Righto buddy. Miners.
You wanna know about royalties? This whole episode's about
royalties. Everything and everything you
wanna know. I wouldn't the the dark art of
royalties and you can make a whole episode about it.
Really you can. We've got it here, buddy.
We have got bloody speaking about royalties.
Talk about insurance, broking royalties, CRE insurance.
Well, we're on the topic on the on the back of telling everyone
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Oh, getting right back on to royalties, right this episode
we've got Spencer Carl from UBSBHBS 32 fame started the
royalty marketplace CIO at Vox Royalties.
And since I've said royalty so many times, you can tell this
guy's a guru about royalties. Yes, royalties streaming buddy.
The the art of it, all the funky stuff.
Let's get into it, JC. Thanks to the boys for recording
this one. Spencer Cole, thank you so much
for for joining us. We're really keen to understand
the landscape of, of royalties, how that industry has changed.
It's changed a lot. The whole yeah, investment
universe for investors has evolved.
The valuations have changed. The way that, you know, mining
companies get finance has changed.
Yeah, I'm, I'm really interested to have this conversation with
you because you've spent obviously the best part is 15
years just trying to find obscure royalties in in the most
strange of places and, and get your hands on them.
Would that be a fair, fair characterisation?
Yeah, it's a fair assessment, Trev, and thanks for having me
here. Yeah, I'm a sort of self
confessed royalty nerd, so I could talk the leg off the chair
about royalties. So happy to talk both of your
the legs off your collective chairs and hopefully it's
interesting for listeners. We, we, we, we want to own some
royalties, Spencer. So if you can find some for us,
that'd be wonderful. But I don't think I don't think
we're alone in wanting to own royalties.
The the challenge is we're just not massive fans of seeing
royalties pop up when they are created in deals because they
they're pretty the hemorrhage projects.
Yeah. Well, not to be flippant, Trev,
but if you're in the market for extremely cheap royalties, the
the the inside money would be if you're willing to go to northern
Burkina where there's, you know, it's more sandy than secure, I
think you you'd be able to buy them for probably less than one
times revenue. But that's not necessarily an
investment strategy that we at Vox Royalty would necessarily
support. So what about?
What about actually upholding the the terms of that royalty?
Would I, how would I go about doing that?
Yeah, need a few. Well you might bit of security.
Challenges You might be getting paid in rubles rather than U.S.
dollars, but when your when your friends at the Wagner Group are
sending you royalty checks. But no, in All, in all
seriousness, there are some some extremely cheap royalties out
there, but they're probably not the type of royalties you want
to be acquiring. Yeah, makes sense.
Totally. It's like for, for us observing
the, the mining industry and, you know, albeit our careers are
shorter than the, the history of the royalty industry, but it, it
really seems like, you know, the oil and gas industry led the way
with, you know, with royalty businesses.
They're they're much larger in that, in that world and, and the
likes. But Franco kind of kind of
captured the essence of, of, of that, that industry and, and,
and birth what is now becoming a quite a substantial and growing
part of the mining industry over time.
They started like, was it 1986 was the first royalty, but they
they didn't actually become at least they spun out of Newmont
in 2007. Is that right?
Yeah. So they they were incubated
within Newmont and then spun out and then ultimately they were
IPO D in 2007. But yeah, that the the classic
story was, you know, they threw one of their connections.
They they heard heard about a small ad in a local Nevada
newspaper selling a a little gold royalty for 2,000,000 bucks
and they rattled the tin with friends and family.
This is PLS on and Seymour short can Fast forward to today and I
think over 40 million oz have been delineated at that little
gold gold claim. So you know, turned that into
that $2,000,000 into a billion Ave. and probably another
billion in MPV at gold strikes. So you know when you do it
right, the industry can be extremely lucrative.
It really is like the ultimate treasure hunt.
If you like sifting through dusty old maps and storerooms
looking for a reference to a forgotten royalty, this is the
industry for you. And you know, it's a great
industry where if you choose the right royalty and, you know, you
just sit back and collect quarterly checks.
So it's that's not a bad business to be in if you can, if
you can choose the right royalties.
They're such awesome business and yet pretty envious.
It's, they're not just limited to natural resources either,
like some of the ones that come to mind, Michael Jordan on, on
his shoes and Coco Chanel, I'm pretty sure had one on Chanel #5
and you know, one of them had like just living expenses
chucked in for the rest of their life.
They're such awesome businesses. I'm sure that's part of the
reason you're sort of attracted to them.
It's. Perpetuity you've got like, it's
these things, it's perpetuity. How many assets do you buy that
have? Yeah, an entitlement for
perpetuity like. The people in the you guys
fence. I think one of the the most
lucrative royalties is actually like AI think it was a royalty
on Listerine or some sort of mouthwash.
And that's, that's yielded, you know, hundreds of 1,000,000.
So, yeah, I mean, these these types of yield instruments, you
know, whether you're in the Pharmaceutical industry, the
music industry or mining, you know, you name it, oil and gas,
you know, they, they're extremely attractive because as
you said, they're perpetual typically.
And you know, if there's a fundamental change or shift in
the industry, you know, you can see, you know, exponential
factor in, in the yield you're getting, which is why I think
generalist investors are also attracted to this model, you
know, relative to just single asset mining, mining companies.
That's a big distinction right in, in mining royalties versus
the the more generic royalties is that, yeah, I'd use the word
perpetuity, but the reality is mines have a finite mine life.
However, you can have a royal, a royalty over an asset and then
there's some new discovery or some like crazy my life
extension, which can, you know, and and they can just keep going
in there. You talked about Frank Franco's
origination. One like that's that's where
things get exciting because you can pay a small amount and and
have a a really large long term lucrative pay off.
Yeah. I think what's what's not as
well understood is, you know, you know, when you value any
sort of option, you know, how do you actually increase the value
of that option? And, and there's a lot of people
running around sort of buying moose pasture royalties or spin
effects royalties that don't have any work going on them.
