Understanding the Royalty and Prospect Generator Models
EMX Royalty Corporation
Golden Valley Mines
You just heard legendary resource investor Rick Rule talk about the risks inherent in the junior resource sector.
Rick Rule, President & CEO
Sprott US Holdings, Inc.
He warns… if you merged every junior mineral exploration company in the world into one company – call it Junior Explorer Corp. – that company would lose between $2 billion and $5 billion a year!
Henceforth, the investment risks in the junior resource sector are both well-known and well-documented. As a general rule of thumb, do not speculate with more money than you can easily afford to lose. And, do not think you're going to get rich in 90 days… it’s going to take a lot of time and a lot of hard work!
If you aren't prepared to do the work necessary to separate the wheat from the chaff, Rick says, “Don't get near the juniors!”
Rick also goes on to say that you can mitigate risk by speculating in two distinct types of juniors: Royalty Companies and Prospect Generators.
Both of these models allocate risk over numerous projects and/or investments. Let’s explore both with EMX Royalty Corporation and Golden Valley Mines.
EMX Royalty Corporation: A Well-Positioned Royalty Company
EMX Royalty Corp. is a precious and base metals royalty company wherein shareholders are provided with discovery, development, and commodity price optionality while limiting exposure to risks inherent to operating companies.
Many resource stock investors ask the question, “How does a royalty company work?”
For simplicity, let’s explore this question from strictly a “gold royalty” perspective.
A gold royalty is a contract that gives the owner (a royalty company such as EMX) the right to a percentage of gold production or revenue from a mineral producer in exchange for an upfront payment.
Gold royalty companies use these contracts as a way to finance mining companies in need of capital. This alternative form of mine financing is often more attractive than traditional debt or issuing equity.
Gold royalty companies such as EMX will also purchase pre-existing royalties as a way to build a diversified portfolio of royalty assets. Since royalties typically cover the life of a mine, gold royalty companies benefit from the exploration upside that may extend the life of the mine and thus increase the amount of gold (or revenue) they receive from the mining company at no additional cost.
There are several types of royalties. The two most common types are NSR and NPI royalties:
A Net Smelter Return (NSR) royalty is an agreement whereby the mining company agrees to pay the royalty owner a percentage of the revenue, less refining costs.
A Net Profits Interest (NPI) royalty allows the royalty owner a percentage of the profit from the mine.
Investors also ask, “What’s the difference between a royalty and a stream?”
As described above, a royalty is when a mining company agrees to pay a certain part of its revenue to the royalty's owner.
A stream is when the mining company actually sells physical metal to the holder of the streaming agreement. The price per ounce is either a set price (at a much lower rate that the gold spot price) or it is a percentage of the gold spot price. The royalty company makes money by selling the gold for a profit at the current market value.
EMX Royalty Corporation: A Closer Look
EMX Royalty Corp. is a diversified royalty company (not a streaming company) with a balanced mix of precious metal, base metal, and other assets.
Projects & investments on five continents
Total of over 2.3 million acres of mineral property assets from acquisition & evaluation of >5 million acres over 16 years
Gold, copper, cobalt, polymetallic, & other interests
Assets range from royalty properties to early stage exploration projects
EMX boasts a long-standing track record of success in exploration discovery, royalty generation, royalty acquisition, and strategic investments. The company’s diversified, three pronged business approach (illustrated below) provides exposure to multiple upside opportunities while minimizing the impact on the company’s treasury.
EMX’s business model is designed to efficiently manage the risks inherent to the minerals exploration and mining industry. Key elements and resulting advantages of the company’s unique approach are:
Organically generate royalties through low cost property acquisition and early-stage exploration to build value and then develop partnerships with quality companies to advance the projects with EMX retaining a royalty interest and receiving pre-production payments.
Organic royalty growth is supplemented by purchases of royalties from other parties as well as strategic investments.
Cash flow from royalties, advance royalties, and other property payments are supplemented by returns from strategic investments and provide self-funding operating capital for the company’s ongoing business initiatives.
Using this model, EMX is able to sustainably grow its royalty portfolio with minimal dilution to shareholders.
EMX Royalty Corp. is utilizing its strong balance sheet to further grow its pipeline of royalty and royalty generation mineral properties. In recent quarters, the company has been particularly successful in adding prospective new royalty generation properties in the western United States and Scandinavia.
