By James Kwantes
Published first at Patreon.com/jameskwantes
The fabled ending that most junior mining investors seek continues to be the elusive buyout, ideally after a 10-bagger. Oh, and a hostile takeover battle.
These scenarios are rare. Setting up your portfolio – or your junior mining company – around them is usually a recipe for pain at best, failure at worst.
In this sector, innovation is survival.
Zach Flood, the CEO of Kenorland Minerals (KLD-V), served up a potent example this week. The discovery-focused project generator swapped its 20% JV stake in the Frotet gold project in northern Quebec for a 4% net smelter return royalty (NSR).
Kenorland staked Frotet in 2017 and partnered with Sumitomo (80-20) a year later. About 82,000 metres of drilling since the discovery has identified several high-grade gold structures at Frotet’s Regnault discovery, which is shaping up to be a multi-million-oz deposit.
Sumitomo is a global miner with a $10-billion market cap that operates Hishikari, one of the world’s highest-grade gold mines. The Japanese miner also built and operated the Pogo gold mine in Alaska (before selling it to Northern Star). It’s an exceptional counter-party.
Sumitomo can buy down the 4% royalty to 3.25% but it will cost them:
- $3 million for 0.25%
- $10 million for 0.50%
Let’s assume Sumitomo is going to buy down the 0.75% and build a mine at Frotet. It’s a reasonable assumption given the strength of the company, its experience building Northern mines, the high-grade results at Regnault and the substantial resources Sumitomo has already devoted to Frotet. Sumitomo also owns 10% of Kenorland’s equity.
A 4% royalty on a multi-million-oz gold deposit is more valuable and much more liquid than a 20% interest. Especially because the latter comes with 20% of ongoing and open-ended costs as Sumitomo drills out the deposit first to resource then to feasibility-stage level, not to mention capex.
Consider the 2% NSR on the Dixie project, which was spun out of Great Bear Resources (bought by Kinross) into Great Bear Royalties. The royalty company was purchased by Royal Gold for $200 million and Kinross’s maiden resource estimate was about 5 million ounces. That’s $20 million per 1%/1M oz – and includes a large premium because of the quality of the deposit, which will likely get much bigger.
Even a measure of $10 million per 1%/1M oz puts a high price tag on Kenorland’s Frotet NSR. Assuming the Sumitomo buyback (a likely scenario) and a 3.25% NSR, that works out to $97.5 million for 3 million ounces or $162.5 million for 5 million ounces. It would also give Kenorland another $13 million for the 0.75% Sumitomo buyback.
Compare that to Kenorland’s current market cap of $45.8 million and working capital of $23.6 million (as of year-end 2023). Kenorland is the operator for most of the properties it options, and brings in almost enough revenue each year to cover G&A costs.
Most junior mining companies are lottery tickets. Kenorland is a well-financed, innovative business that is building shareholder value. In this market, the stock remains priced as a lottery ticket – even with the small bump generated by this royalty news.
In other Sumitomo news, the miner just invested $14.45 million for a 9.9% stake in British Columbia nickel play FPX Nickel (FPX-V). I wrote about Kenorland and FPX Nickel in Premium Pricing: Pay Attention<
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Disclosure: I own shares of Kenorland Minerals and FPX Nickel and write about each company in my newsletter, Resource Opportunities. No business relationship with companies mentioned in this article.
