New Teams are Playing in
the Royalty Market

Issue 167, September 2016

Frederick Bell has just turned thirty. He is sitting under a chandelier in the oldest restaurant in London. In the 1980s, Bell's family made a small fortune buying shares in Nintendo. His father moved into mining and Frederick followed. He spent his school holidays posting prospectuses to investors in his father's companies. At 24, he was parachuted into Malawi to help rescue an insolvent nickel operation. Now, Frederick is getting into the royalty business.

His private company, Elemental Royalties, has so far agreed three royalty deals. Two are cash-flowing in Africa. The deals are small, in the $1m to $2m bracket, but the returns are high, with payback of two-to-three years, on operations with mine lives of five-to-ten. One family office has offered to backstop Elemental's agreements and Bell is now looking at larger transactions, in the $5m to $20m bracket.

In theory, the royalty sector is saturated. The two biggest players, Franco-Nevada and Silver Wheaton, boast multi-billion dollar market caps. New players in Canada, including Sandstorm and Osisko, are also fiercely bidding for deals. New pretenders abound: Barrick Gold's finance director recently left the group to pair up with Elliott Management, the New York-based hedge fund, to start yet another new royalty firm. Franco-Nevada has meanwhile warned off smaller upstarts, saying it considers no deal too small.

On the ground, Bell sees deals for the taking. He is currently working on four, with “plus-million” ounce resources. “We know the guys who own the royalties and in various ways, all those are available. One of them is blue-chip and would be the cornerstone asset.”

“There's a learning process to everything you do,” Bell says. “We missed out on a deal we wanted last year. We liked the deal, did all the work and actually put a lot of time into looking at the risks... Things changed on their side. Deals were moving so fast, and people's motivation to sell was changing so quickly, you've got the chicken and egg scenario: how do you get the big royalties without the money? So we took the view, you go conservative, you get some smaller cash-flowing royalties on good mines with credible operators and you get it paying. Do it privately and get it done. They didn't fall into our laps, it was quite a lot of work, but we're not paying ourselves, so we're fully incentivised to get it up and running.”

Elemental has also scooped-up a pre-production royalty in Australia, which it bought off administrators, but Bell is wary of buying royalties on assets not yet in production. “It's the high risk option, but it's on an established resource. We need to do deals that will get investors in and get them a return. The exploration model, you need the most patient investors in the world, or you need unlimited money. It's something to do when you're bigger.”

Bell's deals, he says, are coming from two directions. First, large mining houses, with residual non-core royalties, inherited in takeover deals. Often forgotten about, they are sitting on company books, bundled in with royalties to the government. They are overlooked and sellers don't tend to quibble. “It's a decimal point of a decimal point on their balance sheet,” he says. “Because you're essentially doing a discounted cash flow model, they're relatively okay if you get a number that they're happy with. There's a bit of back and forwards, but essentially...

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“If you’re sitting in an office and you’re looking at the accounts, you’re never going to see that.”

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