COM - EMX Royalty: Investors Are Upset About This

2023-05-25 18:03:58 ET

Summary

• EMX Royalty Corporation reported Q1 financial results recently.
• EMX has grown its portfolio of royalties to 170+ and counting.
• EMX Royalty Corporation shares trade at a huge discount to its net asset value.
• But investors continue to sell EMX Royalty Corporation stock.

EMX Royalty Analysis

This is an update on EMX Royalty Corporation ( EMX ), one of my more significant portfolio holdings. It’s been a while since I’ve provided coverage on this small-cap royalty and prospect generation company.

The key takeaway from my Q2 2022 earnings analysis was that EMX shares appeared fairly priced, if not undervalued, and I predicted that the resolution of the Timok royalty dispute would positively impact the stock price soon. I highlighted its net asset value ("NAV") of $3.30, with the stock trading below $2.00, as a key reason for considering the purchase.

But I also said the company anticipated resolving the Timok royalty dispute within weeks. The Timok mine, managed by Zijin Mining, commenced commercial production last year, and EMX holds a disputed 0.50% NSR royalty. That hasn't happened yet, nearly one year later.

Finally, I previously estimated that this royalty would generate approximately $3-$4 million in annual revenue for EMX (given the current commodity prices, this figure is now more likely to exceed $4-5 million). Additionally, EMX reported a cash and investments balance of ~$37 million against a debt of $51 million at the time of the news release.

So, what has changed since my last update? Here’s a complete breakdown.

EMX Royalty: What’s New?

EMX's stock price has remained steady over the past year. However, several significant developments have occurred since my last article publication.

Here's what you need to know:

1. Commercial production commenced at the Gediktepe royalty property.

2. A significant milestone payment of $3 million was received from the Parks-Salyer royalty property.

3. Initial payments were secured from Balya North.

4. EMX purchased a royalty portfolio over Nevada Gold Projects.

5. Several Norwegian Projects were sold.

6. Outstanding exploration results were reported at various royalty properties, including the Diablillos property in Argentina, the Parks-Salyer copper project in Arizona, and the wholly-owned Yarrol Project in Australia.

7. EMX established an Idaho-focused gold explorer by integrating several precious and base metals projects.

8. The company optioned its Yarrol and Mt. Steadman projects.

9. In the latest earnings report, EMX announced it acquired an additional 2.263% ownership in the underlying Caserones royalty holder, Sociedad Legal Minera California Una de la Sierra Peña Negra ("SLM"). This acquisition equals a .044% NSR royalty on Caserones, raising its total interest to .7775%.

Note: You can find detailed information about these developments on EMX's website under its news release section.

EMX remains highly proactive in the prospect generation business and in royalty acquisitions. The company now commands an impressive portfolio of more than 170 royalties at varying development stages.

Q1 2023 Results: A Closer Look

EMX Royalty's recent quarterly earnings report provides significant updates.

Key highlights from Q1 2023 include robust revenue and other income figures of $2.74 million, a substantial increase from $1.749 million reported in Q1 2022. Additionally, the adjusted revenue, which incorporates the Caserones mine royalty interest, reached $4.968 million, up from $3.2 million.

Despite these positive trends, EMX reported a modest net loss of -$3.7 million, primarily attributed to the costs associated with its prospect generation business in Q1. The company's royalty generation business was notably active in North America, South America, Europe, Turkey, Australia, and Morocco during Q1 2023. The company's expenditure in this regard totaled $5.73 million, a jump from $4.26 million in Q1 2022, though it says it managed to recover $2.88 million from its partners.

These costs comprise exploration-related activities, technical services, project marketing, land and legal expenses, and third-party due diligence for acquisitions. Also note that EMX successfully finalized four partnerships across the portfolio in Q1 2023, while continuously replacing partnered properties with new royalty-generation projects.

Based on these figures, my current estimate puts EMX in a net debt position of $16 million, marking an increase of about $2 million from the same period last year. It's in decent financial shape, and I don't think it needs to issue equity or take on debt in the near future, barring an acquisition or M&A.

Update on Timok Royalty Dispute

One key highlight of its earnings release is the ongoing Timok royalty dispute with Zijin Mining. This dispute remains unresolved, and comments on various stock market message boards show that investors are upset about this.

As a refresher, EMX announced on January 27, 2022, that it had suspended filing a Notice of Arbitration to Zijin Mining Group Ltd regarding its royalty agreement encompassing the Timok project in Serbia, which includes the operational Cukaru Peki copper and gold mine. EMX owns a valuable 0.50% NSR on this property, which should be generating around $4-$5 million in annual royalty revenue for EMX.

EMX reports that their discussions with Zijin have been cordial, continuing through Q1 2023. Both companies anticipate executing a modified royalty agreement in 2023.

While it's been a long wait for shareholders, it is hoped that matters will be resolved by the end of this year. Based on management's language, it sounds like this will happen. It's important to remember that EMX is also due royalty payments retroactive to when commercial production commenced last year.

EMX should receive a significant initial payment from Zijin, in addition to ongoing royalty remittances.

EMX Royalty: The Bottom Line

Despite the string of positive developments over the past year and the increased cash flow from several royalties, EMX's stock price performance has been lackluster. I believe this is largely due to the unresolved Timok dispute, contradicting several management comments about its expected resolution timeline. It may also be due to lower copper prices, as EMX owns a significant copper royalty on the Caserones mine.

Nevertheless, I continue to perceive EMX shares as a good buy for investors. I believe that the market is not fully appreciating the company's portfolio of 170+ royalties. EMX's net asset value persists above $3 per share based on analyst estimates, contrasting with the current stock price of $1.95.

But I have a HOLD rating for EMX Royalty Corporation stock, for a couple of reasons.

Firstly, copper prices have been under pressure and are likely to remain so in the near future, especially with the U.S. likely entering a recession. Given EMX's acquisition of the Caserones royalty (a copper property), the company is significantly exposed to copper price fluctuations. Any short-term decline in copper, therefore, could negatively impact its stock.

Secondly, the resolution timeline for the Timok dispute remains uncertain and could extend over a few more quarters. This could potentially prompt impatient shareholders to offload the stock. I don't blame them at this point, since it's been over a year now that we've been waiting for a resolution.

However, both these scenarios could present long-term investors with a lucrative buying opportunity. A stock price below $1.80 is an attractive entry point for EMX Royalty Corporation.

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