Transcript: Vox Royalty (VOX) - Disciplined Anti-Inflationary Investing!
Vox is a high growth precious metals royalty and streaming company with a portfolio of over 50 royalties and streams spanning eight jurisdictions. The company was established in 2014 and has since built unique intellectual property, a technically focused transactional team and a global sourcing network which has allowed Vox to become the fastest growing company in the royalty sector. Since the beginning of 2019, Vox has announced over 20 separate transactions to acquire over 45 royalties.
Vox’s portfolio is predominantly geared towards precious metals royalties which make up over 70% of their portfolio weighting by NAV. Vox is focused on disciplined capital allocation in the royalty sector and believes that royalties are the best way to generate commodity exposure and the company has built a business around that strategy.
Vox has had a very productive quarter since we last spoke and has seen tremendous growth by their operating partners operating the portfolio of assets which has led to organic growth.
Last year, assets were very highly priced due to the upsurge in the gold price. A lot of royalty companies bought assets at a premium with additional premiums paid for potential future discoveries and increase in resource size plus the expectation of a further increase in metal prices. Now the gold price has dropped, leaving some royalty companies in trouble as they bought assets at these exceedingly high prices.
Vox has invested on the basis that commodities will decline in value when the company has purchased royalties. Vox takes a portfolio approach to royalty purchases and now has great exposure which the company has generated for investors. A lot of royalty companies are doing deals which are not generating returns for their investors.
Vox was created to be the outlet for retail investors looking for commodity investment without the need to become experts in mining or geology to understand the junior exploration end of the sector. Vox is a platform for investors who want commodity exposure with less risk plus the leverage upside that the company provides for its investors.
0:00 – Company Overview
0:50 – Recent Updates, Things done Right, Recovery & Its Importance
5:18 – Market Observation for Rare Metals, Return on Assets & Option Value
8:31 – Portfolio Approach: Production Stage Assets, Deriving Leverage, Ultimate Return
11:01 – Royalty Companies Justifying Price, Capital Allocation & Take on Spot
12:51 – Saving Grace for Companies, Reality, Aggressiveness in Market
14:43 – Industry Problems Aggravation Via Spot, Marketing & Promotion
15:37 – Revenue Projections, Abundance of Assets, Need to Study Details
17:58 – Toughness of Industry, Platform for Investors & Chance for Commodity Exposure
20:33 – Outro
Kyle Floyd: I'm Kyle Floyd, CEO of Vox Royalty Corp. We are a purchaser of third-party royalties. We aggregate those third-party royalties into a portfolio for our shareholders. We focus on precious metals and assets that are typically anywhere from 1 day to 3-years out from production, and we are focused on disciplined capital allocation in the royalty sector. We believe that royalties are the best way to generate commodity exposure, and we built a business around that strategy.
Matthew Gordon: Kyle, thanks for joining us. I haven’t seen you for a while so I thought I’d better reach out and see how you are. You’ve been quite busy since we last spoke. I'm here to talk about the market because the royalty market has gone a little bit wonky and I wanted to get your take on what's been happening out there. But first of all, let's talk about what you have done since we last spoke.
Kyle Floyd: It's been a really productive quarter for us in terms of what's absolutely been generated at a foundational level in our portfolio. Not a tremendous amount of deals have been announced, but a tremendous amount of growth has been announced through our operating partners that operate our portfolio of assets. It's that organic growth that we've been referencing now for a very long time, that separates us from a lot of the pack in the royalties sector that has surfaced, and that has provided a lot of clarity for our investors and shareholders in terms of the value that's being created without us doing any additional transactions.
Matthew Gordon: When we’ve spoken on previous occasions we talked about the discipline required. Some people in certain markets lose their minds and spend money they haven't got, they spend money that they shouldn't, and they definitely pay more than they should. I know you can't talk about specific companies and I wouldn’t expect you to, but for me, and looking across the industry, it makes me nervous. The precious metal market has come off in the last 12 months, but we've seen huge, huge declines in the equities of some royalty companies. Yours seems to be the only one that's gone up. What have you done right that the others have got wrong?
