Investors
like spin-offs. Normally, the attraction here is when investors are already holding a company that announces it is spinning out a new entity. One day they are holding shares in one company; the next day they are holding shares in two companies. A freebie.
However, there is another scenario where a spin-out can be very appetizing to the investing community. A company that is operating different business entities announces a spin-out. Once completed, investors can (if they wish) choose to focus their dollars on only the one entity in which they have the greatest interest.
For these reasons, existing shareholders and new investors alike will be interested in the news of the spin-out of
Sailfish Royalty Corp. (
TSX: V.FISH,
OTCQB: SROYF,
Forum).
FISH is a recently spun-out, stand-alone entity from parent company: Marlin Gold Mining Ltd.(
TSX: V.MLN,
OTCQX: MLNZF,
Forum). For Marlin’s shareholder’s, the appeal is obvious. This was an accretive transaction. The combined market cap for the two entities significantly exceeds the market cap as a single company. Clearly, for that group of investors the creation of Sailfish was good news indeed.
Are there reasons for outside investors to get excited about this new entity? Plenty.
Gaining an understanding of Sailfish Royalty (and Marlin Gold Mining) requires a closer look at the corporate structure. Marlin has its own “parent”: Wexford Capital LP.
What does Wexford bring to the table? That can be summarized fairly simply: leadership, experience, and access to capital markets.
Wexford Capital LP is an SEC registered investment advisor with over US$3 billion of assets under management. The firm, which was formed in 1994, manages a series of hedge funds and private equity funds from its Greenwich, CT and West Palm Beach, FL offices, with a particular focus on energy and natural resources.
This resource sector experience and expertise has led Wexford into the
active management of public companies within its portfolio. One such venture was/is Marlin Gold Mining Ltd. MLN is led by CEO Akiba Leisman. He is supported by Cesar Gonzalez, Vice President of Corporate Development. Both are connected to Wexford.
This is significant for several reasons, beginning with funding for operations. With deep experience in capital markets and established access to funding, Wexford-managed entities have superior access to capital versus typical junior resource companies.
Then there is efficiency. Asset management is the specialty of Leisman, Gonzalez, and the Wexford team. In addition to continuing to operate Marlin; Leisman and Gonzalez will also be the principals for Sailfish, in their same roles. What this means is G&A expenditures for FISH will be kept to an absolute minimum.
That will leave Sailfish’s capital fully available for this Company’s central mission: supplying funding for junior gold mining companies, and then negotiating production streams and/or royalties in return. Alternately, FISH can simply purchase royalty interests or streams directly from the third-party holders of these assets.
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Why hive-off assets into a separate unit, and then spin-off a “gold royalty company”? Spin-offs are always intended to help to maximize shareholder value. Given current market conditions, management viewed this as an especially accretive option for the Company’s shareholders. This will become more apparent as investors read further.
While Sailfish represents a “ground floor” opportunity for gold sector investors, by no means is the Company starting its business from scratch. As part of the terms of the spin-off from Marlin, FISH already boasts two premier assets: a production stream for the San Albino Gold Project (Golden Reign Resources), and a 1.5% - 3.5% NSR on the Tocantinzinho Gold Project (Eldorado Gold).
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Both are advanced-stage gold projects: San Albino with a Preliminary Economic Assessment, and Tocantinzinho with a Feasibility Study, outlining the economics of the gold resources on those properties. San Albino is fully permitted (up to 500 tpd’s), financed for mine construction and could begin production as early as the end of this year. Tocantinzinho is moving toward a production decision, with commercial production potentially commencing in 2019.
San Albino represents near-term revenues for the Company. It is also a potentially greater revenue stream. Under the terms of the agreement with Golden Reign, Sailfish has agreed to provide US$15 million (US$1.1 million funded to date) in financing to advance the project to production.
In exchange, FISH will receive a
40% stream of gold production from San Albino. That stream remains in effect until Sailfish has received
a total of US$19.6 million from Golden Reign (based upon the prevailing spot price for gold). At that time, the stream reverts to a 20% interest, with the 20% production stream remaining in effect for (up to) 40 years.
