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Ellis Martin Report with EMX Royalty Corp's David Cole

Ellis Martin, Ellis Martin
0 Comments| February 7, 2020

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Jan 12, 2020

In this segment of The Ellis Martin Report, Ellis speaks with David Cole, the CEO of EMX Royalty Corp.(NYSE:EMX/TSX-V:EMX) about the company's successful prospect generator/ royalty generator business model. EMX announced on January 7th, that Dedeman Madencilik has sold the Balya lead-zinc-silver mine to neighboring Esan. In mid-December, EMX announced that they had acquired a 19.9% interest in the Rawhide gold-silver mine in Nevada. The Company also holds a 0.5% royalty over the giant Timok copper-gold deposit in Serbia, now being advanced by Zijin Mining fasting tracking a road to production by constructing two vertical shafts into the upper deposit. Mr. Cole and Ellis take a broad look at the continued growth related to EMX.

0:00 Introduction
1:31 Royalty model
5:57 Ownership advancing Balya mine changes hands
8:51 Gargantuan royalty on Timok project
14:49Equity purchase of Rawhide Gold-Silver mine
16:53Resource potential of Nevada Gold Mines Leeville property

Ellis Martin[0:00]

I'm Ellis Martin. Join me now for conversation with David Cole, the president and CEO of EMX Royalty Corp, trading on the TSX Venture Exchange and on the New York Stock Exchange as EMX. EMX is a precious and base metals royalty company whose investors are provided with discovery, development and commodity price optionality, while limiting exposure to the risks inherent to operating companies. EMX has a sizable global portfolio of assets and has currently over $70 million in the treasury and no debt.

Dave, welcome back to the program. Happy new year to you, although it's well into January now.

David Cole:
Happy new decade to you too,

Ellis. Always my pleasure.Ellis Martin:A lot of exciting things happening with EMX. I noticed the stock price, the share price has done extremely well. Let's start with that. Why in a sector that's been down or flat have we seen such growth with EMX Royalty?

David Cole:
Well, I could expound upon that for a long period of time, but try and summarize it down, we've got over $50 million in cash, $65 million in working capital, no debt exposure 2.3 million acres of mineral rights around the world, and the market is slowly digesting that and understanding that. And I've got some guys that just love to buy value that are managing some funds and been accumulating the stock over the course of the last few months. And that's just augmented. What's been a nice growth story for us over the last four years. We're up four and a half times in four years and still a substantial percentage of our market cap is cash in the bank. And I think we've got quite a bit ways to go, honestly.

Ellis Martin[1:31]
It's really about your business model. It's about cash, it's about revenue, and that's the only thing that's really super sustainable in the mining sector and the resource sector. Wouldn't you agree?

David Cole:
Everybody loves cash flow, particularly in aworld where bonds are trading near zero, that definitely matters. And we have a lot of incipient cashflow as well as some current cashflow embedded in our portfolio. But that has been built thanks to our business model as you point out.

And our business model is unique in the industry in that we grow royalties organically and that's why we call ourselves the royalty generator. We generate royalties through execution of the prospect, generation business model, where we acquire prospective mineral rights, add value to the projects using astute geology, sell them off for cash, shares in companies and always a production royalty. And we've been doing that for 16 years building out a royalty portfolio.

Ellis Martin:
Isn't it interesting that some of the companies now and great for them in the mining sector at 6, 7, 8, $9 a share, and yet they're not in production, they may not be for a while? I would think that a company like yours was perhaps
underexposed to investors around the world and it's such a great store that we still may see a four or five X with regard to your company. And I'm speculating, I'm not asking you to speculate, just a comment if you will.

David Cole:
So, it's an accretive business model that builds value over time. So it's only a matter of time in my view that the business model accretes the fundamental value that will deserve a 4x in the stock price. That's the way royalty companies work, we accrete value over time. The way we build royalties costs less than the traditional royalty company which are doing royalty financings or buying existing royalties at a very high multiple to cash flow because these are very phenomenal financial instruments with embedded optionality, discovery, optionality at no cost to the royalty holder. Commodity price,optionality at no cost to us as the royalty owner.