Kyle Floyd: For Vox it's been about discipline. One of the benefits of our business model and of our management team is we've been there through cycles. Last year it was really easy for companies to buy very expensive assets at valuations that didn't make sense. The market has digested that, it understands it and it wants to see whatever it’s buying generate value, generate return on assets and generate the type of returns that you need to generate in this sector to reward investors.
A lot of the companies in our sector got ahead of themselves; they believed that gold was going to much higher prices. It's obviously retrenched a little, which left them exposed to what the market is today. Whereas we've been very disciplined. We said: we haven't won a process on a deal. A lot of the processes that get shopped, we see them, but we pass them because, ultimately, the price that was paid for these assets was far too much in our opinion. Meanwhile, we've closed on a number of different transactions that have surface value. It's demonstrated that our discipline works and it's demonstrated that it’s going to generate the type of returns that investor should expect.
Matthew Gordon: Why do you think that us retail and family investors get sucked into that rhetoric? There were a few sort of carnival barkers last year, talking about USD$3,000 gold, $5,000, $10,000 gold. Everything looks good when there's $10,000 gold, right? It's hard not to make money at those levels, but that's not the reality of it, but huge swathes of people got attracted to that rhetoric. We saw some meteorite rises in some royalty companies in the precious metals space and those people have been left hanging. How do those companies get out of that situation? How do they get back into better deals? Can they recover? What do they need to do to recover?
Kyle Floyd: That’s a really hard question, and I'll tell you why: most of these royalty sector companies don't have a competitive advantage in terms of finding good royalties at good value. Their beholden to banks to bring processes of shopped royalties, then in turn, buy those royalties. What ultimately ends up happening is that the highest strategic value to a group ends up buying that royalty, but strategic value can mean different things to different people. It ultimately means that the prices paid for these assets are exceedingly high. We've all heard of the winners curse. It's a challenge. If you don't have a competitive advantage in terms of sourcing deals and building your business at good value, you're going to have a problem for a very long time. I don't know how those companies get out of that situation because they haven't built competitive advantages. They came into the royalty space because it seems sexy, it seems hot. In some respects it was, but over the long term the good business models pan out.
Matthew Gordon: That concerns me because a lot of retail has bought into, or have been brought into, a scenario which is doomed to fail in a market like today’s. Last year saw a fairly frothy market, a lot of it was sentiment driven and gold was going to the moon due to the economy, etc. Those guys are now left high and dry. I literally wouldn't know what to say to people like that in terms of what they should do with the investments that they've got. I suspect most will sit on them, hold on as long as possible in the hope that the market turns. Do you think there’s a chance that the market will turn for precious metals? What's gold going to do next year?
Kyle Floyd: I don't like to speculate on gold price. I'll tell you how we price our deals; we price gold going down. I personally might feel that gold goes up over the long term, but that does not influence how we invest. We invest on the basis that gold is likely to decline in value, along with the entire suite of hard rock mining commodities that we’ll obtain royalties on. The reality is we use a consensus price tag that typically has most metal prices decreasing significantly below spot prices. That's our business model. We don't get lost in the gold going higher conversation, and I'll tell you, that helped serve our investors well.
Matthew Gordon: Let's look at some of the ratios. We've talked about a couple of ratios that are important in the past because this game is about a return on the asset. You've got to think in those terms. What should we naive investors be looking for? If we listen to royalty company CEOs in the future, what part of their pitch is most important for us to understand?
Kyle Floyd: You have to understand that the royalty model should make money in 2 respects. It should make money, this is our belief, both in terms of what you're buying now and what you know is in the ground. You should make money on that. Then there's the option value about what you don't know, you can speculate on, but you don't know. A lot of royalty companies out there are paying absolutely full value for everything that is in the ground now, or believe is in the ground now and believe is mineable. They are also paying a premium on top of that - premium to net asset value - and hoping that there will be discoveries and increases. They hope to increase the resources and reserves of the new discoveries, and hope that there's increases in metal prices. If those two things don't happen, if you’ve paid more for that asset than what is there right now, you've already lost money for your investors. That is something that we don't do. That is something that a lot of the companies in the royalty sector are doing.