The terms are different at Tocantinzinho. Sailfish has purchased a 3.5% NSR on that project, an interest that predates Eldorado’s acquisition of the property. Eldorado has the option to reduce the NSR to 1.5%, subject to certain terms/conditions.
However, Tocantinzinho is a much larger project. At its targeted production rate, a future mine would produce approximately 170,000 ounces of gold per year. Even at the current, modest price for the yellow metal, that represents annual revenues of more than US$200 million per year.
A 3.5% NSR on that large revenue pie would amount to over US$7 million per year. Although the expectation is that the buy-back will be exercised by the operator to bring the NSR down to 1.5%, that’s still more than a US$3 million per year revenue stream (before taxes). And the Tocantinzinho royalty remains in effect for the life of the mine, irrespective of how many years/decades that the (potential) mine remains in production.
These are specific reasons why investors would be interested in FISH. But there are also general reasons to be excited about this new public company, and it begins with the royalty company model itself.
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The general rule in the resource sector is that mining entities provide upside leverage when a commodity is in a bull market, but downside leverage in a bear market. As the chart above indicates, the bear market conditions that still largely persist in the gold sector have taken their toll on the valuations of the
mining companies.
But look at the indexed data for the royalty companies. Even in the current flat market, royalty companies provide significant upside leverage versus holding the commodity. And this upside leverage persists when the sector is in a bull market (as gold was for virtually an entire decade).
Some investors will still wish to hold gold, as a physical metal, because of the financial security that this asset class represents. However, many investors in the gold sector are purely interested in participating in the upside potential of the price of gold. As the chart above indicates, those investors would be substantially better off by holding shares in royalty companies.
In a rising market they do better. In a flat market they do better. A no-brainer.
Sailfish is not merely a gold royalty company. It is a brand-new gold royalty company, well funded, with experienced leadership and superior access to capital. That’s the business model as it exists today.
Over the longer term, the message is “more of the same”. More prospective precious metals projects (gold and potentially silver) being added to the portfolio. More royalties and streams. Increasing cash flow for the Company and its shareholders.
In turn, that spells “dividends”. Not only do gold royalty companies provide their shareholders with upside performance versus the price of gold, these companies
pay their shareholders a dividend while they enjoy that greater return. A double no-brainer.
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When it comes to potential future investments for FISH, it may be wise for investors to continue to watch Marlin as well. While Marlin is currently operating the profitable La Trinidad heap leach gold mine in Mexico, MLN also holds title to several other prospective properties. And the Marlin team has already
stated their goal to turn that company into “the next mid-tier gold producer”.
The main advantage for FISH in adding even more streams and/or royalties directly from Marlin is familiarity. One of the main investments for royalty companies (other than their capital) is in conducting the extensive due diligence that is necessary before any responsible management group would deploy their capital in a new project.
With any future acquisitions from Marlin, the time/energy required for such due diligence shrinks to virtually zero. At the same time, however, Akiba Leisman stresses that these two companies operate independently, with all business decisions made with the best interests of each entity in mind.
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Why do gold royalty companies outperform mining companies in a flat market? The royalty business model is a nimble business model. The investment necessary to acquire a royalty or stream is much smaller than the cap-ex to put a mine into production.
With it taking as long as a decade to take a new mining discovery all the way to production, royalty companies will generally obtain a return on their capital more quickly than mining companies. Put those factors together and they equate to a lower-risk business model – something especially attractive to investors in lukewarm market conditions.
One more reason why this spin-off makes particular sense at the current time is ease of transactions. In a conference call with Stockhouse Editorial, Leisman explained that executing a deal as a gold royalty company is roughly “an order of magnitude easier” than negotiating deals as a mining company. Being much more active translates into greater opportunity to add value to operations.
There is “a new kid in town”, called Sailfish Royalty Corp, a new
gold royalty company. Spread the word.
sailfishroyalty.com
FULL DISCLOSURE: Sailfish Royalty Corp. is a paid client of Stockhouse Publishing.