Summary
- Maverix has cut its guidance, and the market has punished the company.
- Recent acquisitions have not been appreciated by the market.
- We check on the company's financial performance and formulate our investment thesis.
Royalty and streaming companies are sheltered from most direct effects of cost inflation, one of the main drivers behind the bearish sentiment for gold mining companies. Nevertheless, the market has not spared royalty and streaming companies lately, reflecting the general bearish sentiment towards precious metals investments. Maverix Metals ( MMX ) is no exception in this regard, and in actual fact has even underperformed the gold miners ( GDX ) over the past twelve months, as shown in the chart below.
We would like to take a look at the reasons behind this seemingly harsh market treatment in the following.
Omolon And Karma
The level of risk associated with Maverix's portfolio of royalties and streams is arguably higher than with some of the company's peers, and two assets have been affected by the inherent risk factors in recent months. Firstly, cash flows from the royalty on the Karma mine in Burkina Faso have ceased following the sale of this mine to Néré Mining (a private local mining company) and the subsequent suspension of operations following a security incident. And secondly, cash flows from a royalty on the Omolon gold mine in Russia have been put into question due to sanctions stemming from the war in Ukraine.
Maverix has cut its 2022 guidance by 12% as a result (calculated on the mid points of the given ranges). The two mentioned underperforming assets are only the latest entries in a growing list of royalties and streams that have come under stress. The suspension of operations at Relief Canyon and also at Hope Bay are other examples. However, having said this, we are also aware of the limited impact the issues have had on the overall portfolio performance thanks to the company's high degree of diversification of cash-flowing royalties and streams. The chart below illustrates this diversification, showing quarterly gold-equivalent contributions from each cash-flowing royalty or stream.
Attributable gold-equivalent quarterly production has stabilized above 7500 ounces despite the listed problems with individual assets, greatly helped by another aspect of the company's portfolio. Maverix has been highly successful in picking up royalties on development projects with near-term production potential. The Camino Rojo royalty is a prime example as it has just become cash-flowing, picking up some of the shortfall from under-performing income streams. Plus, we note the relative new contributions from the Auramet gold stream. This is a creative arrangement with a metals trader offering comparatively secure cash in-flows for a very attractive price. Overall, we see a robust performance from this highly diversified portfolio, and only limited damage from the calamities at Karma and Omolon.
Recent Deals
Valuations for royalties and streams have increased substantially over the past couple of years, and in our opinion, the market for these assets has clearly turned into a sellers' market. This development has made it difficult to find accretive deals, prompting some of Maverix's peers to fiddle with their business model, in some cases with questionable methods and limited success. This development is not all bad, however, as a sellers' market also brings out opportunities which are not typically available under less favorable market conditions. And arguably, Maverix has been highly successful in capitalizing on some these opportunities. In March, the company managed to pick up three royalties centered around the Railroad project in Nevada. And more recently, the company announced the closure of an acquisition of a royalty package from Barrick Gold ( GOLD ).
The company paid $42.2M in total (plus $10M in contingency payments) for the two packages, a stately sum by any measure, especially since out of the two dozen newly added royalties only one is actually cash-flowing. However, there are arguably some gems with very high near-term potential among them, playing to the company's aforementioned strength of finding royalties on high-quality near-term producing development projects. We won't see an immediate impact on Maverix's cash flow statement from these two deals, but there is little doubt in our mind that several of these royalties will become cash flowing within just a few years. Plus as an aside, we note that most of these new royalties come with a significantly lower risk profile than the current cash flowing portion of the portfolio.
Financial Performance
Revenues have printed in excess of $15M per quarter for the last couple of years, thanks to a conductive metal price environment and growing attributable production.
Maverix generates these revenues predominantly from royalties, and the few streaming agreements stipulate low ongoing payments. These characteristics lead to relatively low leverage to the gold price on the one hand, but they ensure comparatively high margins on the other. In the current metal price environment cash cost margins consistently exceed $1,500/oz as illustrated in the chart below.
Revenues on average translate into ~$8M in operating cash flow per quarter. This capital has been spent mostly on acquisitions, and more recently on a modest dividend. The $160M credit facility has provided the liquidity buffer for these deals, yet Maverix has managed to maintain a strong balance sheet despite the remarkable growth since its inception in 2016. Furthermore, we note that Maverix has been more diligent than certain peers with its share count, using script comparatively sparingly in its acquisitions.
Summary And Investment Thesis
Maverix is a remarkable growth story. The company was a first-mover in the small-cap precious metals royalty space and has comfortably beaten later entries to the best assets available to companies in this space. In a previous post to subscribers we wondered how Maverix would manage the transition to becoming a larger player. The company has answered this question for us: it has stuck to its business model, and it has been especially successful in picking up royalties on highly promising development projects. We have already seen some of these royalties come into production, and there are plenty more candidates for near-term cash flow hidden in the portfolio. Growth will happen organically this way.
The market values the larger royalty plays predominantly on cash flow multiples, and Maverix has become large enough to fall into this category. At the moment, the company's valuation multiples lag its larger peers by a considerable margin. Company size plays a role here, but also the relatively high risk profile of Maverix's asset base. Furthermore, we don't see Maverix receiving much recognition for its development-stage royalties.
All these points indicate mid-to-long-term opportunity in our view. The market will start putting value on certain royalties, as the underlying mines come into production. Risk perception will become more favorable as more and more of these assets start generating cash flow, further increasing diversification. And cash flow growth should also bring about margin expansion for the company.
At the time of writing the share price hovered around $3, translating into just 1.4x NAV and 12x CF where larger peers currently fetch in excess of 2x NAV and 20x CF. In fact, these two multiples are currently at their lowest since inception of the company. Sure, the gold price appears under pressure, and might pull Maverix even lower; but at $3 or less, the company is a resounding BUY in our view.
For further details see:
Maverix Metals: Growth Potential Not Priced In