World’s Top Mining Investors Turn To Metal “Royalties” To Cash In On Next Gold Rush

World’s Top Mining Investors Turn To Metal “Royalties” To Cash In On Next Gold Rush

  • The True Story Of How A Tiny Company’s Shares Soared110,000%By Leveraging Small Stakes In The World’s Largest Gold Mines

  • Why Metal “Royalty” Agreements Are The Hottest And Most Lucrative Assets In Mining Today

  • How Elemental Royalties (TSXV:ELE / US:ELMNF), A Ground-Floor Royalty Company, Took Advantage Of Gold Bear Market To Snap Up Metal “Royalties”

  • And How It’s Using Them TRIPLE Its Mining Business

Dear Reader

The most successful mining stock of the last thirty years does not mine a single ounce of gold, copper, or any other metal. 

Instead, it owns small stakes in some of the world’s largest mines called “royalties.”

These royalties require the mining company to pay the royalty holder a tiny percentage of revenues from the mining operations each quarter. 

As metal prices rise, these royalties can rapidly increase in value. 

Royal Gold (NASDAQ:RGLD) has been buying up royalties on gold and metals mining companies around the world for decades.

It started back in 1991 when, after adjusting for splits, Royal Gold had a market cap of about $7 million.

The steady accumulation of royalty agreements has propelled Royal Gold into a mining giant today though. 

Royal Gold received more than $490 million in revenue last year and it has a market cap of more than $7 BILLION today.

Royal Gold’s rise since 1991 makes it the most successful mining company of the past 30 years. 

It took advantage of the major up and down cycles in mining to deliver 110,000% returns to early investors. 

Today, Elemental Royalties (TSXV:ELE / US:ELEMF), a small upstart royalty company still at the ground-floor level of growth, is following the proven path of Royal Gold by focusing on royalties. 

And 2021 is set to be a breakout year for Elemental as its acquisitions during the last few years, in a tough market for gold and mining, are poised to pay off in a more favorable market.

You’ll Never Buy A “Mining Stock” Again

Before we get into the large royalty agreements Elemental Royalties has acquired during a down market for gold, how it could triple revenues by 2023, and how it’s currently valued at a fraction of its royalty company competitors, you’ve got to understand how the metal royalty business works. 

Because once you get a handle on how metal royalties work, you will see how royalties:

– Leverage to metals prices like owning mining stocks

– Steadily rise in value over time along with other income streams

– Are ideal for cyclical commodity markets because they have ultra-low costs during the weak part of commodity cycles

And they get all those benefits without the costs and extreme financial and engineering risks of building mines in some of the most inhospitable regions in the world. 

These are a few of the reasons why the world’s top investors are turning to the consistency and growth potential of royalty companies to get in on any upturns in gold, copper, and other mineral prices. 

This simple strategy propelled Royal Gold’s shares 110,000%, and it is the exact same strategy  Elemental Royalties (TSXV:ELE / US:ELEMF) has followed over the last few years, while mining assets were out of favor. 

But let’s start at the foundation — the mining royalties themselves.

How To Harness The Explosive Potential Of Mining Royalties

Crating value for shareholders

Royalties are payments usually calculated as a small percentage of the total product sale value. 

The most common form of royalties are on books, where authors will get paid a small amount per copy that’s sold. So, for example, $2 for each $20 book that’s sold goes to the author. 

Common royalties go to producers of movies and TV shows for the revenue they generate. 

These are called royalties because at one time in history private ownership of assets wasn’t as common as it is today. 

And still in most countries, land can be owned by private citizens or companies, but any natural resources under it belong to the government, or at one point in history, the king or queen. 

In exchange for the right to extract those resources, the operator would pay a small fee — hence the “royalty” — to the king or government that claimed ownership. 

Royalties on natural resources are still very common today.

Oil companies pay a significant portion of each barrel sold directly to a local government. For example, Texas charges a 25% royalty rate on oil recovered on state lands. 

They’re also common in mining. Many gold and copper mines have to pay a small portion of revenues to someone who helped develop the mine. 

Making The World’s Largest Gold Miner Pay You…A Fortune

Here’s why Royal Gold is a $7 billion mining company with 27 employees. 

One of Royal Gold’s most successful royalty agreements is on the Penasquito Mine in central Mexico.

Penasquito is owned by the Newmont Corp (NYSE:NEM), the world’s largest gold mining company. 

The mine produces gold, silver, lead, and zinc. 

Although the global economy has caused a lot of havoc in the mining industry, we know that Newmont projected Penasquito to produce 510,000 ounces of gold, 28 million ounces of silver, 360 million pounds of zinc, and 190 million pounds of lead.  

This mine started production in 2010 and is expected to produce minerals until 2032. 

However, Royal Gold moved in early. 