I believe the better model is to make money on what you're buying with what you know, and then also get the option value. But you're not paying for that when you don't know what that could be. The reality is that most royalty companies are going about it that way which means their ultimate return on assets can be negative or very, very low.
Matthew Gordon: If we talk to investors and they say, what should I do with my portfolio? We talked about having a steady revenue, whether it be dividend paying or just cashflow and businesses which go up at a modest pace, but you know it will keep going because it's a fundamentally solid business. We then may say, if you've got some spare cash you could invest in some higher leverage plays, which might get you a bigger return. It might not, but it won't matter in the context of your portfolio. Could you guys not employ the same strategy? Discipline is great and all that, but maybe we can knock it out of the park with 1-2 of these dollars of ours?
Kyle Floyd: We take a portfolio approach to what we buy. We have amazing exposure that we've generated for investors. We have 35Moz gold equivalent covered in royalties within our projects that we have royalties over. We have 5 production-stage assets, going to 10 production-stage assets. It's going to much more than that. We absolutely derive that leverage and that optionality upside. You can generate both for investors. To give you an example, we had a royalty that we were exclusive on under LOI. It was in the USD$100M price tag range and it was a world class ore body . It was a generational royalty. A lot of people in our industry said, why didn't you do it? The reality was, its ultimate return on assets and return on invested capital for us was going to really diminish what our existing portfolio is generating and will continue to be capable of generating. So while we had a great value and someone ultimately transacted on it at a much higher price, it was really going to deteriorate our return on assets and return on invested capital, which are metrics that we watch very closely for our shareholders.
We think that we produce the highest return, highest share price and share price growth for our business and shareholders, so that's our model. But most of the royalty companies, I'll tell you, if they would have had that royalty under exclusive option, they would have absolutely executed on it. The returns would have been 2%-3%. It could have obviously gone up, but that's tough when you're investing in the small end of the royalty sector. You should be affecting better returns than that. And that overall would have been lowering the average return that we're generating on our assets and on our business.
Matthew Gordon: We’ve been analysing some of the acquisitions made by royalty companies over the past 12 months, and we’ve spoken to a lot of royalty companies. In a few instances we've seen royalty companies justify the price that they pay based on today's price of gold. In some cases that was USD$1,850-$1,900 gold which today looks a bit foolish. Is there anything wrong with doing that at the time? Should companies be discounting the price? You talk about looking at a lower price for your deals, but is there anything wrong with looking at spot as acquisition price?
Kyle Floyd: There's everything wrong with it. If you look at the mining companies, and I believe there's data that supports this, the mining companies that have outperformed have been very disciplined on capital allocation. They use a much lower gold price when they're modelling out assets and modelling how they're going to deploy their capital. The companies that have, let's say been exuberant at times when metal prices are running, have been proven to be the worst performers in the industry.
We've been disciplined. We've been very targeted in terms of what we acquire and we don't use spot. That's part of our business model, which is: we expect to generate a return for investors at lower prices than where metals are trading at today. That is what supports the risk-adjusted benefits of owning a royalty company. Royalty companies out there, buying assets at a premium to net asset value are taking on a lot of risk for some leverage upside, but there's better ways to get that.
Matthew Gordon: Another question from me because it was something I didn't really understand last year: there were portfolios and deals being done on multiples which seemed way out of whack with how soon cash would come through - little things like that. A company would buy a portfolio of assets, not all of which were good, some may be good, some mediocre and others were questionable, but they all got the same multiple. Is that the saving grace here, for some of the companies which perhaps are struggling in an environment like now. M&A will come along and solve the problem because they will get a straight multiple across all of their portfolio, in which case they could give their shareholders a decent return. Or are they sitting there waiting for the price of gold, or whatever commodity, to go up? They seem like the 2 options available to them.
Kyle Floyd: They really only have 1 option available to them, which is to wait it out and hope that a much higher commodity price comes their way. The reality is that the majors have been pretty disciplined in terms of what royalty companies still acquire. There obviously is a relatively new entrant in the space that has been a little bit more aggressive in terms of M&A, but there are truly only probably certain companies sub-USD$500M in the royalty space where a third party could come to value on and actually purchase. There's not many in my opinion. I don't believe that M&A will bail out a lot of the bad investment decisions that have been made over the last few years in the sector. The only option then for that business and for their shareholders is to hope that metal prices increase, and ultimately, they can exit. That's my opinion on the space.
