The following interview of Brett Heath, CEO of Metalla Royalty & Streaming, took place by phone & email over the past 10 days. Brett and his expert team have achieved quite a lot over the past year. In this interview I asked Brett for an update as I am especially interested in Metalla’s latest transaction, (a 2% NSR) on the Santa Gertrudis Royalty.
Please describe the importance of your most recent acquisition, the Santa Gertrudis Royalty (a 2% NSR).
The Santa Gertrudis royalty has the potential to be a Company maker for Metalla. The expansive 42,000-hectare property in Sonora Mexico hosts Carlin-type deposits, similar in nature to what has created some of the largest hydrothermal gold deposits in the world. This, combined with a world-class major gold producer in Agnico Eagle as the operator, that has invested upwards of $100 million into the asset shows the confidence and potential of further upside surprises like the new high-grade discovery of the Centauro Zone. With an overall strike length of 18 km on the Santa Gertrudis property that has already been identified, Metalla is positioned to benefit from additional exploration success from the balance of Agnico’s 2018 drilling campaign and beyond.
Can we get an update on your 2 or 3 most important assets?
The Endeavor mine, operated by CBH Resources where we have a silver stream that contributes the most significant portion of Metalla’s cash flow continues to show signs of further exploration success of the Deep Zinc Lode discovery that was made earlier this year. We hope to have an update in 2019 that outlines a mine plan extension past December 2020.
Also, we are expecting a resource update in January 2019 from Osisko Mining on the Garrison gold property where Metalla has a 2% NSR royalty. Osisko has drilled an additional 90,000 m since the latest PEA (the PEA has just under 2 million ounces of gold resources). We are expecting a significant improvement in total ounces, but also an improvement in the categories of Measured & Indicated.
Finally, the Joaquin project which is being developed by Pan American Silver, where Metalla owns a 2% NSR continues to show progress. Pan American has stated that they now expect production in Q1 of 2020.
The Santa Gertrudis deal puts your market cap above C$80 M. At what stage might a mid-tier precious metals Royalty & Streaming company like Sandstorm Gold (~C$1 billion market cap), or Maverix Metals (~C$515 M market cap) show interest in acquiring Metalla?
The bigger royalty companies historically look to take over smaller royalty companies when gold & silver enter into a bull market. This is because mining company equity often becomes over-valued, making it is less costly to acquire a company like Metalla outright rather than take on a royalty or stream. Bigger royalty companies that trade at much higher valuations can provide big premiums to smaller royalty companies while still being accretive.
One of the biggest problems the big royalty companies have in a bull market in precious metals is growth. That’s because providing project capital to mining companies usually gives them a 2-3 year window for those projects to come online. They are forced to look at buying companies like Metalla or price royalties or streams at a much higher cost. Historically that hasn’t worked out so well.
A crucial part of our portfolio is royalties on development projects with major mining companies. We think these assets will command a large premium in the future, potentially even more than our royalties that are already producing.
Silver & Gold prices (in USD) have been weak this year, down 16% & 6%, respectively, how much is that likely to impact your FY 2019 earnings (for the year ending May 2019)?
We take metal price risk along with the mining companies, specifically on silver where 100% of our cash flow comes from currently. What is important to remember is that royalty & streaming contracts offer guaranteed margins. So where a mining company may be break even or losing money at a slightly lower gold or silver price, Metalla will always have cash flow as long as the asset is in production. More importantly, when precious metals prices rise, there is a tremendous amount of leverage built in that translates directly to the shareholders of Metalla.
On the other hand, lower precious metals prices might enable Metalla to strike better deal terms, do you see more attractive transaction opportunities?
We are looking to lock up as much gold and silver in royalty & streaming contracts as we can at current prices. These are the times when incredible deals can be struck, and, as an investor of Metalla, we pay you to wait through our monthly dividend program.
What can you tell readers about new deals that you’re actively working on, deals that could be announced within the next 6 months?
I can tell readers that the hardest part of building a royalty company is getting to a place of critical mass. I believe we have achieved this in the first two years at Metalla and I think it will be easier to scale this company from C$80M to C$500M than it was to go from C$0 – C$80M. Now is the time to position for the next cycle before the institutions take notice of what we have built.
Your current annualized distribution yield is 2.25% (based on C$0.80 stock price), the highest of any precious metals-focused Royalty/Streamer I know of. As the company grows, what are the implications for monthly distributions over the next 6-12 months?
We hope to bring on some royalties that are currently producing over the next 6 months. If we do, the development pipeline could allow us to enhance our dividend program. We have stated a 50% dividend payout goal, but we are prudently working our way towards that goal.
In terms of company valuation, how does Metalla compare to peers? What metrics do you use in your comparisons?
We still trade at a steep discount to peers based on a Net Asset Value (NAV) perspective. As we grow Metalla to C$100M+ in market cap, we expect investment banks to pick up research coverage of us showing the deep value Metalla has to offer. This could be a big potential catalyst for shareholders over the coming year.
Why should readers consider buying shares of Metalla Royalty & Streaming Ltd. instead of other precious metals companies?
We have a strategy, focusing on the pre-existing royalty market that has allowed up to excel in what is a very competitive industry. As a first mover, this should continue to translate into outperformance among our peers.
Thank you again Brett for your time and thoughtful responses to my questions.
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