Premier an up-and-comer in the royalty space

Investors holding paper in most gold producers and explorers have been disappointed recently, but it’s been a different story for investors in gold royalty companies.

An index of royalty companies has outperformed not only a basket of producers (as represented by the Market Vectors Gold Miners ETF), but also the spot price for the yellow metal.

“What we are seeing is that producers and explorers are having their valuations beaten down by rising costs, whereas royalty companies are immune from those costs, and can generate alpha for investors on the basis of making the best transactions,” says Abraham Drost, president and CEO of Premier ­Royalty (NSR-T).

Premier’s emergence on the scene is a sign that higher returns are drawing not only more investors, but also issuers that have built a good reputation on the mining and exploration side. Premier traces its origins to Ewan Downie, of Wolfden Resources fame.

The Northern Miner sat down with Drost in a Trump Tower suite overlooking the glimmering Toronto skyline, away from the buzz of the Prospectors & Developers Association of Canada convention.

“Ewan was approached about some royalties that he had down in Nevada, and he got to thinking that if someone else wants them so bad, then perhaps he should look into the whole royalty thing a bit more,” Drost explains.

With Drost’s recent success in building up the Downie-connected Sabina Gold & Silver (SBB-T) — which he followed up with a stint as president of Sandspring Resources — Downie’s choice was easy.

“The vision was Ewan’s, and I executed on it,” Drost says.

 This included building up a 7,000 oz. per year gold-attributable net smelter return royalty (NSR). If the portfolio remains the same size, this number will dip slightly going into 2014, as two mines in Brazil would shut down before the San Andres mine in Honduras and Emigrant Springs in Nevada provide more ounces, boosting the company back above 7,000 oz. per year heading into 2016.

But with $31 million in the bank, Premier is set to add to its totals when the right deal comes along.

“Over the next two years we plan to reach 10,000 oz.,” Drost says. “We will look at any stable jurisdiction where there is current production.”

Premier has royalties on mines in Nevada, South Africa, Timmins, Argentina, Honduras and Brazil. And unlike Sandstorm Gold (SSL-T, SAND-X), its largest investor, Premier is focusing on NSRs that are attached to producing mines.

In contrast, Standstorm has been strong in the gold-stream space. The distinction between the two is that gold streams are acquired earlier in the development phase, which provides the acquirer with greater risk, but also a higher potential return to compensate for added risk.

Drost explains that Premier’s value added comes from its team’s geological expertise, and its ability to identify NSRs that are available on projects, with the potential to add plenty more ounces down the road.

Competition in the royalty space comes from senior royalty companies such as Silver Wheaton (SLW-T, SLW-N), Franco-Nevada (FNV-T, FNV-N) and Royal Gold (RGL-T, RGLD-Q), but Drost says the royalties that these firms target are larger than what Premier targets.

This doesn’t mean Premier has the smaller-scale royalty landscape all to itself. Drost says that competition comes largely from senior gold producers that are looking to extinguish outstanding royalties on properties that are often held by early stage owners and prospectors.

On the flip side, however, are juniors and smaller-scale producers, which may want to carve out a new royalty to finance expansion, or some other higher-capex project.

The current portfolio of NSRs holds 75% of royalties from third parties, 15% from senior producers and the remaining 10% from juniors with stressed operations.

And while all of these royalties are on gold, going forward Premier has flexibility in acquiring royalties on other metals. This is because the valuation premium that is generally afforded to gold pure plays is only retained when a company generates 80% of revenues from gold, Drost argues.

With Premier generating 100% of revenues from the yellow metal, it could take on 20% of revenue generation from another metal.

“Should we add other metals to the mix? I’ve seen enough to know that you’ve got to keep an open mind,” Drost says.