You know, our focus is really buy royalties at attractive
prices. But most importantly, they have
millions, 10s, hundreds of millions of dollars of work
being done on the ground because, you know, buying
completely out out of the money options.
You know, you're not sort of getting enough shots on goal
relative to if you're buying. You know, if you, if you want
one hypothesis we love is you pick a big hungry mill that's
running out of feed and you try and buy all the royalties on all
the satellite deposits around it.
You know, we've, we've had some success with the likes of
Genesis and whatnot consolidating some of our
royalties and you know, we've made some, some really
attractive returns on that, that hypothesis.
But fundamentally if your royalty isn't getting any
activity and it's moves past you, obviously you know it's
you're not going to get a lot of return on it.
Kaydrill or Exploration royalty that checks out.
They they do all this royalty talk just reminds me of Rhino
Sol Ryan O'Sullivan, the royalty of operation manager exploration
drilling, king of the RC and diamond rig.
Yeah, mate, there mate. There ain't going to be enough
bloody exploration rigs to keep up with this gold mania we are
seeing at the moment. So I would suggest calling K
drill right now if you want their expertise drilling your RC
and diamond holes, because they're probably by the end of
this episode they've been snapped up by someone else.
Get up the team go K drill. Oh, mate, call them now.
Number is in the show notes. Finds yourself some gold.
Spencer, you made the really interesting comment just before
about generalists being attracted to royalties.
And I think that's a an awesome segue into sort of setting the
landscape of what the royalty business looks like in the Hard
Rock natural resources industry right now.
Because it's evolved massively over the past couple decades.
Over the past ten years in particular, the the number of
companies, while not massive, it sort of ticked up steadily and
the combined market cap has also grown quite massively over that
period. So given your sort of 15 year
experience, talk us through how it's kind of evolved and I'm
keen to hear the sort of impacts that the growth in the royalty
sector has had on more classical miners, whether that might be
sort of pulling away market cap, pulling away generalist dollars
and these sorts of things. Yeah.
So, yeah, it's an interesting sort of history, JD, if you go
back sort of 20 years ago, you know, there are about 10 royalty
companies and but collectively I think the combined market cap
was about 1,000,000 bucks, a billion bucks.
Sorry. So, you know, the industry as a
whole has really picked up steam, I guess you could say
largely since the success of Franklin Nevada post 2007.
And you know, there has been somewhat of a proliferation of
royalty companies. So the industry's gone from
circuit 10 companies to 30 companies in the last 20 years
and it's gone from a billion dollar combined market cap to
about 70 billion. Then you know, when you
segmented through a few different lenses, you know it
it, it fragments a bit further. So the majority of that 70
billion is, is precious metals and more specifically gold and
silver. So that probably speaks for, you
know, about 65 of that 70 billion.
And then there's about 5 billion across sort of diversified or
non precious royalty companies. There's three majors, There's
like 3, three major royalty companies kind of dominate.
Is that right? Yeah, that's absolutely right.
So you know, the top three speak for I think 2nd 90 odd percent
of the industry in for in terms of market cap.
But you know, in terms of deal flow and activity, obviously the
the other sort of 27 odd companies, you know, nipping at
their heels and you know, aggressively trying to sort of
step into that sort of next that next category.
I think in terms of how capital has shifted between miners and
royalty companies, you know, it's interesting.
We I'd say the incremental buyer of our stock, particularly since
we do listed on NASDAQ has been US generalist investors.
And so we get a lot of really granular feedback from US family
office investors and generalists and small cap investors.
And for a lot of them, what they'll tell us is I was burnt
on this, this junior mining stock or this whatever mining
stock, you know, a couple of years ago.
And so I haven't been able to trust the mining industry since
then. And so, you know, the attract
the attraction to a royalty model where you've got a
portfolio approach, it's capital light, head count light.
It resonates really strongly. So, you know, I wouldn't say
that that's always been the same level of attraction from
generalists in the last five to 10 years.
But you know, certainly, you know, in these markets where
particularly American generalists are looking for an
inflation hedge, looking for metals exposure, but don't
really know how to dissect the mine.
You know, I think this model is resonating really strongly in
these markets, particularly in the US.
Combine that with the, the historic tendency of of miners
to disappoint expectations as well, right?
Like I was talking to JD this morning about that, that chart
that is always used the showing the historical P NAV, a price to
NAV ratio that the gold miners would would, would trade at for
over like a, you know, 40 year period.
And for the best part of of history, they roughly traded
about two times NAV And then it kind of, you know, rapidly falls
off around 2010 ish 2009 two thousand and 10:00-ish where
they kind of now hover around one times NAV And the the bulls
will tell you a return to the long term average of of of 1.5
Times Now. But I just I think previously
the like investors in those gold companies were were willing to
pay greater than NAV because if because that would attribute,
you know, the option value, the upside or option value of those
like the projects that they had to the to the mining company,
They get the upside of them. But in reality, costs escalate
massively and they're not able to capture the upside of my life
extension on on new discoveries very well at all.
In fact, the royalty companies capture that very well.
Hence, Franco Nevada rightfully trades at two times NAV.
Do you think that's like a fairway to interpret trading
valuation evolution as well? I think there's sort of infinite
ways you could dissect it. Look, I think one metric that is
really telling or maybe 2 metrics, 1 is if you look at the
total quantum of managed mining funds relative to passive mining
ETFs. So as of the end of last year,
the stats I saw was it was about US 28 billion collectively in in
discretionary like mining hedge funds and you know, managed
mining funds. So contrast that 28 billion with
the passive mining ETF money and that that was 330 billion.
So you know, what do you take out of that?
It's that for a lot of the, you know, historically a lot of the
industry and the volatility has been driven by that
discretionary capital. Whereas now this sort of light
towards, you know, passive ETF mining capital.
