 200,000 tonnes a day. That’s already so big, it’s not like it could be expanded. And there’s already 50 years of reserves. Even if they find another 20 years of reserves, it doesn’t matter. The optionality is worth something maybe 50 years down the road. But for the next 50 years, it’s not worth a great deal. And that’s the problem with streaming. You don’t get much optionality.
With royalties you get a lot of optionality, and that’s the strength of the Franco-Nevada business model. That’s why it’s so powerful.
Read more here: https://sprottglobal.com/thoughts/articles/pierre-lassonde-franco-nevada-very-few-people-get-this-but-its-worth-so-much-money/