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In conversation: Uncapped growth - exploration the true sweetener to royalty deals

Elemental Royalties (TSX.V:ELE) listed in July 2020. By year end, the company reported gross revenues of $5.1 million, a 110% increase year-over-year. Company guidance is for an annual growth rate of more than 50% over the next two years.  Supported by Discovery Group, Tembo Capital and an experienced board and advisory panel, Elemental Royalties is purpose built to create scalable lower risk growth in the gold space. We talked with Elemental Royalties CEO Frederick Bell on uncapped growth and the company’s prized portfolio asset. Part 2 of 3.

Exploration is considered the true sweetener for royalty deals – exposure to future unrealized value. Full leverage to low-risk growth seems to be the foundational tenet for Elementa out of the gate, including cost burdens?

Frederick: We are entirely focused on growth with as little headwinds as possible. For example, all of the initial deals we’ve done are royalties, rather than streaming agreements (an upfront payment made to a mining company in exchange for the right to purchase some or all of the production from a mine, at a discounted price). So, effectively, zero cost ounces with no ongoing payments. However, as Elemental grows, we are actively reviewing streaming opportunities and if the right deal comes along we will transact.

All of our royalties have uncapped revenue and no buyback options. The operator can’t put a fixed ceiling on what we’re paid or buy us out over time.  We want to be fully leveraged to an operator’s success, especially the exploration upside. Ideally, you want a good operator of a de-risked mine with sufficient cashflow to take advantage of discovery and building out reserves and new resources. When you get the combination of a good operator and good asset, it becomes a multiplier. A mine you bought in at 100,000 ounces per year production could grow to 150,000 oz/year mine. That would be a material impact. If you look at our portfolio, our royalty at Wahgnion (Burkino Faso) with Endeavour Mining covers more than 1,000 sqkm2 and at Mercedes (Mexico) with Equinox Gold spans almost 700 sqkm2. We have two district-scale royalties as a $100M market-cap company in our first year of listing. I think that is greatly underappreciated. From a 10-year outlook, just with those two assets alone in our portfolio from Day One, we have a strong foundation for growth.

Can you give a little more detail and spotlight one of the more prized assets of your portfolio?

Wahgnion (Burkino Faso) is our most recent producing asset that Endeavour recently acquired with the close of its acquisition of Teranga Gold in February for C$2.44B. Wahgnion came online in late 2019 as a 135,000 ounces per year mine. However, it produced 175,000 ounces last year. It’s pretty unusual to have a mine that is that successful in its first full year of production. It’s typically the other way around: you get these surprises on the downside. To have that production growth in Year 1 is really, really encouraging. Endeavour, one of the world’s top 10 gold miners, has committed the second highest exploration budget out of its entire portfolio (US$10M) to Wahgnion. Elemental shareholders are exposed, firstly, to some really good continuing production at Wahgnion far in excess of the mine plan and, secondly, to resource-to-reserve conversion and exploration drilling on targets to build up the resource base. We bought this as a royalty for an asset that was going to produce 130,000 ounces/year but is now producing 170,000 ounces with the potential to discover and define a million ounces that wasn’t there before. Wahgnion is a 1,000km2 land package that represents the entire gold belt. There should be many years ahead to build out the resource base that Elemental will benefit from.