David Cole: How to Win the Royalty Lottery
Issue 93, July 2014
After 18 years as an exploration geologist at Newmont Mining, then in its heyday as the world’s largest gold producer, David Cole left in 2003 to found Eurasian Minerals.
“One of the key observations early in my career was the success that Franco-Nevada had with their royalties on the Carlin Trend,” Cole says. “Witnessing how much work was done on the trend, how much money was spent, the risk capital that was invested and how easy it was for Franco to just reap huge rewards as the royalty holder without taking any financial risk. That really sat with me.”
Backed by investor Rick Rule, Cole created a “royalty factory”, a company that would manufacture royalty claims over huge prospective mineral belts for as little cost as possible, free-riding the investment of metal hungry operators.
Recognising that buying royalties was a high cost game and given his “passion” for exploration, Cole’s model was to identify overlooked belts, stake dominant land positions, portion them off into properties and option out a majority share in exchange for small cash payments and a retained royalty right. AMRs, advances on a royalty that kick-in before production, meanwhile help span the gap between prospecting and shovelling ore.
Contrary to Eurasian’s share price, the model is innately counter-cyclical: acreage mopped up in bear markets is unavoidably optioned on when risk capital is hungriest. The trick to the model however, according to Rule, is to keep properties turning in all markets.
Like an estate agent’s window, Eurasian’s “Asset Handbook” includes a list of properties “available for partnership”. The company farmed out 9 in 2013. The deals together include $1.5m in cash payments, $6.7m in contingent payments and $33m in spending commitments, money partners are obliged to spend to help kickstart a discovery, attracting further capital and adding value to the underlying royalty.
The deals have meanwhile pushed 9 new royalties onto Eurasian’s books. “The terms we’re able to achieve has probably taken a step backwards,” Cole says. “That’s okay. What’s important is that dealflow continues to build our portfolio. I’m proud that there’s still robust demand for our product.”
Initially applied in Turkey, then an unfashionable mining address, Eurasian has rolled the model out across the US, Serbia, Sweden, Norway, Haiti, Australia and New Zealand. Cole is secretive about where Eurasian is staking land, but says the company has been picking up acreage dropped by “a competitor that went broke.”
The sprawling portfolio makes that of Newmont, increasingly facing calls for asset rationalisation, look orderly and retrenched. Cole says it is managed by delegating decisions as far as possible, with autonomous business units plying a single model but on different continents.
Bronco Creek Exploration for example is Eurasian’s prospecting business in the US, whilst Eurasian Capital is charged with its merchant bank-type trading operations, spotting opportunistic royalty deals and taking equity stakes in peers, adding props to Eurasian’s royalty assembly line.
“Decisions are commonly made at too high a level within a corporation,” Cole says. His thinking has created a company of maverick geologists, bending new theories such as tilted porphyry systems to spot prospective belts. Eurasian has “the greatest collection of geological talent in the industry,” the chief geologist of a rival company says.
A market that pays big premiums for cash flowing royalties however appears to assign little value to a model that creates them: shares have slipped 70 per cent in 3 years, valuing the company at $56m, vs. royalty income last year of $3m and cash of $11m.
On a property-by-property basis, Eurasian offers something of a royalty lottery: it is impossible for geologists or investors to calculate the future royalty value of scrubland in Arizona or New South Wales. On a portfolio basis however, Eurasian is playing a statistics game: the more properties turned over, the more royalty claims it amasses, until discoveries become a question of time, rather than equity raised.
“It is a long term model,” Cole says, “and of course, stockbrokers want to hear why a stock’s going up next week.” Cole is not short of cues: Rio Tinto is funding a $4.5m exploration campaign on its Lomitas Negras copper project, Arizona, whilst the Turkish operator of the Balya lead-zinc property, subject to a 4 per cent Eurasian royalty, is in discussions with a bordering operator looking to increase its mill feed.
Eurasian is also hosting talks with companies wanting to buy its share of a copper joint-venture with Freeport in Russia worth “substantially more” than Eurasian’s market cap, Cole says. “It’s just a matter of the project advancing, so that we get full value.”
Prodigious investor Rick Rule
buys his lottery tickets with
other people's money
"I think history will demonstrate that he bought it before the lid of the can tore off…"
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"Get naked on the freeway and opportunity will come. Be seen and be in the way of opportunity."