Royal Gold acquired a 2% royalty on Penasquito in 2007 for $100 million in cash and stock.

The deal has paid off well. 

Remember, Royal Gold has a 2% Net Smelter Royalty on that production. 

That 2% is small, but when it’s going against a $1 billion in total metal value of production, that’s $20 million right there. 

And it’s $20 million without all the costs of mining personnel, fuel, trucks, insurance, and everything else that goes into mining. 

Since Royal Gold is focused on acquiring and holding royalties on the minerals produced from mines, the company doesn’t have all the risks that come along with mining stocks. 

Mining is a costly and risky business.

A lot can and does go wrong. 

The life of a major mining operation can stretch 10 to 20 years today. 

But the actual life of a mine from first discovery to eventual closure can be a decade or more on both sides of the producing mine. 

It can take a decade from the initial discovery before the mine is producing any metals. 

That’s an excruciatingly long time as an investor, when very little value for shareholders may even be created at all.

By investing in royalties, you also don’t have to deal with the permitting, technical & development risks.

There are also political risks involved in mining projects. Many of the world’s largest mines are in jurisdictions without long and well-founded legal structures and institutions which can and do complicate the mine development and building process. 

There’s financial risk too. 

There are many horror stories of mine projects just not coming together, even after billions of dollars has been spent on them.

For example, Barrick Gold (NYSE:ABX) was developing the Pascua-Lama project high in the Andes mountains on the border between Chile and Argentina. 

The mine is in a historical district with major mineral discoveries and massive mines that can operate profitably for decades. 

Pascua-Lama had the potential to be bigger than them all, and could have become one of the largest copper and gold mines in the world. 

The budget for the project was $3 billion when development of the project commenced.

However, the cost of the project soared 60%, to more than $5.0 billion in 2011. 

Then in 2012, the company revised the expected costs up to $7.5 billion and then $8 billion.

The mine still hasn’t been placed into production, and Barrick Gold eventually took at $5.1 billion write-down on its investment in the project. 

It was a total failure, with billions of dollars lost. 

Mining royalty companies don’t have exposure to this extreme risk. 

Additionally, with a typical mining project, even after all the ore is extracted, the revenue has been collected, and the mine is closed, there are still more costs. 

These costs include shutting down the mine, environmental clean-up costs, and much more.

Avoiding those risks has plenty of benefits. But there are also some others. 

One of the biggest benefits is exposure to losses. 

Royalties are paid off the top of revenue. 

Costs of production, equipment, maintenance, expansion, and everything else are the mine owner’s problem. 

Royalties are paid to the owner of the royalty right off the top.  

But one of the most exciting benefits of all, where royalties can multiply in value, is the exploration potential of a project. 

Because the royalty agreement often extends to all those parts as well. 

The world’s largest and most successful mines didn’t always start off that way. 

Often, there is additional mineralization discovered nearby, and each additional mine within the area that is covered by the royalty agreement pays out too. 

Still, decades later many of them are still mining gold, copper, and other metals quite profitably. And they’re shipping off checks to the royalty holders the whole time. 

Early investments into royalty streams like the Penasquito Mine and others is how Royal Gold became one of the most successful gold stocks of the last 30 years and returned 110,000% through all the ups and downs the mining industry faced over that time. 

That’s where Elemental Royalties (TSXV:ELE / US:ELEMF) comes in. 

Elemental is following a similar strategy as Royal Gold, but it is much earlier in its growth cycle. 

A Ground-Floor Royalty Stock

Elemental Royalties has been building up a portfolio of mining royalties while private, since 2017.

Although it was in 2020 that Elemental completed a Reverse Take Over (RTO), obtaining a TSX-V listing and raising $24 million, which put the company in a stronger position to acquire further assets, the company’s leaders have been building the foundation for a gold mining royalty stock for a few years now. 

The last few years have been a middling time for the mining industry, and Elemental has taken advantage of this to acquire some potentially lucrative royalty streams. 

The company made a number of critical acquisitions of royalty revenue streams before it went public. 

The chart below shows how the company has been taking advantage of one of the longest flat markets in gold to acquire some potentially lucrative royalty streams.

 

Elemental has acquired four main royalty streams to date:

Wahgnion

  • Produced 175koz gold in 2020. Targeting ~150koz average gold production over next 4 years. 
  • Initial 10-year mine life.
  • Operator Teranga acquired by West African specialist miner Endeavour Gold (TSX: EDV), creating a top ten listed gold producer.
  • US$12m exploration budget in 2021, targeting near-pit discoveries on 1,022km2 license.

Karlawinda

  • Australia’s newest gold mine – first production Q2 2021.
  • Targeting up to 125koz of annual gold production over a 10+ year mine life.
  • Proven management team: Capricorn CEO Mark Clark took WA gold miner Regis Resources (ASX: RRL) from A$40 million to A$2 billion.