It's, it's just it grown so much that, you know, if, if investors
want exposure to gold, they're going to buy an ETF that's sort
of gold linked or mining linked more, more and more.
So, So yeah, I think there is an element that a lot of the large
cap golds have have disappointed.
You know, I think our investors tell us that all the time and
that's why they sort of move recycling capital into
royalties. Like you look at Newmont, I
think over the last five years they've doubled their share
count. They've grown production from 5
million oz per annum to 8 million oz and then they've sold
3,000,000 ounces of production. So, you know, they're still at 5
million ounces of production, but they've doubled their share
count. And the share prices, you know,
they're broadly flat. So I think for some of these
large golds companies that just haven't focused on value per
share or compounding returns per share, investors are
understandably pissed off. And you know, that's why a, a
number of people are sort of moving away from the large caps
and just, you know, there's, there's a trend towards passive
sort of index hugging. To to go into the, the multiples
of how these royalty businesses trade sort of in general, it
seems to be around that 20 times, you know, EBITDA multiple
that they kind of trade on. And whilst the market has grown
massively. Am I sort of right in thinking
that has, you know swayed as the the commodity cycle of ebb and
flowed, but it's broadly for a long time despite the growth
stayed similar to that level, right?
Yeah, I think, I think you're right, JD, particularly at the
sort of mid to large cap space at the small cap end of town,
you know, we see sort of multiples that are quasi tech
multiples like 50 to 60 times revenue where, you know,
investors I guess are buying into longer dated, you know,
DCF. Or.
Yeah, development royalties, so and there's probably a lot more
arm waving around, you know, those development pipelines that
at the large end of town. So but yeah, like broadly
speaking, the industry has sort of traded around that sort of
2020 times level. And look, I think what also
shifted in the industry was about sort of 15 years ago with
the advent of streaming and streaming and it's, you know,
when it was created, it was just pure financial arbitrage.
We'll pay 10 times revenue for this metal, this, this silver
byproduct stream and it'll trade, you know, magically it'll
trade at 20 times. And there's a number of people
in the industry that's still trying to chase that, you know,
financial arbitrage dragon, so to speak, some successfully,
some extremely unsuccessfully. But, you know, we're, we're not
in the game of sort of financial arbitrage.
We're trying to focus on, you know, identifying which mines
and deposits are just about to be built and then finding
forgotten royalties from 20 to 40 years ago on those rural on
those projects and acquiring them at attractive prices.
But yeah, this this arbitrage game and and hoping that
everything trades 20 times historically that that's been
quite prevalent, particularly on the streaming side of the
business. That that's an interesting
point, right? And I mean, you do get the the
big difference in in trading valuations between the the
royalty goes that have largely development portfolios.
You don't get too much value for a development royalty given so
much uncertainty with them. But I can like those companies
can try to like slows like .3 Times Now all the way up to to
Franco, which is often north of two Times Now whenever I've
checked. But on the on the on the actual
like the the arbitrage, financial arbitrage side of
things, it's like how do you if you're playing that game, how do
you compete with the, the Francos of the world where the
cost of capital is so, so low? You know what I mean?
Like that, Like, yeah, I always, I always thought of that
conundrum for De Terra in a lot of ways because they they didn't
have the same cost of capital as as as Franco, but you know,
probably found themselves trying to compete with them on various
opportunities. Yeah.
Look, I think if you go head to head with, you know, the
strongest balance sheet in the industry, generally speaking,
you're going to come come off pretty bad and then bruised.
You know, I think the behind closed doors, a lot of the large
capital royalty companies will tell you their cost of capital
is effectively 0 and 1%. You know, maybe that's crept up
with rates a little bit, but you know, you're probably talking
zero to 3% for a lot of the, you know, the large caps.
And so for them, you know, a lot of things, almost everything
looks accretive. So, yeah, the key to in any
rational business model is not not coming head to head with
that extremely low cost of capital.
You know, it's, it's I guess comparable to say, you know, a
sand fire or capstone, you know, trying to compete with a Chinese
SOA cost of capital, you know, that places strategic value on
copper off take like, you know, it just doesn't make any sense.
Don't don't bid against someone who's got, you know, a
structural advantage relative to you.
So look, I think, you know, most sort of mid to small cap royalty
companies acknowledge that and you know, some are still in the
business of trying to win auctions.
Others, you know, we're trying to find bilateral proprietary
deal flow. But you know, it doesn't grow on
trees and you can sort of go seek 25% returns in Excel, you
know, all day every day. But as we all know, you know,
you often that's often not going to be reality.
So just copying and pasting the PEA or the pre phase into Excel,
you know, that's delusional. So, yeah, all that is to say, I
think people have tried to compete with with the large cap
cost of capital, but you know, there's there's a trail of
impairments behind that sort of folly in.
My banking Dave Spencer, I did it.
There was like one, yeah, unsuccessful advisory to a
royalty Co bidding for a, a, a royalty portfolio.
And I can tell you the the assumptions to to try and
compete in that process were assumed better than the better
than the Peas and PEFSS have some really questionable,
dubious projects and they still didn't win.
Yeah. Yeah.
I mean, some people there, some people sort of reach for the
wrong assets. I'm sure we've all seen it.
But yeah. And, and I think others will try
and sort of create, construct this narrative that, you know,
the market's missing a certain technical assumption or, but you
know, if you're getting close to paying 10 to 15 times revenue,
even if there is exploration success in year 25, what does
that really mean for your DCF? And, you know, you're probably
not going to be able to massage your returns from, you know,
maybe from 5 to 6% if you're bidding against the herd like
that. That's a really interesting sort
of concept you, you bring up there because the beauty in a in
a sense is the, the optionality and the thing the, the, you
know, you think about the iron ore royalties and some of them
gone on for 50 years and that wouldn't have looked great in
ADCF, but it's awesome to still get that check 50 years down the
track down the track. But it just doesn't show up as a
massive kicker if you're looking at it from a DCF perspective.
