Northern Miner Article ( the worst disconnect) The discrepancy between mining company valuations and commodity prices is at its worst levels in decades, the Precious Metals Summit in Colorado heard this week. “This is probably the worst disconnect I’ve seen in over 20 years,” Haytham Hodaly, senior vice-president for corporate development for streaming pioneer Wheaton Precious Metals (TSX: WPM; NYSE: WPM), told the Precious Metals Summit in Colorado.
Eaun Gray, senior vice-president for business development at Franco-Nevada (TSX: FNV; NYSE: FNV) and a 30-year veteran of the sector agreed, calling the situation “unprecedented.”
“This is worse than the ‘little Bre-X thing’ when that came out and everything dropped,” Gray said.
At the same time, the panel of royalty and streaming companies noted that the current divide between mining equities and commodity prices is without parallel, creating a buying opportunity for strategic investors.
Hodaly, who has nearly three decades of experience in the sector, highlights the industry’s approach during such periods of disruption, referring to it as a time of “harvesting.”
“Royalty and streaming companies are essentially providing the necessary funding for other enterprises to advance their projects toward production. While this strategy may seem counterintuitive initially, it reflects a forward-looking approach to long-term value growth,” Hodaly said.
“We’re not seeing necessarily all the fruits of that yet, but I think over the next two to six, maybe even eight years, they will start to bring fruit.”
Wheaton is credited for creating the streaming model in 2004, helping to revolutionize the royalty business. Wheaton’s innovative approach to financing mining companies in exchange for a share of future production has become widely adopted and popular with investors. The model preserves companies’ capital structure while often enabling streaming companies to profit from any future project expansions at no cost.
Royalty companies, on the other hand, do not purchase future production. Instead, they receive a percentage of a mining project’s gross revenue or profit as a royalty payment. This royalty is typically based on a fixed rate of the mine’s production, regardless of the prevailing market prices.
M&A activity
Like the wider mining industry, royalty and streaming companies have seen strong mergers and acquisitions (M&A) activity recently — but with some differences.
Jason Hynes, vice-president for business development and strategy at Royal Gold (NASDAQ: RGLD) and John Griffith, chief development officer for Gold Royalty (NYSE: GROY), noted that M&A activity has evolved, with smaller royalty and streaming companies consolidating with others in their league rather than being absorbed by larger corporations.
In the current landscape, royalty companies have unique advantages. Gray and Griffith highlighted the scalability and potential for upside in royalty investments. Unlike traditional mining investments, royalty investments offer a different risk-reward profile, which can be valuable to a diversified investment portfolio.