Valuing Royalty Companies - EMX

EMX started as Eurasian Minerals Exploration or somesuch.  They were a prospect generator that has been around a long time.  In that time they have acquired a LOT of royalties.  I'll run down their more advanced assets, but it's worth noting they continue to generate royalties, selling 80 projects from 2018 through 2021, that's an average of 20 projects per year.

EMX has an enterprise value of around $216m USD, $240m fully diluted.

Asset Overview

In addition EMX has by my count 116 royalties at the exploration stage that I'm not even going to value.

My bottom up asset valuation puts EMX's assets at 5-5.5x its market cap excluding any value to the 116 exploration stage assets, some of which have significant drill intercepts.  

Until recently EMX didn't have many cashflowing royalties and lived hand to mouth selling equity and taking cash payments on projects, slowing building up a war-chest of royalties.  With $50m in the bank and two long time portfolio projects set to come into production in 2022 (Timok upper, Balya) EMX decided to make two big transactions to transition faster to a cash flow machine.  The first transaction was the already producing Caserones royalty, a low risk low reward but long term cashflow bedrock asset.  

Then EMX bought a portfolio from SSR mining.  I like the acquisition.  The main assets from it are Gediktepe, Yenipazar, and Diablillos.  None are producing yet, but several are advanced, with Gediktepe hopefully producing soon.  The jurisdictions of Turkey, Turkey, and Salta Argentina have spooked a lot of investors.  

The late new that threw the market was Zijin threatened to not pay the 0.5% royalty on Timok and instead pay only 0.125%.  EMX has extended the Sprott loan to give them cashflow wiggle room while Timok Upper payments are delayed during the dispute.  But the bigger issue is the Timok overall value including the lower would take a hit if they don't prevail.  If the royalty were fully lowered from 0.5% to 0.125% it lowers my total valuation of the company assets by 48% to $621.9m.  Even at that valuation the company trades at a larger discount than most royalty companies.

In short, EMX is at an inflection point.  As more of their assets move to reliable cashflow generation the company market cap should increase to reflect the value of its assets.  I can easily forsee that in a couple years they will be a cash generating machine with tons of exploration upside.

Asset Discussion - Producing

We value producing mine royalties by the attributable resource royalty ounces.  See previous articles for a more full discussion of the rationale for this valuation method.

Caserones (aka Casherones)

0.418% NSR.  In November 2020 JX Nippon announced plans for "stepping up exploration efforts in areas around the mine".  It's a big copper/moly porphyry mine originally with resources through 2040.  Current payable production should average 148k tons of Copper Equivalent.  With copper at $9,678/ton we end up with:
148,000 tons peryear * $9,678 per ton * 0.00418 * 18 years = $107m

EMX Acquired the royalty for $34.1m.  Nomad Royalty also owns some of the NSR on this mine and can be a good source of predicting cashflows.  If you run the full discounted cashflow spreadsheet (DCF) with just the current mine production and mine life you get a pretty modest single digit percentage annual return on the investment.  The real return on this one comes if you assume that there will be either increases in production or increases in mine life by adding resources through exploration.

Leeville

Acquired in 2012 for about $36.9m in shares and cash it has already paid out $16.8m.  It's a 1% GSR on an area operated by Nevada Gold Mines that crosses three different operations, West Leeville, CArlin East, and Turf.  In 2020 it produced 555 ounces of gold to EMX.  NGM has made several statements about expansion in the area, including in areas covered by EMX's royalty.  There is no statement of reserve life or size.  Let's wild guess 10 years of resources, or 5550 oz M&I.

5550 oz * $1797 per oz = $10m

Rawhide

EMX own 39% of the Rawhide mine directly via equity.  It seems to be losing money.  I don't know if it made money early on after the acqusition, but I'm valuing it at $0 now.  This is another example of why I prefer royalty companies not hold equity long term and only keep royalties while selling equity in mines.

EMX still belives there is lots of potential upside to Rawhide and has increased their percentage stake in the mine.  I hope they are right.

Asset Discussion - Production Expected in 2022

Balya North

4% NSR on all metals.  The Balya complex is in commercial production, but the North portion that EMX has a royalty on is just producing a little as construction of the decline is underway.  So this will produce some income for EMX this year, but isn't yet fully scaled yet.  The operator continue to drill more wide intersections of high grade lead-zinc-silver mineralization.