But how do you think about the optionality of multiple cycles
in a commodity and the fact that if you're, you know, in, in a
precious or often in a, in a bulk like an iron ore or a a
long life cop of mine, that it could be around way, way, way
down the track. How do you sort of put that in
perspective when you're crunching the numbers?
Yeah, there's there's probably two different answers to that.
JDI think 1 is, you know, P Ellison often says as the the
godfather of the royalty industry often talks about, you
know, you need a, you know, a 20 year mine life.
So that then you're going to have four or five peaks.
And, you know, if you have commissioning and ramp up
challenges for up to three or four years and then, you know,
enclosure or sort of as the the mine starts to run off, you
know, becomes less predictable and less stable.
So, yeah, I mean, obviously if you can, if you can sort of
underwrite and acquire a royalty on that sort of longevity happy
days. But I think, you know, and, and,
and getting exposure to the full commodity cycle and multiple
cycles, you know, I think gives you some extra embedded
optionality and option value. But I think something is more
important perhaps is if you look at the absolutely spectacular,
like the best deals in the royalty industry, the absolute
barn burners, a lot of them haven't been from, you know,
mine life extending from 10 to 15 years.
A lot of them have been, you know, if you take gold strike,
it was, you know, a smaller scale gold, gold asset in 1986
something, it had 400,000 ounces of reserves in the ground.
There was an ownership change, you know, some brownfields
drilling that that really proved up, you know, extremely well.
And then lo and behold, they've produced another 20 million oz.
So often it's change of ownership, change of project
scale, you know, doubling, tripling, quadrupling the size
of the mill. As ridiculous as that sounds in
this sort of capital intensity environment, you know, it's,
it's often that ownership change and rescoping the fundamental
size and shape of the project that where you see the 100X plus
returns in the royalty industry. And so even if you look at, you
know, another, another incredible deal that Franco did
historically was they put, I think it was a 2 or $3,000,000
into D2 or like when that asset was effectively being acquired.
So, you know, if you can back acquisition finance for an asset
that's been either forgotten or overlooked and then the new
management team comes in, dusts it off and absolutely, you know,
it might inject a billion or a couple of billion dollars of
capital into it. That's where you get the real
talk. It's not, it's not necessarily
the mind life extension. It's it's that rescoping the the
actual throughput and often through change of ownership.
That's yeah, that's fascinating how the different ways that
royalties actually like come come into existence is is an
area of interest. And and like what you talked
about there is acquisition finance is one method.
Project finance, I imagine is a, is an, is another method of a
single asset developer might not be able to access equity in debt
markets quite enough. Chuck a royalty in there.
Yeah. And so so M and a project
finance distressed balance sheets, I think, I think that's
why Sabani I did their streaming deal last year because they
needed the cash. Franco sure, we'll do that.
What like what are the other way weird ways that that you see
royalties kind of come into existence?
Yeah, so, so before moving to other categories, I think
balance sheet repair is an interesting one and particularly
on the streaming side of of the business, less so on the royalty
side. So if you look at some of the
the highest IRR streams in the industry, most of them came from
balance sheet repair transactions.
So, you know, you may recall Circuit 10 years ago when
Glencore had a mountain of debt. And then, you know, the, the,
the, the, the extremely novelty sized checkbooks from the
streaming industry came out and started writing half half
billion dollar checks, you know, into sort of large silver
streams on assets like antimener and you know, some of these
absolute generational base metal ore bodies to repair the likes
of Glencore's balance sheet. Those streams really have been
the most, the highest IRR streams in the industry and
likewise the balance sheet repair royalties as well.
The other, I guess probably the most common way royalties are
created is, you know, when mineral rights claims, tenements
are farmed out or sold. So, you know, particularly in
Australian or US context or in some other countries where the
individual owns the mineral rights, you know, and let's say
a rancher, you know, in Brazil or Nova or even Nevada sells the
the gold rights to their to their land.
You know, selling the mineral rights and then retaining a
royalty is sort of deferred consideration.
That's the most common way that royalties are typically created.
But the challenge then becomes, how the hell do you find that
landowner or, you know, that salty prospector who lives in a
van doesn't have an e-mail address?
It's a real example. But yeah, so it becomes, you
know, bizarrely, the challenge for the industry for these
forgotten royalties is how do you actually track down who owns
the royalty? So, you know, we, we use private
investigators. We send a lot of snail mail, as
as crazy as that sounds, because there's a number of prospectors
and royalty holders that are basically off grid and the only
way you can reach them is, you know, with a written letter or,
you know, through a a private investigator.
So yeah, that that type of royalty created from mineral
rights being sold, that's probably the the most common
sort of creation mechanism for royalties in the industry.
I think you sort of nailed the other ones.
Project finance is probably the second most common creation sort
of genesis. Yeah.
And when you're in a big company and you sell, sell an asset, you
maybe can't get much for it. You've got to put a royalty on
it to have some insurance. You don't look silly down the
track if the new if the new are going to find something.
You call small. That's everyone.
Yeah, it's a great way to get some schmuck insurance as long
as you don't sell the royalty too early.
And unfortunately I've, I've, you know, having worked at the
big end of town, I've, I've seen, you know, that schmuck
insurance created sometimes and then, you know, sold too
cheaply, unfortunately. On the, the earlier point that's
really counter cyclical investing the the Glencore
example you gave when they're in a real pinch point, you know,
indebted up to the hilt and they need to get cash on board.
How do you how do you think about counter cyclical investing
given that you know, you spend a lot of time looking at the
precious metal space Gold has done phenomenally well over the
past couple years. Those more counter cyclical type
deals would be a bit harder to come by, right?
