Juxtaposed against miners scrambling to replace mined-out reserves, the metals streamers are looking towards unrivalled production growth at low costs in the coming years. With growing free cash flows, they are on the prowl for accretive deals. This sector's risk-off business model is demonstrating sustainability and organic growth opportunities not seen elsewhere in the mining industry.
Whereas goldminers found about 1.4 ounces of gold reserves and resources for every ounce produced between 1990 and 1999, the rate had dropped to about 0.3oz of gold found for every ounce produced, according to S&P Global Market Intelligence.
The majors need new deposits with scale and capital efficiency that can be permitted in safe jurisdictions - a rare proposition these days as grades fall and new tier 1 deposits become scarcer, more expensive to acquire and complicated to develop.
Franco-Nevada (TSX:FNV) is one of the royalty and streaming scene darlings, and had proven that its model could outperform the underlying mining equities. The company had grown to a market valuation of C$15 billion in 10 years, returning more than a billion dollars in dividends to shareholders over the past decade. The yield was about 6.3% since its initial public offering, far more than what any other miner could accomplish in the same time frame.
"The bulk of investors are generalists and the stock has been outperforming the gold and the S&P Global gold index. We are outperforming in bull and bear markets," COO Paul Brink told the Denver Gold Forum in Colorado Springs.
He said investors often failed to understand that royalty and streaming portfolios were more defensive in bear markets, but what was less well understood, was how well they performed in bull markets.
So successful had the company's cash-generating model been, that it returned US$168 million to shareholders in 2017, the highest in the global gold industry.
Franco-Nevada's performance was underpinned by 51 producing assets, which formed part of a portfolio of 377 assets spanning the mining and oil and gas industries.
"Organic growth is the best kind if growth. We tend to run ahead of our initial asset acquisition projections," he said.
In Franco-Nevada's case, most of its ore deposits yielded more gold over time than what was expected at the time of the initial investment. In some cases, it was substantially more.
This meant the company had witnessed a 92% increase in the compliant proven and probable reserves in its portfolio than when compared with the reserves it held at the IPO in 2007. Despite producing more than 31 million ounces of gold over this period, the reserves had doubled at no additional cost. Measured and indicated resources rose 34% and inferred resourcee climbed 19%.
And the upside continued to stagger. Among Franco-Nevada's most recent acquisitions, First Quantum Minerals' (TSX:FM) Cobre Panama copper-gold project had added 47% in the initial throughput since the company acquired the initial gold stream on the asset, while the contained copper in reserves climbed 31%.
At Antamina, silver ounces had increased 21% over the initial acquisition guidance, while Candelaria's gold equivalent ounces (GEOs) were up 8%, life-of-mine gold output was up 100% and silver output up 80%. This demonstrated the exceptional value creation potential at no additional cost to the initial investment, Brink said.
With a strong growth pipeline, GEOs were expected to climb another 17% between 2017 and 2022, to about 600,000 oz of GEOs - all at no additional cost.
This would translate to 35% growth in earnings before interest, tax, depreciation and amortisation, giving the company a competitive advantage in how it managed its balance sheet. It is debt averse and has available capital of $1.2 billion on the balance sheet.
Meanwhile, the metals streaming model pioneer and the world's largest such company Wheaton Precious Metals (TSX:WPM) had honed its craft to be a fit for every size of partner, CEO Randy Smallwood said.
The company had built a low-cost, long-life asset base, containing enough reserves to keep going for 33 years.
Smallwood said key to its success was that 71% of the company's output was in the lowest-cost quartile. This climbed to 96% of the company's production when it came to assets in the lowest half of the cost curve.
"Our straight cost lines are indicative of how predictable our cost profile is, leading to high margin growth."
Smallwood said exploration and inferred resource conversion had generated more than nine million GEOs, lifting the total acquired assets from 8.8 million and 25.7 million GEOs in the reserve and resource categories, respectively, to more than 14.2 million GEOs in the measured and indicated categories and 20.4 million GEOs in the proven and probable categories over time.
With about a $1 billion available under its revolving credit facility and coupled with about $500 million in free cash flow in 2018, it retained a lot of fire power with which to pursue new acquisitions.
To date the company had paid more than $800 million in dividends, the equivalent of about 40% of its cumulative net earnings, he said.
Smallwood bemoaned the fact the C$10 billion company remained undervalued despite boasting industry leading cash flow and income.
Meanwhile, Colorado-based Royal Gold (NasdaqGS:RGLD) was in its second consecutive year of record financial performance.
CEO Tony Jensen said the company had deployed more than $1.4 billion in capital between March 2015-2017.
"We expect our net cash position next year to allow for accretive cash deployment opportunities," he said.
Meanwhile, Sandstorm Gold (TSX:SSL) CEO Nolan Watson outlined the three most important characteristics that gave the metals streaming and royalty business an edge over competitors. "We have more growth as a percentage of production, more upside for every dollar invested that translates to more drilling, and more value at a time when it is hard to attract investment," he said.
The company was expanding from 60,000oz in 2018, to 140,000oz by 2023 - 133% growth at no additional cost to investors.
The company was betting bigtime on the ultra high-grade Hod Maden project, in Turkey, as its major growth accelerator. Again, the streaming upside was demonstrated after the operator, Lidya Madencilik Sanayi ve Ticaret and Mariana Resources recently said construction of the project could be moved up by about a year.
"We are aiming at declaring a potential dividend by 2019 and to have a mature portfolio by 2022. We hope it will revalue Sandstorm. With our improving financials, our ability to pursue new deals is also increasing."