Rule Summit: Royalty juniors seek higher value in prolonged metals rally

BOCA RATON, Fla. – Smaller royalty companies say stronger metals prices and growing demand for mine financing are creating opportunities to narrow the valuation gap with larger royalty firms.

London-based Ecora Royalties (LSE, TSX: ECOR; US-OTC: ECRAF) doubled its first-quarter portfolio contribution to $12.3 million (C$17.5 million), led by base metals, while Empress Royalty (TSXV: EMPR; US-OTC: EMPYF) more than tripled first-quarter revenue to $9.1 million as stronger production and higher metal prices boosted returnsExecutives from both companies made the case for the royalty model at the Rule Symposium this week.

“We don’t own mines, we don’t hire trucks,” Empress CEO Alexandra Woodyer Sherron told investors Tuesday at the Rule Symposium on Resource Investment. “We don’t deal with labour, unit costs or fuel costs. We provide capital, so our operating partners build the mine. If production grows for them, if the mine expands, additional resources are discovered, we participate in that upside without having to spend any additional capital.”

Executives say smaller royalty companies could benefit as miners seek alternative sources for funding expansions, restarts and new projects while investors remain wary of cost overruns. Royalty and streaming firms offer a middle path: they fund mine owners in return for a slice of revenue or discounted metal, giving shareholders leverage to commodity prices and mine growth without direct exposure to operating costs or risk. The catch is that royalty holders depend on operators they do not control.

Market gap

Ecora is working to leave coal behind. Kestrel, the Australian steelmaking coal royalty that once drove the business, is winding down as the mine plan shifts to ground where Ecora does not earn royalties. Growth now rests on copper and other critical minerals, Ecora aiming to be coal-free after 2030.

That shift started to show in the first quarter. Base metals contribution rose 152% to $8.3 million even though some of Vale’s (NYSE: VALE) Voisey’s Bay cobalt shipments slipped into the second quarter. Ecora says base metals made up half of portfolio contribution last year and could reach about 85% by 2030.

The company’s question is whether investors will pay for future copper growth before the cash arrives. Ecora says its attributable copper exposure could rise from less than 5 million lb. a year to almost 20 million lb. over the next decade as several development-stage royalties move toward production.

Precious bet

Empress offers the simpler precious metals version of the trade. It owns four producing royalties and streams tied to gold and silver mines in Mexico, Peru, South Africa and Mozambique.

The Vancouver-based company expects revenue to climb to about $30 million this year from $17 million last year and says it has sufficient liquidity to pursue additional royalty acquisitions.

Tahuehueto carries the most weight. Empress put $5 million into the silver stream while Luca completed the mine and says it has received $22 million to date from the investment since commercial production began last year.

That concentration cuts both ways, since a small royalty company can move quickly when one or two mines perform, but misses and delays also show up quickly. Empress’s first-quarter Galaxy revenue included a 200-oz. catch-up delivery from a prior-year shortfall, a reminder that royalty revenue can be lumpy even when metal prices help.

Risk-reward model

The royalty model’s caveat is control. Royalty companies do not run mine plans, budgets, labour, permits, shipping or exploration. They often rely on public disclosure and operator forecasts for the assets that pay them.

Ecora felt that in the first quarter when shipping timelines pushed some Voisey’s Bay cobalt into the second quarter and Kestrel produced no royalty revenue because mining fell on land outside Ecora’s private royalty area. Neither setback reflected on Ecora’s own operations , but both affected its results.

Yet the appeal remains clear. Royalty companies can give investors exposure to mine growth without diesel bills, wage pressure or sustaining capital. They can also help executives fight dilution by giving miners capital without issuing shares or taking on more debt.

But the trade is not free. Miners sell away part of future upside and investors buy exposure to mines they cannot steer.

For Ecora and Empress, stronger metals prices have strengthened the investment case for royalties. Whether that translates into higher valuations will depend mainly on their operators delivering the production growth behind their portfolios.