Gold investors love royalty companies.
They get to experience all the upside of metals prices without having to take on any of the crazy risks of operating a mine. They are not responsible for ballooning capital expenditures and operating costs. They take on very little debt relative to producers and operate very lean. The perfect leverage to metals.
Due to these reasons, its apparent why promoters have cobbled together their own royalty companies to market to the masses. After all, it’s a tried and tested concept that both investors and operators understand – at least in theory.
However, there is one Royalty Company that has flown under the radar that is the perfect recipe for a successful royalty company. In fact, the CEO, Shaun Usmar, left a multi-million dollar job at Barrick, to put it together. In the ultimate tribute to the adage of putting your money where your mouth is, Shaun Usmar created Triple Flag Precious Metals (TSX: $TFPM), a royalty company that can pin its team and quality of assets against Franco-Nevada, Royal Gold, and Wheaton Precious Metals, but completely overlooked by the entire market.
Ultimate Gold Bet
Shaun Usmar was handpicked by legendary hedge fund manager, Paul Singer, to establish a premium streaming and royalty company. The same Paul Singer who parlayed an investment of $1.3M from friends and family back in 1977 into the $50B behemoth it is today – he did so by averaging an astonishing 13.1% annualized return since inception.
A proponent for gold, Paul has stated that gold is "one of the most undervalued" assets available and its fair value is "multiples of its current price.” Paul and his celebrated Lieutenant, Mark Cicirelli, who heads the prestigious insurance portfolio at Elliott, dedicated years of study to the use of gold to hedge inflation and the forensic analysis of Franco Nevada’s success. However, numerous attempts to jump start a business fell short even with the help of the so-called top investment bankers in America.
Paul was missing one key ingredient in any successful business, which was someone to steer the ship. He courted Shaun and finally harpooned his whale when he essentially offered a blank cheque, unlimited time horizon, and the ability to run the company at his own discretion. But who is this man that Paul had so much conviction in he was willing to bet his unblemished 44-year track record?
Mercenaries
To say Shaun Usmar is understated is an understatement itself. A metallurgist by training, Shaun made a name for himself in high mining finance by joining BHP right after receiving his MBA from the prestigious Kellogg School of Management at Northwestern University. Honing his skills in corporate finance, Shaun was involved in transformational deals in Colombia, China and South Africa before taking a part of the US$38B mega merger between BHP and Billiton.
From there he joined Xstrata as one of the “original seven”, working his way up from co-head of Business Development to CFO of Xstrata’s global Ferro-Alloys business in South Africa to finally CFO of Xstrata’s global Nickel business in Canada. At Xstrata, Shaun was once again integral in some of the largest deals in mining history, including the C$18.1B acquisition of Falconbridge before the eventual acquisition of Xstrata itself to mining giant Glencore International for a staggering US$62B.
After moving to Canada after the acquisition of Falconbridge, Shaun decided that living in five countries was enough and declined Glencore’s offer to relocate to Switzerland. In 2014, he took on the challenge of restructuring Barrick, who at the time was suffering due to depressed gold prices and a reeling US$13B in various debt.
Shaun’s initial plan included the restructuring of incumbrances, life-of-mine optimization and the sale of non-core assets. This included the potential sale of streams and royalties, and through the bombardment of proposals from both bankers and operators Shaun studied all the intricacies involved in a deal and how all the major royalty companies structured deals.
He studied diligently and finally received his PhD in royalties in August 2015 when he oversaw the US$610M sale of a gold and silver stream to Royal Gold. This transaction also solidified his desire to start his own company, once again rekindling his entrepreneurial drive. By his own recount, Shaun met with Paul a day after his birthday in January 2016 and resigned from Barrick in April 2016. Not before significantly reducing Barrick’s the debt load and seeing a complete turnaround in the stock price. At the time of his resignation, Barrick stock was up 70% for the year.
With the backing of Paul Singer, Shaun created his team of “mercenaries” to replicate the nimbleness and entrepreneurial spirit of Xstrata. He put together a small team of elite specialists leaning on his robust network he created throughout his career. His VP, Finance masterminded the complex accounting and subsequent tax concerns during the previously mentioned streaming deal of Barrick's 60% interest in the Pueblo Viejo mine. His CFO was the Senior Director of Legal Affairs at Inmet Mining and oversaw the US$1B stream financing deal for the Cobre Panama copper project with Franco Nevada. Top gun geologist, James Dendle, was poached from the renown consultancy, SRK, to head technical due diligence.
As Shaun puts it, his team was specifically put together to outmaneuver and out hustle larger companies with the equity ownership as the carrot.