So that optionality continues to be exposed, to develop more value in the portfolio over time. And that particularly becomes a case when the portfolio effect starts to come into play. When you've got a multitude of royalties spread out across the world and you're never sure where the big success is going to come from. But you know that companies are spending millions of dollars on your projects at no cost to you advancing more resources, more reserves, and more discoveries all to the royalty holder's benefit.

If you go back and you look at the price performance of Franco-Nevada since inception and they've just accreted in valuation, averaged out over their existence in the high teens compounded annually. We take EMX, we're close to 15%, we originally went public at 30 cents Canadian. We're $2 and 10 or 12 cents Canadian now over 16 year period. That works out to a mid teens compounded growth and share price over that time.

Now of course, we're all exposedto these exacerbated cycles in the market that can take the stock and propel it up to crazy evaluations as we saw in 2010, 11, where the entire sector was overvalued. And then it was a steep decline from there, what I call the beta impact, the impact of the overall market, which is independent from what the company's actually doing, where the stock price got hammered along with the entire sector and we became deeply undervalued.

And when we became deeply undervalued, you saw my bind, right? I stepped in, I started buying. I've bought a salient amount of stock over the course of the last four years. I believe I've bought about 700,000 shares in the last year or so alone. That's in my simple recognition that the stocks undervalued, and I'm buying it because I thoroughly understand the business.

Ellis Martin:
I think last time we spoke, your share price was around a $1.65 Canadian, maybe a $1.10, as you said, it's over $2 now Canadian. I'm wondering when your company's performing that well, the company that generates revenue from the royalties that you have around the world, is that an early indicator that the sector itself may see some more love in general?

David Cole:
Well, that's a crystal ball that I don't know. It's certainly an observation. One thing thatwe have seen throughout history a long period of time is that the stock prices tend to move before commodity prices. Although this particular last run, the commodity prices, particularly gold, took quite a run and the stocks were a little bit muted in their response. So it's not always exactly the way you expect it to be.

But I will say simply this, the world consumes approximately 3% more metal every year compounded. And we expect the planet to consume as much copper in the next 25 years as has ever beenconsumed cumulatively throughout all of history, which means every copper mine on the planet has to double in size over the course of the next 25 years. So the value of mineral rights, Ellis, they're not going down.

Ellis Martin[5:57]
One of the most interesting things about a company like yours, is that you'll have a royalty on the property and the property may change hands and it may change hands for the better where actually work gets done and you get paid. You've got a 4% royalty on a property in Turkey right now, and Dedeman Madencilik has sold the Balya Lead-Zinc-Silver mine to neighboring Esan. Now I know that your company, EMX, holds a 4% royalty on this particular property, but let's talk about what that could mean for EMX when something changes hands like this.

David Cole:
It's a great example of the power of royalty generation, Ellis. We originally bought the Balya license at auction from the Turkish government for USD$17,000. We did what we do best and that is build geologic models on the property. We identified prospective zones. We sold that for $100,000 in cash, so we got all our money back and more, plus a 4% uncapped, unbuyable gross royalty on the property for any future production to Dedeman. Dedeman came in and they did 59,000 feet of drilling to advance multiple discoveries and multiple stacked lead-zinc-silver zones, zones of lead, zinc and silver mineralization. And within a district that has been operating on and off for nearly a century.

And the neighboring property had advanced to discovery as well and they were better capitalized, that's Esan, they were better capitalized, they built a 5,000 ton per day mill and that mill chewed through the deposit that they had on their side of the line and they're now mining at 800 to 900 meters depth, which is pretty deep for that style of mineralization.

So that mill's becoming hungry, there's a big discovery on the other side of the property boundary where our 4% royalty is, and those two companies came together and consolidated the district. And anytime you'd have a district consolidation, there's substantial synergies, and synergies that result in more production.

And so now the ores that are on our side of the line where we have the 4% royalty are going to go through the 5,000 ton per day mill because it's all owned by the same company. And as part of that transaction, we had to approve it. So we had leverage. And so we took advantage of that leverage by negotiating a very good co-mingling agreement. And what that means is an agreement that allows our ores to be mixed with their ores and go through the mill.