Matthew Gordon: You are saying that the market, or retail, has been fooled by marketing and promotion but industry players are unlikely to walk in and solve their problems by picking up assets which are subpar. That’s not good.
Kyle Floyd: It's not good if you've been investing in a royalty companies that have been very aggressive using, let's say, spot prices to value deals, and needing every bit of resource to reserve conversion to happen. Those are some of the issues in the industry right now. It will likely be a very tough ride for some of those companies if they're not bailed out with a much higher commodity price cycle, which I don't think anyone can expect. You have to plan for the worst and make money in a worst-case type scenario.
Matthew Gordon: Therefore, a bunch of resetting of expectations across the board. We’ll go back and look at our data and try to understand where some of those companies sit today. For you looking forward, have you any reason to believe that your revenue projections are not on track?
Kyle Floyd: No. We came out with our revenue guidance just a few months back, everything continues to track. One of the big wins for us was that iron ore was at all time high prices. That's backed off a little. But again, we're tracking to guidance very, very well. Next year we have an abundance of assets coming online: Segilola, operated by Thor Explorations, they just announced first gold pour for commercial production. Bulong is a Western Australian Gold asset that is projected to come online mid-next year and then we have a number of other projects also expected to come online next year. We've got every reason to believe that we'll continue generating really nice revenue growth whilst also continuing to deploy our capital efficiently.
Matthew Gordon: Royalties are, and can be, a good investment class to get into but you need to look at the detail.
Kyle Floyd: You have to look at the detail, and investors need to be asking the CEOs and investment decision makers, and understand who they are in these companies; what is their track record and experience? Are they mining engineers? Are they geologist? Have they invested capital previously in the space? Do they have a track record of success? They need to ask the hard questions because a lot of companies out there are trying to do deals for the sake of marketing value or increasing their notoriety, whatever the case may be, but it's not coming down to fundamentals. That's a real issue in the industry right now, so investors need to start asking the harder questions to understand what they are investing in. The royalty industry has become its own cottage industry, thus sophistication in the sector has to grow. For those that put the time in to learn a little bit more, and obviously we're here to try and help in that process, they're going to be able to discern what a good royalty company looks like.
Matthew Gordon: It's a difficult thing though, as last year everyone was excited. Not just retail and family officers, but the brokers and bankers; it was an environment where you could raise money for anything. I've had a couple of CEOs say to me this month that there are too many junior exploration companies for gold out there. With royalty and streaming companies going through what they're going through at the moment, i.e., the hard lessons of where you should and shouldn't place your money, there will be a little less optionality for junior gold exploration companies, certainly for the rest of this year and next, unless it stands up to scrutiny. And hopefully, brokers and bankers pay more attention to that instead of their fees.
Kyle Floyd: The junior space is very, very difficult. The majors have basically said they're not going to go do all the exploration work for the industry, so that really pushes it down to the junior end of the sector. There are, obviously, those really big wins that can be generated, but it's a tough industry to invest in. There's a lot of people who don't know what they're doing and there's a few people who do know what they're doing, and you have to tip your cap to those who do know what they're doing. They’re the ones doing the hard work to find the deposits and prove those deposits out.
It's tough because it's very difficult to weed out those who know what they're doing from those that don't. That then makes the job harder on those that do and who are able to generate returns for their shareholders. They have to compete with a lot of noise out there. It's one of the things that the sector could improve upon, but it's tough being a junior company out there. I respect them for what they're doing. It's a hardy industry for sure, but it's tough, as an investor, to be able to discern the good opportunities from the bad.
We created Vox to be that outlet for retail investors and foreign investors looking for commodity exposure. They didn't have to be mining engineers and geologists to try and pick these assets and spend the time that's needed to really understand the junior end of the sector. That's why this business was created. That's why we present as a really interesting investment idea and platform for investors who want the commodity exposure. They want a little bit less risk. They want that leveraged upside. That's why this business was created, and we offer that well for our shareholders and investors.