You'd be surprised, I think, you know, royalty holders are still,
you know, subject to the same whims and emotions as everyone
else. And you know, depending on what
types of royalties you're, you're creating, like which of
those you know, whether it's project finance or historical
prospect or royalty, you know, there are, there are, you know,
plentiful opportunities to acquire royalties in troughs in
certain commodities. So you know for example, you
know, when we speak to people about lithium royalties or
Palladium royalties today, you know, relative to two years ago,
you know it's night and day. So yeah, I think the fact that
there is effectively no holding cost on a royalty means that
there are close to perfect counter cyclical investment
instrument because you can buy a royalty when the price is in the
doldrums and put in the bottom drawer.
And then you know, hopefully you know that commodity price, that
metal price main reverts and happy days.
But obviously, you need to make sure that you're buying a
royalty on on an asset that's at the right point in the cost
curve. Yeah, I'd never thought of the
fact they have no holding costs. That's actually like a food.
Food for. Thought the only, the only one
caveat I should say on that is like the only way typically or
sorry, I guess there's two ways that a royalty can be zeroed
out. One is if the mining company
relinquishes the tenements. The other one is if the mining
company ultimately disputes the royalty legally.
But you know, put that to one side, assuming you've done your
proper legal due diligence, like I guess there's no holding cost
on a royalty insofar as the mining company doesn't give the
tenements back to the actual state, which would only
typically happen if there's there's no buyer for those those
tenements. So it's a pretty sort of rare,
rare event. So you don't want to buy
royalties on absolute junk, can you?
Because. It will be really good.
Gotcha. Yeah, or, or or, you know, you
need to be careful also like if the company, if the operator
goes into administration, this gets into the weeds.
But you need to be sure that the royalty runs with the land and
can be secured in the event of administration.
But yeah, so, but generally speaking, it's if you don't buy
a lot of moose pasture royalties with dodgy operators, you're
probably in in good shape. Spencer, there were some pretty
big themes coming out of 2024 in In Your World of royalties.
And I'm came to chat through a couple of them.
You sort of mentioned with a bit of experience the offloading of
these, you know, non core royalties out of, you know, you
know, some of the big companies you worked with.
But it it was a trend across a number of companies last year
with near on a billion dollars in transactions happening.
Is is that something you see continuing?
And can you sort of dig into just briefly the, the rationale
behind the, you know, the liquidation of these royalties?
Yeah, absolutely, JD. So you know there's a lot of
major mining companies or large mid caps that end up with sort
of stranded portfolios of royalties as you're sort of
alluding to. Yeah, last year we did see sort
of close to a billion dollars of secondary royalties traded.
There still are, you know, a number of quite a large quantum
of royalties held within mining companies.
You know, I think as the broader mining industry has sort of, you
know, understood more about the sort of option value of
royalties, you've seen more large cap miners include
royalties as part of sort of divestment or sale proceeds when
they're selling assets. So I think you will see that the
trend of majors creating royalties continue.
You know, if you look at BHP effectively gave away a 2
million oz project in Brazil, the central gold asset just for
a 1% NSR. So, you know, I think the major
miners do realize the value in these royalties G mining.
Picked that up. Yeah, that was the one that came
out of Oscar was Oscar was. Oscar Minerals, Yeah, I think I
tried to sell it, yeah, in the past, but couldn't get much,
yeah. So, yeah, so look, it typically
these are the completely orphaned assets internally.
And you know, when I was with BHP in South 32, it was less so
S 32 more so BHP that, you know, we LED this project essentially
trying to find all these bottom, bottom drawer royalty contracts.
And you know, they they either come from divestments or you
acquire a company like BHP bought WMC and WMC were
brilliant in the 90s when they were divesting all their gold
assets. They always kept a royalty and
so, so you know you've got some of these companies, you know,
I've got a lot of respect for WMC that in their DNA, you know
they understood the value of royalties, so they created a lot
of them. So you know, I think when will
these major miners, when will large the various miners are
still on royalty portfolios sell them.
A lot of it comes down to our esteemed beam counters and you
know, when the CFO has a 50 to $200 million holder plug on
there, you know, for their annual cash flow or their
balance sheet, they'll say, oh, don't we own those royalties?
Can we flip those to, to some sucker for, you know, 50 to 200
million. So a lot of it's sort of
influenced by filling cash holes.
That matches the balance sheet, that matches the divestment of
South 32's royalty portfolios and also Anglo's divestment.
In their in their defence, though, shareholders just don't
really care an awful lot about a couple royalties within a 20 to
$200 billion company, do they? But then they're not really
getting much value. From royalty to pay through the
roof for it. Yeah.
And royalties will see the value, like you said, if they're
going to get marked 20X on the, on the cash flow of some of
these, then it's, you know, it's the kind of financial type of
engineering or whatever you call it that the people on the
finance side love. But it really goes back to what
you were saying before, that you need a balance of geological
knowledge as well as financial knowledge to understand the the
true value of a lot of these royalties.
I'd love to ask. Yeah, two of them.
Two of the WMC 1 Spencer, one of one of them.
One of them you're about to ask about Trev, but go on.
So the the I'm not going to, I'm going to ask about the other
one. So the one I want to ask about
is when I actually only learned about it recently.
But so there was like the, the royalty, the infamous Morgan
Stanley royalties that that haunted WA kind of gold, gold
companies that this was like these were royalties put in
place in 1991 by WMC. But smart folks at Morgan
Stanley commodities, a portfolio of the they will have the same
royalty I think in 2002. And the way it was, was
structured was an unindexed royalty, 4% net smell to return
with an additional price participation at 10% of, of, of
any gold price above $600.00 Australian per oz.
That's an amazing royalty to own because gold grass has just like
trended N over time. And all of a sudden, you know,
like you just get 10% of that price capture into perpetuity.
How like, like surely that's like just an unknown pitfall.
You don't structure royalties like that anymore.