And it's a sophisticated process of sampling with umpire assays and metallurgical work, which determine how much metals coming from our side of the line so we can be paid appropriately for that royalty. I talk about the power of royalty generation in generating royalties at the grassroots level, organically growing royalties, if you will, and how powerful that is. We're into this property for nothing. We bought it for 17 grand, sold it for100 grand plus a 4% royalty. So we have no cost basis in this and it's to become a multimillion dollar cash flowing royalty annually for many, many, many years into the future.

The money that we will make off the BalyaRoyalty, in my opinion, will be more valuable than all the money we have spent in the history of the company generating all the royalties that we have generated. It's very powerful.

Ellis Martin[8:51]
I want to stay overseas now and talk about something else is very powerful. And again, we're talking about something that has changed hands, specifically the giant Timok copper-gold deposit of Serbia where you have a 0.5% royalty. It's now being advanced by Zijin Mining. I understand they really have their foot on the gas more or less getting this into production and they're constructing two vertical shafts into the upper deposit as you and I are speaking right now, and there'll be likely mining there for in excess of a hundred years. This really is a monster. How does this play out for EMX shareholders potentially?

David Cole:That's the company maker embedded in the portfolio, Ellis. And you hit the nail on the head. It's another example of district consolidation. The Chinese, and you said it right, they've got the pedal to the metal, right? Those guys are so hungry for metal. Their whole economy, and of course, they have an integrated economy and this is a state-owned enterprise or largely a state-owned enterprises, so they're looking at it holistically throughout their economy. They know they'd have to have the copper in order to fuel the manufacturing capacities that they have in China.

So they came in, they bought out Nevsun who had been advancing the deposit. Nevsun had bought out the company of which weoriginally sold the property to and generated the royalty. That was Reservoir Capital and Reservoir made the discovery, then they sold to Nevsun. Nevsun's a much bigger company. Nevsun was then bought out for 1.X billion-dollars because of this deposit byZijin who's even a bigger company. And so now they've got all the capital they need to put the pedal to the metal, really drive this thing into production.

And they just signed a memorandum of understanding representing this fact that they want to move this ahead very, very, very quickly. They signed a memorandum of understanding with the Serbian government to invest $474 million in the ground, to bring on the upper high-grade zone, which is a small but very high-grade and a great economic zone within thebroader Timok deposit. And they're going to bring that high-grade zone into production first. Based on the feasibility study that was filed by Nevsun, when they're mining in the high-grade upper zone, it will pay to EMX Royalty $2.5 million at today's metal prices. And that's in the feasibility study that was filed by Nevsun before the sale to Zijin.

And $2.5 million coming into us is, I mean, that's fine, we're delighted to have that, but that's not company making. When they start to develop the lower zone, which is gargantuan, it's over a billion tons at close to a 1% copper with a really nice gold credit. When they get into the lower zone, which they'll do whilst they're mining the upper zone and getting their payback on capital, they'll develop the underground infrastructure to advance the lower zone. Then the production of the property will go up marketably and the royalty payment will go up marketably from there. And longterm, you can do the math, over a billion tons at a percent copper with a gold credit, that half percent royalty's worth a lot of money and we're delighted to own that royalty...

[10:57]

Listen to the remainder of the interview https://youtu.be/IqulAikuAeo

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About Ellis Martin:Subscribe to the Ellis Martin newsletter. It's free. Go to ellismartinreport.com and fill out the quick and easy popup form.

Important Disclaimer: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. Ellis Martin is a media personality, not a certified financial analyst, licensed broker, fund dealer, exempt market dealer nor does he hold a professional license to offer investment advice. Weprovide no legal opinion in regard to accounting, tax or law. Nothing in an article, report, commentary, interview, and other content constitutes or can be construed as investment advice or an offer or solicitation to buy or sell stock or commodity. Whilethe information is believed to be accurate and reliable, it is not guaranteed or implied to be so.Do your own math and due diligenceand always consult with a financial advisor before making an investment decision.



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