Ross Beaty Vehicle Rolling-Up Royalty Deals
Issue 183, June 2017
In 2015, after 12 years at the helm of Pan American Silver, CEO Geoff Burns fancied a change.
Following a portfolio review, he sat down with chairman Ross Beaty, Pan American's founder, and brought-up the topic of several royalties and streams, sitting buried inside the group's portfolio of South American mines. “I didn't fully appreciate that they had all these royalties,” says Dan O'Flaherty, a former M&A banker at Scotia and Macquarie, who worked on some of the mining industry's first streaming transactions.
Burns pitched to Beaty the idea of hiving-off Pan American's royalties, then going after deals. “Ross thought about it for all of about two minutes” and “instinctively” liked it, says O'Flaherty, who joined the new company, Maverix, as CEO. Burns became Maverix's chairman, they pinched some empty offices in Pan American's Vancouver headquarters and a year later, Maverix is valued at C$209m ($158m), having run into the royalty space at high-speed.
Maverix is one of several new players to recently break into the burgeoning royalty and streaming sector, which was limited to just one player until 2007. At least a dozen listed companies have popped up in the sector since, pumping over $20bn of capital into mining deals in ten years.
Montreal-based Osisko announced an $845m royalty deal earlier this month, only three years after entering the sector, whilst Vancouver-based Metalla, which launched in 2016, recently paid $13m for a portfolio of royalties previously owned by silver group Coeur.
“When we launched Maverix, a lot of the feedback was, geez, there sure are a lot of people wanting to get into the royalty sector,” O'Flaherty says. It is tough to enter, he agrees; some of Pan American's royalties sat dormant for decades before kicking into production. “You need to get that cash flow engine going. It's a tough road.” But ever since Maverix listed, deal flow has been intense.
In December the company swallowed eleven royalties held by South African group Gold Fields, in exchange for a third of Maverix's stock. Two months later, it paid $14m for a second royalty package. Then in April, O'Flaherty announced his third deal in five months. “They are moving really fast,” a rival boss at a smaller firm in the royalty sector says.
“We're starting to burst at the seams,” says O'Flaherty. “We're looking at the $15m to $40m space, which is kind of our strike-zone, and we're able to be very busy, without trying to get in the way of the larger guys. We also get pitched a tremendous amount of ideas. I think we can do more transactions in 2017, I'm confident on that.”
As Maverix's shares have shot up, Pan American's 37 per cent stake is now worth C$77m, daylighting value for assets that investors previously knew nothing about. But can the sector continue its growth?
“In bear markets, royalty companies have tended to outperform,” says O'Flaherty; royalties have high margins, even when metal prices tank. What is “a little counter-intuitive” is that the sector has also outgrown the wider industry on the way up. “Just looking at our own portfolio, our operating partners are incredibly active and aggressive in growing their own assets.”
Six of the nine mines underlying Maverix's royalty portfolio, including Pan American's La Colorada mine in Mexico and Royal Nickel's new Beta Hunt mine in Australia, are either undergoing expansions, or recently entered construction and ramp-up. Aided by deals, Maverix's sales are due to hit $20m to $23m this year, up from around $4m when it listed.
O'Flaherty doesn't see the growth slowing down. When he first worked on streaming in 2004, “people were leery to do new and fancy financial engineering.” Now, the world's largest mining companies, from Glencore to Teck, have all leant on the model for capital. “Some of the bigger transaction have really shone a spotlight on the sector, which is a good thing for deal-flow. We see a lot of steps in front of us.”
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