But what's your understanding of like that royalty and the the
kind of impact it had? Yeah, this sort of brings up,
you know, I guess a few questions around, you know,
what's sustainable from a royalty percentage or burden
generally. So, you know, WMC, they
structured a number of gold royalties with price linked
escalators historically. That's that's on the public
record. I think, you know, when gold's
at 23400 bucks, who could possibly imagine that it's going
to double. So it's not not only is it sort
of schmuck insurance, it's schmuck insurance with, you
know, an escalating clause type thing.
But yeah, I think in that that world is specifically and more
generally, I think once you start to see a royalty
overburdening the asset and, you know, directly impacting
operators willingness to drill, you know, develop or expand an
asset, it's this bad business. And so unfortunately, this whole
large swathes of that Morgan Stanley royalty ground that were
effectively sterilized for, you know, over a decade at least
because of how hefty that royalty was.
So hats off to the Morgan Stanley team for for picking
that royalty up. What did what did they pay for
it? And what have it like?
Have you ever done the numbers on what that what their returns
must have been on that? I No, I haven't.
I haven't. I'd be talking out of school, to
be honest. Trav yeah, I can speculate.
But yeah, the most recent iteration, I guess of that
specific royalty was just with. In and around Higginsville and
and Beta Hunt where it was obviously restructured but but
no like I'm sure was a great deal for Morgan Stanley.
But when you think about the cumulative oz and and
exploration that you know that that royalty sterilized in WA,
it was it's probably quite substantial, although you know
somewhat amusingly that WA government's probably in Morgan
Stanley's debt because it means that gold's being mined at you
know, 4400 bucks an ounce instead of 1000 bucks an ounce.
Exactly. Yeah, exactly.
Yeah, yeah, I it's it's I'd I'd love to own that royalty if I if
I couldn't almost stand if you've got any, any left, I'll
I'll happily be gifted one Yeah. And then the the other funky
kind of like WMC. They must have just had yeah
like real now so at them. But these royalties always been
kind of part of their, their deal making, which is wicked.
But they, the one that came into focus last year was a royalty
linked to the use of a drill database.
They had this like drill database from I think diamond
exploration and and I think IGO had some agreement with them
that they could access the database.
And if that database access led to a discovery, then there would
be an applicable royalty on that discovery.
And then it became kind of contentious last year when S S
32 had had basically suggested that Tropicana, Tropicana, you
know, is entitled to to to that royalty.
That's a kind of a funky different structure, but.
It's hard to pay that. Yeah, yeah, yeah, yeah, yeah,
yeah, yeah. Which wouldn't be great for IGO
and Regis, but yeah. Yeah.
I mean, look, it's an interesting example where you
can create royalties through a number of different methods.
You don't only need to sell tenements in that case, you
know, WMC had, you know, one of the most prolific geochem sort
of databases, you know, in Australia or probably in
Australian geoscience history. So, you know, that's a piece of
IP that has, you know, infinite future value.
So creating a royalty structure on the back of that, I think
it's brilliant. And so, you know, it's, it's not
dissimilar to to, you know, in the Pharmaceutical industry, if
someone comes up with a new sort of, you know, formula that can
be the base of a number of different vaccines, you know,
getting a royalty on that, you know, that's that it's very
comparable. Like if you create some some
valuable IPA royalty is a perfect way to sort of extract
rental value where you don't even know what the future use
cases could possibly be. So, yeah, look, I'm having been
at South 32 for a number of years and a lot of friends that
are still, you know, at South 32, I'm obviously, you know,
very invested in how that one plays out, you know, very strong
team at South 32. So I'm sure they've got their
fact base fairly well put together.
But here we'll have to wait and see how that one, how the chips
fall on that one. I think we should touch on
briefly why there's a bit of a, you know, a relative lack of a
royalty sector in Australia. Obviously, like you've said,
heaps of royalties over assets here in Australia.
But when it comes to the big companies you mentioned earlier,
Trev, they're not listed here. We've got the terror, but the,
you know, the combined market cap of ASX listed royalties is
relatively small. So it'd be worth you just
glossing over why, why you think that sort of is, and why the
market formed that way. Yeah, it's one of the most
common questions we get from investors, JD, is why isn't
there, you know, a sort of a royalty industry on the ASX and
you know, why, why is it sort of a bit of a forgotten sector, you
know, until I guess the terror hit the market.
Look, something I've given countless hours of thought over.
I don't think there is anyone sort of logical reason for it.
I think there was an element of first mover advantage in, you
know the likes of Toronto and North America generally where
you know, you had the likes of Franco and Royal Gold just
aggressively mopping up royalties, you know, in
Australia, you know, and globally.
And so if you look at some of the largest royalties by sort of
square kilometre coverage in Australia, a number of them are
owned by Franco and Royal. And so it's a.
Pretty big run out by Gina. Yeah.
So, well, but I mean, particularly royalties that have
that have sort of transacted, yeah.
But yeah, I mean, Gina's no stranger to royalty checks,
obviously, but so, but yeah, no, going back to why, why have
hasn't there been more of an industry?
Yeah, I think it's just that people started to make from when
Franco came out of the gates in 2007 on on equity markets, you
know, it was up and to the right, the share price chart.
And so as you know, they were successful.
It sort of created, you know, it was a bit of a self fulfilling
prophecy in North American equity markets.
More royalty companies were created in North America trying
to replicate that same success and that same multiple and
investors were recycling capital that they that made from
Franco's appreciation. So I think it was this, this
sort of, you know, this this virtuous cycle that was heavily
North American centric and that ecosystem was picking off
Australian royalties, you know, over, over that, that history.
So yeah, there were a couple of attempts, you know, we speak to
different entrepreneurs around the traps and they said, oh, I
tried to launch a royalty company in Oz 10 years ago, but
investors couldn't understand why I should, you know, they
should value it at 20 times when BHP trades at 7 times.