It's really hard to value this one, because the operator is private and doesn't disclose a lot. Average global Lead-zinc grade is estimated at 6.05% Pb-Zn.

Balya has a 5k ton per day mill.  The North will probably account for half of the ore once fully ramped up.  "Now it's going to pay millions of dollars per year for decades into the future."  It's huge, 1800m x 3000m CRD with mineraliation at various depths from 10-20m to 200-300m to over 700m.  

Let's figure 2.5k ton per day * 300 days per year * 0.0605 Pb-Zn = 45,375 tons per year production.  4% of that is 1815 tons per year attributable to EMX.  Call it $2981 per ton = $5.4 million per year to EMX.  Give it a 20 year mine life and it is $108m.  They'll probably double mill capacity at some point, but we haven't discounted the cash.  Call it a round $100m.  It's a wild guess, but it lines up as plausible with millions per year decades into the future, the size and depth of the system, the mill throughput, reasonable grades, limited drill results from press releases, etc.

Timok Cukaru Peki Upper

Zijin mining has started production.  However, they are currently disputing the EMX royalty rate.  EMX initially decided to file for arbitration in Canada, but has since paused that filing while dicussions with Zijin continue.  I will treat the royalty as if it is at the rate EMX expects based on my reading of the contract.  I am not a lawyer, do your own dilligence.

EMX commissioned an updated 43-101 in Dec 2020, Feb 2021.  It was updated in July 2021.  I could only find it on Sedar (hint to royalty companies, host documents on your website and link to them).

M&I 1.05Mt copper, 2.2Moz gold.  There's another inferred .23Mt Cu & 0.42Moz gold, so that's nice.  EMX has a 0.5% royalty covering the upper and lower.  Zijin would like to pretend it is 0.125%

2,200,000 oz Au * 0.005 * $1797 = $19.7m

1,050,000 tons copper * $9678 per ton * 0.005 = $50.8m

total $70.5m

Gediktepe Oxide

10% NSR.  This project is in construction and should go into production immenintly.  233k oz Au, 5703 oz Ag

233,000 * 0.1 * $1797 + 5,703,000 * $22.47 * 0.1 = $54.7m

Asset Discussion - Advanced Development

Timok Cukaru Peki Lower

The same 43-101 that covered the upper puts the lower as havving Inferred 14.3Mt copper & 9.6Moz gold.  Given the upper is already started production and the lower is fully permitted I'm going to only discount 10% from the full production value.  I'm giving no value to the inferred and no discount for the time value of money or future increases or decreases in copper price.  A DCF may be a better way to value long life projects like this one, but this is still order of magnitude useful.

14,300,000 * $9678 * .005  = $692m in production * 0.9 = $622.7m current value

9,600,000 * $1797 * .005 = $86m in production * 0.9 = $77.6m current value

total $700.3m

Gediktepe Sulfide

2%NSR.  645k oz Au, 24Moz Ag, 241kt Cu, 472kt Zn

645,000 * 0.02 * $1797 + 24,000,000 * 0.02 * $22.47 + 241,000 * $9678 * 0.02 + 472,000 * $3674 * 0.02 = 115.3m if in production.  I will also discount this 50% given the jurisdiction of Turkey, that it is going into production after the oxide, etc.  $57.1m

Yenipazar

EMX acquired a variable net profit interest (NPI) as part of the SSR mining portfolio acquisition.  There was a 2013 Feasability study. Page 1-35 of that study values the Net Present Value (NPV) of the Net Profit Interest (NPI) between NPV0% of  92m to NPV10 of $47m.  That assumed $1450 gold, $28 silver, $3 copper, $0.95 lead, and $0.90 zinc.  The operator is currently seeking financing for the project.

We'll be concervative and give the project a 50% chance, despite having a final feasability study with good economics.  We'll also use the more concervative NPV10 and the low metal prices from the study.

