I've written two articles [
May 5] / [
June 19] about an emerging precious metals Royalty/Streaming (R/S) company in the past two months. I figured that would have been enough until August, especially after the "flash crash" that sent silver briefly to US$ 15.21/oz. on July 7th. So why am I revisiting
Metalla Royalty & Streaming Ltd. (MTS:CSA; NASDAQ:EXCFF) again so soon? First, I was reminded by several readers that an important catalyst for the company is its listing on the TSX Venture Exchange, within two months. I hereby restate that event as not just an important catalyst, but a near-term catalyst.
While some might not think of two months as near-term, it is for those smart enough to buy shares BEFORE the up-listing. The average daily trading volume after the Coeur Mining deal was announced through the end of June has been ~120,000 shares. It would not take a hell of a lot of buying to return the share price to the $0.60's {at $0.52 on July 10th}.
Second, valuation as measured by a cash flow multiple is cheap compared to precious metal R/S peers. However, several peers are giants like Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX), prompting some to question the wisdom in using majors as comps. Point taken. Metalla Royalty is not directly comparable to the largest players, but as it grows through acquisitions like the US$13M deal with Coeur Mining Inc. (CDE:NYSE), it will become attractive to a larger universe of investors, including a range of U.S. and Canadian investment funds. The TSX-V listing is expected soon after the closing of the Coeur transaction. {See July Corporate Presentation}
Third, initiation of a quarterly cash dividend, which I thought was next year's business, could potentially be announced in the 4th quarter. I'm guessing it would start out small, with room to grow. Even a half penny quarterly dividend, (2.0 cents/yr.) would be a 3.85% yield, and only a 26% payout ratio (assuming 71 M shares outstanding and C$5-6 M in annual run-rate cash flow).
Fourth, since May 31st, a large short Interest has developed in Metalla, from a modest 47,500 shares to 1,090,000 shares on 6/30/17. Yet the share price in June was actually up from $0.51 to $0.53. There was modest insider buying and no insider selling in the month and modest insider buying continues in July. I believe a perfect storm could be brewing for summer's end, when the Coeur transaction closes and the TSX-V listing is secured. If a dividend is announced, that too could lead to buying and would add to the holding cost of being short the shares. I think there will be strong buying interest once MTA is on the TSX-V, because I'm told there are a number of institutional accounts on the sidelines waiting for the up-listing.
Fifth, management expects to announce at least one, and possibly two, additional acquisitions by year-end. This could potentially boost annual CF from about C$5-6 M to C$8 M+, a tremendous start for an up and coming R/S company!
Metalla Royalty & Streaming holds great promise as an emerging R/S company. 2018 could be a breakout year for the company in terms of cash flow growth, asset diversification, leveraging the portfolio platform and name recognition. The Coeur Mining transaction is already opening doors; it has put Metalla on the map.
As exciting as the story is, readers are reminded that this is a high-risk, small-cap company. Closing the Coeur transaction and obtaining the TSX-V listing are risk factors worth watching this summer. Metalla's low EV/CF ratio (about 6-7:1) is an indicator of a cheap valuation, but there's no guarantee that the ratio will soon converge with that of peer companies like AuRico Metals Inc. (AMI:TSX; ARCTF:NASDAQ) and Maverix Metals Inc. (MMX:TSX.V; MACIF:NASDAQ)(with EV/CF ratios of ~12-14:1). The company's short operating history as a R/S company might give some investors pause, but therein lies the opportunity as well, to pick up shares before investors catch on that Metalla is the real deal.
I believe that over the next several quarters, Metalla's absolute and relative valuation to industry peers will improve. It won't happen overnight, but it needn't take year(s) either. That's assuming management continues to execute well.
Everything is falling into place, i) gold & silver prices are fairly weak, enabling the company to strike more favorable deals in the near-to-intermediate term, locking in leverage to longer-term uptick in prices ii) Metalla has millions of dollars in loss carry forwards from the previous shell company that will help shield it from cash taxes, iii) management has a full pipeline of transactions for review, iv) upon close of Coeur transaction, the company is already meaningfully de-risked [will be robustly cash flow positive].
That means that in coming years cash flow growth could be much, much higher than peers, with operating margins the same or better. How long will Metalla Royalty's EV/CF ratio remain at 1/2 to 1/4 that of peers? Its P/NAV ratio well under 1.0 to 1 vs. [1.5 - 3.0] to 1 among industry players?
Who knows if or when these valuation gaps might close, but for those with the stomach for high risk, it might be wise to begin investing in this opportunity sooner rather than later.
Peter Epstein is the founder of Epstein Research. His background is in company and financial analysis, and he is a Chartered Financial Analyst (CFA). He holds an MBA degree in financial analysis from New York University's Stern School of Business.
Peter Epstein Disclosures: The content of this article is for illustrative and informational purposes only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research, [ER] including but not limited to, commentary, opinions, views, assumptions, reported facts, estimates, calculations, etc. is to be considered implicit or explicit, investment advice. Further, nothing contained herein is a recommendation or solicitation to buy or sell any security. Mr. Epstein and [ER] are not responsible for investment actions taken by the reader. Mr. Epstein and [ER] have never been, and are not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and do not perform market making activities. Mr. Epstein and [ER] are not directly employed by any company, group, organization, party or person. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they consult with their own licensed or registered financial advisors before making investment decisions.
At the time this article was posted, Peter Epstein owned shares in Metalla Royalty and the Company was an advertiser on [ER]. By virtue of Mr. Epstein’s share ownership and the Company being an advertiser on [ER], Peter Epstein should be viewed as biased in his views on the Company.Readers understand and agree that they must conduct their own research, above and beyond reading this article. While the author believes he’s diligent in screening out companies that are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. Mr. Epstein & [ER] are not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article. Mr. Epstein & [ER] are not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. Mr. Epstein and [ER] are not experts in any company, industry sector or investment topic.
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