And look, I think that's sort of lack of understanding around the
option value in royalties is part of the equation where you
know, let's say you started, you built a royalty portfolio in
Australia 10 years ago. Where are you going to go?
You're going to list on the ASX where instos don't understand
the valuation dynamics as well? Or are you going to go to North
America where the same size institutions have made 3X4X5X on
Franco already and they've got extra change in their back
pocket to fund your new royalty company.
So I think part of it is that the capital, you know, there's
been momentum in the capital markets in North America and
it's just been an easier proposition to, to, to insert
new companies into that slipstream and not have to deal
with educating capital markets that haven't profited from that
industry, which I think, you know, for companies like the
Terra, that's the challenge is. And you know, we've got some
investors in Australia, but you know, some new investors in
Australia say, well, I can buy Fortescue at 8 * 9 times.
You know, why would I buy a senior royalty company at, you
know, 20 to 30 times? It's so.
It's so fascinating and and kind of counter intuitive what what
you're saying there, because on the other side of that, we see
mining companies come and list here in Australia because
they're like Aussies and the ASX get mining.
They understand that there's still relative to other
countries around the world, dedicated mining, investment
funds and these sorts of things. So as a miner, you, you'll come
here to get a better multiple, you know, especially comparing
to the LSE and these things. I think it's linked.
I reckon it's I think, I think you you come and list in
Australia because we have like greater access to equity capital
markets. Our like you know, the the
forthcomingness of investors to provide equity capital is what
it's actually way better than Canada.
I think, correct me if I'm wrong, Spencer, but I think I
think like you know, the equity checks come a lot easier on the
ASX and they do in in your neck of the woods and as a result.
Being a, as a result, being a proud Australian, I, I feel like
I can say this, there's probably more of a, a gambling culture,
yeah, there's more degenerate gamblers in.
Australia way more, yeah. Well, love making having a punt.
So yeah, no, but I think Trevor, I think you've hit the nail on
the head there. Like I think as with any
industry, whether it's tech in Silicon Valley or, you know,
mining in part in Australia, it's where is the, the largest
sort of pool of risk capital at the lowest possible cost.
And if investors don't believe a certain valuation paradigm, say
in the royalty industry or in African gold producers or you
name the sub sector, you know, if there's not sufficient risk
capital or it's at the wrong price, you'll just go to a
different capital market. So, you know, that's probably a
quarter. Why isn't there a royalty
industry here? And why is this such a thriving
mining industry in in Oz still? Yeah, Yeah.
Like why would you put a royalty on your on your project if you
could just raise capital in the company level instead in
general, you know, assuming you don't have egregious pricing
dynamic supply, But yeah. But but I still think, you know,
the mining investment funds understand how hard mining is,
yes. And they understand that a
royalty is a Better Business. Like it's just it's a kind of
interesting feature of the the market.
Yeah. I think also, and this is maybe
a more left of centre perspective, but there's a
natural friction between specialist lining funds and
royalty companies in the sense that royalty companies are, you
know, capital allocators by nature.
And so they're almost in, yeah, correct.
It's effective a listed investment company.
But if you're, you know, a discretionary, you know, APM at
a mining fund, you're charging fees on the basis that you're
picking the right mining assets. And so the minute you put
capital into a royalty company, you're effectively becoming a
quasi fund of funds. You know that it's sort of a
little bit derivative, but that is the way that some, you know,
mining PMS view the royalty industries.
Well, I can pick my own assets, you know, directly and directly
invest in them. So I don't need the portfolio
approach of a royalty company. So that is some pushback from
some mining PMS. But you know, for every one of
those, there's, there's, there's plenty of other investors that
are, you know, very excited to invest in the royalty industry.
That touches on like a yeah, another development in the, in
the royalty space and that's like, you know, hedge funds who
participate a lot in, in the, the equity participation of, of
junior mining. Like here in Australia, Regal,
Regal Regal started their own royalty fund a few years ago.
They, they also acquired 50% of Taurus more kind of private
equity project financing, but they had a big royalty portfolio
themselves. You know, I'll probably see some
synergies with that, but there's that, but also emergence of the
new players in the royalty market who aren't, you know, a
listed, a listed royalty company per SE, but they are instead,
yeah, investment managers, fund managers or, or or private
equity who are, who are bolting together these portfolios.
What's the what's the rationale for for them you say in in doing
this? Look, I'm, you know, talking a
little bit out of school here, given I'm, you know, not on the
buy side per SE. But you know, I think if you
look at most asset management shops, you know, whether they're
private, public equity, hedge fund or something else in
between, you know, you've got to be good at two things.
One, you've got to be good at sourcing deals and investments
and vetting them and, you know, actually allocating the capital.
That's obvious. The other thing you've got to be
good at is raising money and, you know, bringing the money
into the door so you can invest it and get it out the door.
You're not saying they're just trying to offer a new product,
are you? Well, JD, that's a fairpoint.
I think there's the element of that.
But I think, you know, there are some synergies where if you are
offering a credit product through your credit fund and
then, you know, maybe there's a royalty kicker, maybe you know,
your credit, your lending ratios are maxed out with that issuer.
But hey, an extra 1% royalty, you know, doesn't sort of breach
covenants and you know, you can slot that into your royalty
fund. But likewise, you know, if you
have access to proprietary deal flow and you know, if you have
access to capital, you know, the more that you can keep that sort
of flywheel spinning, whether that's requiring other asset
managers or, you know, spinning up extra funds.
Happy days. You know, we're, we're obviously
at the smaller end of town as a, you know, $200 million Aussie
company, you know, US 1:20-ish. You know, we're essentially in a
similar business of allocating capital investors investments,
but then also attracting investors to buy, you know, our
listed, our listed stock. So yeah, I think if you can
marry those two ends of ends of the like 2 barbells and scale it
up, you know, logically, you know, all power to I've.