$47m / 2 = $23.5m

Diablillos

EMX has a 1% NSR on this Abra Silver project in Salta province Argentina.  Abra filed the PEA  January 13, 2022.  It has in M&I 90Moz Ag & 1Moz Au.  They contine to deliver drill results outside the current resource and seem to have found a copper zone under the gold and silver zone.  These developments give lots of upside.

90,000,000 * $22.47 * 0.01 = $20m silver if in production = $10m current value

1,000,000 * $1797 * 0.01 = $18m gold if in production = $9m current value

We'll also discount this 50% since they are quite a ways from production, but there is a lot of upside if they keep growing the resource through drilling as they currently are.  Especially if that copper is a large porphyry copper gold system.

LK project

2% NSR on Palladium One's project.  In 2019 they had 635k PdEq oz Indicated.  

$2340 * 635,000 * 0.02 = $29.7m if in production.  And the resource is likely to at least double from 2019 as there has been a lot more drilling that defines a new South Zone, more depth, etc.

Palladium One has a market cap of $56m and this is their only drilled project, so a royalty to equity economic conversion makes it also seem reasonable as a valuation sanity check.

I'll give it a 50% haircut to $14.9m and ignore that the resource is about to double since commerical development is a long way off.

NP Placers

EMX gets greater of 4% or $0.50/yd.  It's a placier operation in development, I'm carrying at $0 for now.

San Marcial

GR Silver just released drill results from 8 holes aimed at expanding the resource, and they are good.  Previously they had 36Moz AgEq Indicated.  Two of the new holes are the best grade intervals yet, better than the current resource.

36,000,000 * $22.47 * 0.0075 = $6m if in production.  Given the recent better results I'm only going to discount it 50%, $3m

Viscaria

EMX has a 1% NSR, but has to pay 0.5% to another company for awhile.  Let's call it 0.75% average.  It's an interesting underground iron/copper past producing mine.  It has a feasability study and they plan to submit an environmental permit spring 2022.  M&I Copper 519kt, Fe 6406kt.  

519000 * $9678 * 0.0075 + 6406000 * $150 * 0.0075 = $109.7m if in production.  I'll carry it at 20%.  $21.9m

Akarca

EMX has a sliding scale 1-3% NSR.  The last update seems to be from early 2018.  But it had a lot of drilling with some decent intercepts.  I'm carrying it at $0 for now.

Sisorta

The last update was August 2016.  Carrying it at $0 for now.

Tartan Lake

2% NSR.  This is a past producing mine with an existing mill in Canada and a 2017 technical report with a maiden resource of 240k oz Au.  It's owned by Satori Resources, a publicly traded company.

This is early enough we can look at the equity method.  A 2% NSR is about a 15% profit share of the final mine, and as much as 80% for early stage companies.  Satori has a market cap of $9.2m, so let's say the NSR is worth 50% of that, $4.6m.

Going from the resource 240,000 * 0.02 * $1797 = $8.6m if in production, we'll discount it 75% because it's so early, so around $2.2m

Challacollo

EMX has a 2% NSR.  Challacollo is in Chile and is being developed by Aftermath Silver.  It has a Maiden Resource from December 2020 of 35Moz Ag, 58koz Au.  That's a lot of silver.

35,000,000 * $22.47 * 0.02 = $15.7m if in production.  I'll discount it 75% since it is pretty early and Chile doesn't thrill me as a jurisdiction right now.  $3.9m

Berenguela

EMX has a 1-1.25% NSR.  Southern Peru.  Valor did a 2018 Resource, which is the basis of a 2021 technical report by Aftermath Silver.  Aftermath acquired the project from SSR mining at the end of 2020.  They are currently drilling on the project as of this writing. 108Moz Ag, 283kt Cu, 2Mt Mn (Manganese, which trades at similar prices to iron, $150/ton), 109kt Zn, 34kt Pb.

(108000000 × 22.47 × 0.0125) + (283000 × 9678 × 0.0125) + (2000000 × 150 × 0.0125) + (109000 × 3674 × 0.0125) + (34000 × 2288 × 0.0125) = $74m if in production and with perfect recoveries in a flowsheet that is impossible.  I'm knocking 85% off of it because Peru and early stage polymetalic project.

$11.1m

Full disclosure: I own shares in EMX that were purchased in the public market.  I have not received any compensation for this article.