Selling down royalty names after this year’s monster rally.
As a fighter I had power and relatively long reach, but not elite hand speed. Or any other kind of speed. One of the more effective ways I was taught to counter speed was with timing, capitalizing on my power by using a simple heuristic.
If you can feel the other fighters gloves hit your arms, that means he’s in front of you and in range. Fire off a jab and then hammer him with your followup.
Like any heuristic there’s a lot of nuance missing. The effectiveness of that strategy is based on the physical gifts you bring to the ring and whether you’re fighting Ali in his prime, or Joe Hipp.
Applying the principle of heuristics to mining royalties worth buying, all roads lead to one. As in 1 x Net Asset Value:
- Larger royalty companies trade at a premium to NAV
- Smaller royalty companies often trade at large discounts to NAV
- When smaller companies own royalties that bigger companies want, they get bought somewhere around NAV
- NAV, particularly NAV per share, isn’t static. It’s fluid.
You can position early when NAV changes and wait for the market to catch up. Of course when the market catches up you have to sell, or make a conscious decision that there is more value creation possible above and beyond mean reversion to Net Asset Value.
Selling Triple Flag
I’m not sure who buys Triple Flag Precious Metals after surging 66% year-to-date and swallowing Orogen’s Silicon/Arthur NSR. I decided to sell at $36 rather than waiting around to see how far past NAV the stock can run.
I received my TFPM shares after buying Orogen in April/May in the low $1.70s as a takeover arbitrage. Based on the exchange ratio of 0.05355 + 0.25 shares in Orogen 2.0 for every Orogen share, that works out to $1.92 for half my shares.
Combined with the $1.63 in cash I received for the other 50% of my shares, we get an average sale price of $1.77 in cash + 0.25 shares in Orogen 2.0. A long way of saying my cost basis on the Orogen spinco is negative 5 cents.
Selling Gold Royalties common
With Orogen and Altius selling their Silicon/Arthur royalties, Royal Gold buying Sandstorm Gold, and OR Royalties and Triple Flag Precious Metals re-rating closer to their net asset values, these are the royalties I track. They’re the type of royalty a major pays a sickening premium for – gold NSRs on long life assets.
- Odyssey, Cote, Vares: Gold Royalty
- Spring Valley/Moonlight: Sailfish Royalties
- Timok royalty basket: EMX Royalties
- Frotet: Kenorland Minerals
Much easier than tracking dozens of companies holding hundreds of royalties. But you can also see there isn’t much left that would provide an outsized return. We’re waiting on the next wave of monster royalties to appear.
Now here is the year-to-date return on GROY, which went from 0.3 NAV to something approaching 1, we’ll call it 0.9, in a short period of time.
I decided to sell all of my GROY common and lock in the 2.5-bagger return in a few months time. I also sold enough warrants on the move from 25 cents to 1.25 to get my original investment out.
There’s more meat on the bone with GROY as NAV in this case is very fluid. Convertible debentures have moved into the money so the only debt left on the balance sheet that needs to be repaid is approximately US$25-million from a line of credit. That’s nothing for a half billion dollar company. The warrants give me more torque than GROY common to the effects of debt reduction, rising gold prices and cash flow as Cote, Vares, Borborema and Malartic ramp up. With my cost base reduced to zero, I feel comfortable taking on the risk of GROY management relapsing and making a dilutive acquisition. There’s also the possibility increases in the net asset value get cancelled out by warrant exercises and debenture conversions.
Bottom line: I think GROY eventually gets sold but the velocity of the stock move slows down from here. I’m keeping my GROY warrant exposure for as long as I can stomach it.