Got yeah, 22 last questions for you, Spencer, as a as someone
who has probably studied plenty of mining history as a result of
looking at the the deals that created royalties, worst, worst
deal you've come across? Worst, Worst royalty deal, do
you mean? Yeah.
Go for it. Yeah.
Interpret it like that, yeah. Look a funny one maybe like not
ha ha funny, but funny, you know, if you weren't involved in
the deal was if you look at so it's it's it's well understood
that, you know, BHP historically held the ground at at Paleo
Tolgoi. I guess what's sort of less
known is that, that, that BHP actually retained when that when
they sold well, they effectively gave that ground away to Robert
Friedland. They retained, they retained a
2% NSR on the projects on basically all of oil Tolgoi.
So and then the decision was made I think back in sort of
November 2003 to sell that 2% royalty back to Ivanhoe Mines
for like 37 million. You know, so I think that
royalty would easily be doing sort of circa 40 million bucks a
year, 30 to 40 at a minimum, plus have sort of the Stardust
of oil togos sprinkled on it. So you know whether that would
be be easily I think a sort of a billion dollar.
I think you'd probably get a billion dollars for that today.
But yes, so selling that for 37 million even when the initial
sort of discovery drill holes, you know, the, the discovery was
humming along. So I think that's, that's a
cautionary case study of if you've got, you know, absolute
elephant size deposit and intersections and you've got a
uncapped 2% NSR on, on the asset, don't go and sell it for
$37 million. So that was that was probably
one of the more unfortunate deals.
But you know what that. Reminds me of is, do you
remember hearing the story about that the royalty that the terror
is built on Maxi? It's like I, I heard that in
that, that, you know, when when that mine was sort of, you know,
progressing, yada, yada. It was still uncertainty, but
but a few times BHP had had had offered to buy back the royalty
and, and and and basically by Luca who who owned it came, came
back and said no, not, not 10 million.
My numbers could be wrong here. We want we want 50 million for
it something. Like that ten.
I remember that #2 Gabriel spoke about that on the show.
And and and BHP said no and now like fuck look at the valuation
Tara. Anyway, have you heard similar?
Yeah. Well, well, yeah.
So I have, I guess, heard similar anecdotally.
Yeah. So the flip side of that coin
is, you know, not to be BHP bashing because I'm, you know, a
proud former BHP alumni and, you know, I I had a good experience
working for the company. And so I've got a lot of respect
for the big fella. So the other side of that coin,
Trav, is probably the best royalty deal in history was a
little known deal that if you if you're obsessive about tracking
public records, you can find this, you know, in the archives.
But in 2001 there was a duplicate of the of doterra's
Mac royalty that BHP successfully bought back for
about 10 mil. So from a company from a company
called Cyprus. So I did not know that.
So yeah. So they get credit yeah, yeah,
yeah. They tried to buy reportedly
they tried to buy the other one, the doTerra one back.
But so I think you know, to to for a balanced scorecard for my
my former alumni at BHP, worst deals selling the Oyo Togoy 2%
NSR, but probably one of the best deals in in buying back a
duplicate Mac royalty for 10 mil thereabouts.
So, yeah, yeah. You can't win them all, hey?
You can't you can't win them all.
You can't win them all. Yeah, they get they get some
points for buying back. Yeah, the the duplicate totally.
Yeah, right on BHP. Yeah, win some, you lose some.
What's that? That's that Michael Jordan
quote. You can't.
You can't make a shot you don't take.
So just got to just keep throwing those those bricks at
the ring. What's the best royalty you've
bought? The.
Best deal? I don't I don't like to be too
promotional, I guess. You know, we so look 11.
That's that's the sort of near and dear to the heart was yeah,
we we acquired a royalty from an automotive company.
It was the bottom drawer royalty.
They've historically been, you know, a mining exploration
company hollowed out as an ASX shell, an automotive company was
dropped into them. You know, a high grade discovery
is made. And then we saw that this this
shell still held a royalty. So we're able to buy the royalty
for a couple 100 grand. And you know that that royalty
has just come into production in the last in the last couple of
months. So that's been in the timeline
from discovery drill hole to 1st gold bar port was about six
years. So pretty rapid development on
that asset. So that's one that is sort of a
more recent highlight reel is that there's a few others mount.
Ida one or am I thinking different?
No, no, but. That was a shell as well, right?
Yeah. Man, it was from a hearing aid
company. From that a different shell.
But yeah, so that was that was another, another fun deal.
But no, like we've got a few royalties where what I get
really excited about, and this shows just how much of A
colossal mining nerd, royalty nerd I am.
But what what our team gets really excited about is, you
know, if we can buy royalties at really attractive prices, you
know, let's say 50 to 200 K on, on stranded deposits that we
could see ultimately feeding. You know, adjacent mills, I
mentioned it from the outset, but in WA, you know, it's a
dynamic that's really attractive and it's something we've had
quite a bit of success with. So I think, you know, ultimately
our best return return deals are deals that have that
characteristic where it's difficult to see exactly how
that comes into the mind plan. But with some Intel and with a
bit of analysis from our team, technically, you know, that's
how we can, we can see a line of sight around, you know, it's,
it's you can see a path to 5000 X on some of those investments.
They don't grow on trees and you've got to work hard to find
them. But you know, we've been out
this for quite a long time. So those are the deals that get
us get us most excited. Before you call Spencer, if you
got one of those royalties, call me.
Money mine royalties. Hey Spencer, this is this has
been awesome mate. I've learnt a heap about
royalties and yeah, I always love talking to someone who goes
very deep on a a sort of particular niche.
It's always awesome to to speak with those sorts of folks.
So appreciate you sharing your wisdom with us.
Appreciate that JD, I I wish my beloved California wife shared
the same enthusiasm about my passion for mining royalties,
but that's probably that's a separate conversation with the
beer in hand. You can talk to us whenever you
need that. Yeah, I appreciate that, guys.
Right now you are. There you go.
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