Amancaya

  • Satellite operation located 60km from the Guanaco mine and mill, now providing ~98% of mill feed. 
  • 55koz of gold production in 2020, targeting 45-50koz of gold production in 2021.
  • Introducing contractor mining in 2021 to increase skillsets and efficiencies.

Mercedes

  • Equinox Gold (TSX: EQO) acquired Premier Gold Mines, creating a US$3 billion gold miner.
  • Currently producing ~50koz gold following restructuring, potential to return to 80-90koz gold production.
  • Royalty payable to Elemental from July 28, 2022.

 

These are some of the royalty deals Elemental has added to its portfolio over the last few years. 

Many of them are focused on mines operated by large companies, and offer years of revenue ahead. 

Best of all, they show that while these acquisitions were made in a relatively down market period for gold, they are now building up the pay-off in a much more favorable gold market. 

That’s where Elemental’s position in 2021 and beyond is going to provide explosive growth in revenues for the company.

Breakout 2021: Elemental’s Plan To Triple Its Business

The long build-up for Elemental is expected to pay off in 2021 and beyond. 

You’ve seen the quality portfolio of royalty agreements Elemental has acquired since its first acquisition in 2017.

Now it’s time for the rewards of all that effort and investment to start flowing…

And they’re going to start flowing in a big way in 2021. 

For example, the Karlawinda mine in Australia is expected to have its first gold pour in 2021.

There’s an estimated 2.1 million ounces of gold resources in Karlawinda and Elemental has a 2% NSR royalty on this sizable project in Australia’s historic Pilbara mining region. 

On top of that, Elemental receives 11 months of production from the Wahgnion mine in 2021 and Elemental’s 1% NSR royalty on that will be fully realized. 

Add in all the other royalties and it’s clear Elemental has reached its major growth phase, where revenue from all these royalties will start arriving. 

As we’ve seen with many royalty companies in history, the kind of growth that happens at this stage lays the foundation for exponential growth later on.  

As the chart below from Elemental Royalties’ investor presentation shows, the company’s royalty revenues are set to start increasing dramatically in 2021:

The chart shows clearly this is a transformational time for the company. 

Elemental booked $2.4 million revenues in 2019 from its royalties, mainly from its Amancaya royalty. 

It doubled that up last year to $5.1 million, when the first payments from the Wahgnion mine royalty came in as the mine ramped up production. 

This year, with the Karlawinda mine coming online, Elemental is expecting revenues to continue to rise rapidly, to $7.9 million

Then next year and beyond, Elemental is forecasting still higher growth from the ramping up of Karlawinda and additional royalties coming in, including the already operational Mercedes mine.

Right now, without any additional revenues from royalties acquired from reinvesting cash flows, Elemental is expecting revenue to almost triple, from $5.1 million in 2021 to $14.5 million in 2023. 

That’s staggering growth, but it’s just the start of Elemental’s potentially long growth trajectory.

And that’s where Elemental really stands out.  

Ground Floor Royalty Stock With The Goods

Granted, Elemental has a lot going for it. 

It really took advantage of a bad market for gold. 

The payoffs from the targeted acquisitions over more than three years are starting to come in. 

And its revenues are set to soar in the years ahead as a result. 

But perhaps its most attractive feature to an investor looking for gold investment exposure and long-term growth potential is how early Elemental is in its development. 

As we mentioned above, Royal Gold (NASDAQ:RGLD) had some humble beginnings as well. 

Its 110,000% rise has propelled it from a value of just about $7 million to well over $7 billion today.

And it made a lot of investors a fortune in the process. 

Now Elemental has entered the mining royalties sector at a much earlier stage, which is reflected in Elemental’s current market value. 

Elemental currently has 68.9 million shares outstanding, and its shares have averaged at a  trading price of around C$1.40 for the past month. 

Together that gives it a current market cap of about C$96.5 million (or about US$78.3 million),

That’s a fraction of what a royalty company like Royal Gold is. 

A tiny fraction. 

But growth and mining investors understand – you’ve got to start somewhere. 

Elemental’s already started, and is just about to take off and running in 2021.

Conclusion: Better In A Bear, Best In A Bull

Everything is really coming together for Elemental in 2021. 

The royalty revenue streams it was acquiring the rights to over the last few years on developing mine projects are starting to kick in, just as these mines come online. 

Elemental is following a proven growth path, and it’s the same path that made Royal Gold into the most successful mining stock of the last forty years. 

On top of all that, the potential for a strong move in gold prices is as big as it has been in years. 

If you are looking for gold and growth, look into Elemental Royalties (TSXV:ELE / US:ELEMF) today.

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