Better Royalty Company
In addition to the fundamental benefits of a royalty company over traditional producers, Shaun especially likes royalty companies because they don’t experience the cost inflation that producers inevitably have to stomach.
Paul Singer stated “It makes a great deal of sense to own gold. Other investors may be finally starting to agree. Investors have increasingly started processing the fact that the world's central bankers are completely focused on debasing their currencies.”
Truer than ever, the incessant printing of fiat currency will result in the higher cost of everything. This will cause higher gold prices – which results in another affirmation for royalty companies.
Furthermore, royalty companies do not have to deal with closure liabilities – in an ESG-driven world is that adds considerably to an already difficult problem. Lastly, the current royalty market is very concentrated, with significant opportunities still out there.
Triple Flag’s primary objective is to target ounces of immediate cash flow or two to three years away from production that provides extreme optionality to gold and silver prices and further upside to exploration. With this mandate in mind, over the last five years Triple Flag has deployed US$1.7B in capital to close 16 transactions, each with massive scale. Triple Flag sought to build a portfolio to stack up against the “big three”, and they did not disappoint.
Proof is in the Pudding – Triple Flag is Trading at an Extreme Discount
Stock Snapshot (Jan. 5, 2022)
Price (C$) 15.57
Dividend Yield (%) 1.55
Shares Outstanding (M) 156.2
Options & RSUs (M) 1.6
Fully Diluted (M) 157.8
Basic Market Cap. (C$M) 2,432.0
Cash (C$M) 33.9
Debt (C$M) NIL
9 Mo. Earnings (2021) (C$M) 40.8
Since its IPO in May 2021, Triple Flag has steadily sold off (C$15.65) to a low of C$10. The main reason for this correction is Triple Flag’s share structure. In most cases, a tight share structure is touted as an extreme positive for issuers. In Triple Flag’s case, 87% of the float is accounted for by long-term shareholders – 81.8% by Elliot Investment Management and 5.2% by Management. The IPO offering was largely taken by institutions, leaving a minimal float for the retail investor. The lack of liquidity resulted in the decline in share price from a minimal amount of shares. However, TFPM has recovered nicely and according to our analysis, is poised to continue its impressive run.
Triple Flag will experience a reversion back to the market average, which will result in a significant share price appreciation. And while that is exciting, we particularly enjoy the considerable “blue sky” upside each asset brings to the table that is currently not valued.
For example, In March 2019, Triple Flag acquired a gold and silver stream on Buriticá for $100M. The agreement entitled Triple Flag to purchase 2.1% of the gold produced and 100% of the silver produced for 10% and 5% of the spot gold and silver price, respectively. On December 31, 2020, Zijin Mining Group exercised and closed their option to buyback the gold stream for $80M, less net gold cashflows received to date.
Thus, Triple Flag has already earned back $90M of their original investment, with the remaining silver stream still covering the entirety of Buriticá's approximately 755km2 land package. This includes both the prolific Yaraguá and Veta Sur mineral systems which are both open-ended, with no cap, step-down or buyback features. Zijin would not have exercised their buyback unless they were convinced about Buritica’s exploration upside.
Another case study is Triple Flag’s gold and silver acquisition on the Altan Tsagaan Ovoo (ATO) gold project. In August 2017, Triple Flag invested $23M into the stream and in September 2019 another $5M to amend the terms to payments to 17% of the spot gold and silver price. The stream has already realized $16M in cash and ATO’s operator, Steppe Gold, recently released the positive results of a feasibility study comprising a further two years at the producing oxide phase and a 10.5-year expansion, for a 12.5-year aggregate mine life. The results reinforce the company's current phase 2 expansion plans with construction already under way.
Lastly, in December 2016, Triple Flag acquired a silver stream on Cerro Lindo for $250 million, plus a payment of 10% of the monthly average silver price for each ounce of silver purchased. Under the agreement, Triple Flag will purchase 65% of payable silver produced at Cerro Lindo until 19.5 million ounces of silver are delivered. Thereafter, Triple Flag will purchase 25% of payable silver produced. The 69km2 stream area covers the entire Cerro Lindo mine, which includes a large and highly prospective area towards the south and east of the current mining operations – resulting in the exciting “blue sky” potential we reiterated several times before.
Triple Flag
Betting on Shaun and his team of mercenaries is eating baked turkey and the future has never looked brighter. Triple Flag has considerable upside based on its top-tier assets and we would not be surprised if Shaun makes the M&A headlines again when his company is once again acquired.
FULL DISCLOSURE: This is a paid article produced by Belair Capital Advisors..
