Although Metalla Royalty & Streaming Ltd (CVE:MTA) is a relatively young company, it has been many years in the making.
Chief executive Brett Heath has put the hours in various mining finance contexts, and along the way has come to a simple and straightforward conclusion.
“This is the best way to build a portfolio and get exposure to gold and silver,” he says.
The attractions of royalty and streaming companies, especially in bear markets, are well known. They offer upside to production but don't need to make heavy capital outlays in order to make it happen. They aren't prone to dilution during development and construction. And they can be valued easily, with reference to income streams and prevailing metals prices.
Metalla offers something extra, though. In the business model that Heath has put together, the valuations of royalties and streams that Metalla acquires are likely to be re-rated as soon as they are added to the portfolio. That creates instant upside for Metalla shareholders, and also for the vendors, who more often than not, take shares in Metalla as payment.
To understand how this concept has been developed and put into practice, it’s worth taking a look at Heath’s background, and the expertise in mining finance he has been able to build up during his career.
“I’ve been in the streaming and royalty business for going on seven years now,” he says.
It was then that he came to the realisation that the opportunities presented by the royalties and streaming models could be significant.
A look at the growth trajectory of Silver Wheaton (now Wheaton Precious Metals) and Franco Nevada, tells the story well enough. Franco Nevada has returned over 600% since listing in 2007, and in steady incremental growth too, such that it is now worth in excess of C$17bn. Wheaton has had a bit more of a bumpy ride but is still worth more than seven times its 2008 lows at the current C$12.8bn.
These are huge companies now, but in the case of some deals. almost too big.
And therein lies the opportunity.
It was Heath’s realisation that as the streaming and royalty companies grew, so did their deal size.
“It got to a point where they have a problem with critical mass,” he explains.
“The streaming and royalty space became incredibly competitive for transactions north of the US$100mln level, but it had the reverse effect for deals less than US$20mln. That was the opportunity that I saw that I wanted to capitalise on.”
As the major companies grew, there was an opportunity lower down the scale that Heath saw clearly.
READ: Metalla Royalty and Streaming boosted as CBH Resources adds production in new Endeavor mine plan
But there was a nuance to his vision. Heath wasn't primarily interested in new royalties and streaming deals. Instead, he was more interested in picking up royalties and streams from third parties, because it’s here, he calculated, that Metalla can add the most value.
“There are royalties on almost every single property on the planet,” he says.
“Third party holders of these royalties, for example, individuals, exploration companies, major and mid-tier mining companies, etc.… means that these owners don’t get the valuation that they should primarily because it is not their core business.”
But inside a clear, stock-exchange listed structure like Metalla, it’s another matter.
“Immediately they’re worth significantly more just by bringing them inside of Metalla,” says Heath.
“There is a much better price discovery mechanism in Metalla. Vendors are offered equity, liquidity, cash flow through our dividend program, and the exposure to further growth.”
In two years, the company has done eight transactions and holds more than 20 royalties on properties in Canada, the US and Latin America. It has royalties that are producing, under development, and are currently being explored.
All of which is likely to add up to around C$7mln of operating cash flow for Metalla this year, with a further potential of an additional C$5-8mln per year coming in due course from assets that are currently in development.
Plans to pay back 50% of after-tax and G&A cashflow to shareholders
It's a sure enough foundation on which to build a company, and the path to growth is now becoming clear.
“We can acquire most of our assets through equity,” says Heath.
"Instead of having to go back to the market and raise equity we can issue a share certificate or a convertible debenture. Our cost of capital is zero. It's a great model and most of the stock ends up in strong hands. Truly a win-win type of deal. Every single third-party holder of royalties or streams that has taken equity has made money in Metalla. The holders of the most valuable royalties out there don’t need cash. They usually have plenty of cash. But these are typically very sophisticated people who enjoy making money, so when I can lay out that how a partnership will work with Metalla, they are interested.”
The quality of the current portfolio is another attraction. Metalla holds royalties or streams on properties operated by the likes of Osisko Mining, Agnico Eagle, Goldcorp, Tahoe Resources, CBH Resources and Pan American Silver.
But the clincher is Metalla’s ambition.
“In five years I hope we would have over 100 royalties, with at least ten that are producing,” says Heath. "And we aim to pay back 50% of our after-tax and G&A cashflow to shareholders."
With all that in mind, it’s hardly surprising that deals are coming across his desk all the time.