EMX continues to see strong industry interest in its royalty generation properties. The company’s goal is to sustain its royalty generation, royalty acquisition, and strategic investment activities with positive cash flow. The combination of revenue from strategic investments, royalties, advance royalties and other pre-production cash payments has been increasing over time.
EMX is well-funded to identify new strategic investment opportunities while further developing a pipeline of royalty and royalty generation mineral properties that provide multiple opportunities for additional cash flow as well as exploration and production success.
For more information, please visit www.emxroyalty.com
Golden Valley Mines: A Well-Positioned Prospect Generator
Golden Valley Mines is a hybrid exploration company, primarily following the Prospect Generator Model while also participating in royalties.
Many resource investors ask, “What is the Prospect Generator Model?”
First, let’s take a quick look at how the vast majority of junior exploration companies work: A typical junior exploration company will stake a single promising mineral property and then drill exploratory holes until one of two things happen: (1) they get lucky and hit a discovery hole, or (2) the company runs out of cash.
This can be great news for those select few junior explorers that get lucky. Yet, it has been well documented that less than 1% of true grassroots explorers will ever come across an economic mineral deposit.
Those are long odds to say the least!
In the Prospect Generator Model, risk is spread across several projects through joint ventures with third-party firms with the aim of getting those firms to spend capital on advancing the Prospect Generator’s properties in return for an ownership stake.
Here’s how it works:
The Prospect Generator company will stake prospective mineral licenses or acquire early stage projects sometimes for pennies on the dollar.
The Prospect Generator company will partake in early-stage exploration work oftentimes without drilling a single hole.
The Prospect Generator company will package and market its early-stage projects to larger players that may be interested in the jurisdiction, the target commodity, or the geological story.
The joint venture partners (who are usually larger and more established than the Prospect Generator company) will spend their own money and time advancing the project in exchange for a majority ownership position.
The Prospect Generator company can then sit back and watch things unfold for each project on someone else’s dime.
In a best-case scenario, a project will reach production over a period of 5 to 10 years with the Prospect Generator company keeping a decent percentage of the profits.
In a worst-case scenario, the JV partner ends up spending millions of dollars on a project only to decide that they are no longer interested in the partnership. In that scenario, the project is returned to the Prospect Generator company.
As noted, a key benefit of this model is that the risks are spread across multiple projects. Plus, a lower burn rate can mean less dilution to shareholders. More specifically, the company's G&A expenses are spread over many projects versus only one or two.
The Prospect Generator model relies on intellectual capital which gains value with time. In essence, prospect generation is all about leveraging intellectual capital with other people's money.
In general, Prospect Generators will see less upside in the euphoric stage of a bull market but will have much more staying power when the going gets rough.
The only real downside to the Prospect Generator model is that the company does not get to keep the entire project for itself. For instance, if a JV partner finds something that ends up turning into a mine, the Prospect Generator company will only get to keep about 10-30% of a project that it previously owned in full.
That said, mineral deposits are oftentimes worth hundreds of millions, if not billions of dollars. Even a small sliver of ownership in a sizeable deposit can result in a tenfold return for early shareholders.
Golden Valley Mines: A Closer Look
Golden Valley Mines is focused on prospect generation and continues to evaluate opportunities to enhance its mining exploration property portfolio.
Golden Valley Mines Mines has granted an option to O3 Mining to acquire an 80% interest in the Centremaque Gold Prospect, Québec, Canada.
Golden Valley Mines has a 70/30 Joint Venture with Eldorado Gold in a group of nine properties (8 gold and 1 copper-zinc-silver) located in Québec and Ontario, Canada.
Golden Valley Mines has granted an option to Bonterra Resources to acquire an 85% interest in the Lac Barry Prospect, Québec, Canada.
Golden Valley Mines holds an NSR on the Cheechoo Gold Prospect, Québec, Canada, (100% owned by Sirios Resources) which ranges from 2.5% - 4.0% depending on commodity prices.
Golden Valley Mines holds sixty-one 1.25% NSRs via its option/joint venture with Val-d’Or Mining as well as several NSR’s and free-carried interests (FCI) via its active joint ventures with Sirios Resources, Bonterra Resources Ltd. and other joint venture partners.
Golden Valley Mines is focused on asset growth by way of partner-funded option/joint ventures and through its shareholdings and NSR interests in related entities.
For more information, please visit www.goldenvalleymines.com