EMX Royalty (EMX) - Risk Off as Revenue Grows?

EMX Royalty Corp. is a Canada-based precious, base, and battery metals royalty company. The company has a track record of success in exploration, discovery, royalty generation, and strategic investments on 5 continents. 

Matt Gordon caught up with David Cole, President, CEO, and Director, EMX Royalty. David has over 3 decades of industry experience, coming to EMX from Newmont Mining Corp. At Newmont, he held a number of management and senior geologic positions, gaining extensive global experience as a project, mine, and generative exploration geologist in Nevada, Southeast Asia, South America, Europe, and Central Asia. David’s success as part of Newmont’s exploration team includes contributions at the world-class Carlin Trend, Yanacocha, and Minahasa mines.

Subsequently, he established and managed Newmont’s exploration programs in Turkey while also identifying early-stage acquisition targets in Eastern Europe. He specializes in developing new exploration ideas and opportunities, based upon solid technical expertise coupled with a keen business sense. He studied under Dr. Tommy Thompson at Colorado State University, earning an M.S. in Geology.

Company Overview

EMX Royalty Corp. organically generates royalties through low-cost property acquisition and early-stage exploration to build value. The company was founded in 2005 and is headquartered in Vancouver, British Columbia. It is listed on the Toronto Stock Exchange (TSX-V: EMX), the New York Stock Exchange (NYSE: EMX), and the Frankfurt Stock Exchange (FSE: 6E9).

EMX Royalty functions primarily in the metals space including copper, gold, lead, zinc, silver, cobalt, and nickel. The company accumulates royalties through 2 mechanisms. The first is through the organic growth of a royalty portfolio by execution of the prospect generation business model, where it acquires large tracks of prospective mineral rights, adding value, and selling them for cash payments, share payments, and royalties. The second is through the purchase of royalties to augment the portfolio. The company has been in operation for the past 19 years.

The company has purchased royalties as part of its business model. It bought the royalty on the Carlin Trend when it bought Bullion Monarch. This royalty was purchased to augment the portfolio that grew organically. It covers a big discovery in Serbia. The company’s royalty generation model comprises acquiring and accumulating royalties through prospect generation.

In 2018, EMX Royalty’s 42% owned IG Copper LLC agreed to sell the Malmyzh copper-gold project to Russia Copper Co. for an estimated $68M. IG Copper holds a 51% interest in the project and serves as an operator. The liquidation of the asset provided the company’s treasury with a cash infusion of $68M. Following this, the company sought to deploy the funds to buy cash-flowing royalties and other accretive transactions. It deployed capital on smaller transactions as a way to fund organic growth through royalty generation. 

Although the company does not bid to the same extreme as its competitors, it is comfortable with leveraging an investment when it produces immediate cash flow. The company recently acquired 2 fairly large transactions that met its evaluation criteria in quick succession.

SSR Mining Royalty

SSR Mining’s portfolio is the larger of the two recent transactions. EMX Royalty encouraged SSR to sell its royalty portfolio. SSR was looking to gain exposure to EMX’s upside along with the generative side of its business. EMX Royalty was able to fetch a much better IRR (Internal Rate of Return) through modeling the future cash flows from the portfolio. A large part of the company’s competition was reluctant as the assets were based in Turkey, a country that is facing economic issues due to currency devaluation along with additional factors.

Since EMX Royalty already had a presence in the country, it had existing relationships with the counterparty and other players in the market. Additionally, the company had employees and consultants that have a close working relationship with SSR Mining. The association continues with SSR being a shareholder in the company.

The company believes that the political risk in Turkey is overvalued in the marketplace, while the technical risks, engineering risks, geological risks, and metallurgical risks are commonly undervalued. This leads to the creation of an inefficiency that has the potential to be captured. 

The key component of the SSR Mining royalty was that the company was specifically seeking a portion of the EMX equity in order to execute the deal. The company was looking to participate in EMX’s continued rerate and portfolio growth that has been built over the past 2 decades. EMX considers the association with SSR Mining as a long-term partnership and intends to continue conducting business over the short and long term.

The Caserones Copper-Molybdenum Mine

In August last year, EMX Royalty acquired an effective 0.418% NSR (Net Smelter Return) royalty on the operating Caserones Copper-Molybdenum Mine in northern Chile for $34.1M in cash. To purchase the royalty, the company formed a 50%-50% partnership with Altus Strategies Plc to acquire an effective 0.836% NSR royalty for $68.2M. The company views this deal as a 30-year bond that pays in copper. The official mine life is 17 years. The royalty has a large footprint that features alteration systems. The company anticipates a long-term exploration potential. This asset is expected to produce for decades into the future with production upside from existing infrastructure in addition to the possibility for a future mine expansion.

The Timok Project

EMX Royalty began operating in Serbia through its Magmatic Complex royalty portfolio, the largest historic copper and gold producing region in Europe. The Timok Project is the largest ever discovered copper-gold deposit in Europe that is now coming into production.

The company started operations in Serbia following the Balkan wars. EMX Royalty was the first foreign company to be granted exploration licenses in over 40 years. This deal was carried out by the company to achieve organic business growth. It added value and sold the royalty to Reservoir Minerals Inc. for cash, shares, and royalties. Following this, Reservoir Minerals did a transaction with Freeport McMoRan Inc. The latter made a discovery on the Brestovac East license that bordered one of EMX’s royalty.

EMX Royalty purchased the royalty from Euromax Resources Ltd. for CAD$200,000 early in the asset’s discovery history. This led to the augmentation of the company’s existing royalty portfolio within the district.

The royalty agreement is filed on SEDAR (System for Electronic Document Analysis and Retrieval) which is available online. The agreement had an ability for the royalty to be diluted by Freeport in a pro-rata manner relative to the direct project equity earned. As per EMX Royalty’s interpretation based on strong legal advice, the royalty was never diluted. The company anticipates that this is a 0.5% royalty.

This royalty has an upside that instead of going into a lawsuit that eventually becomes a court case, it goes to binding arbitration in British Columbia. It is important to note that British Columbia is a signatory along with all provinces in Canada, the United States, Serbia, and China. The countries are signatories to the New York Convention, which outlines that binding arbitration that’s settled in any member state is applicable across all member states. EMX Royalty plans to go through the process vigorously to support its 0.5% royalty.

Meanwhile, Zijin Mining completely recognizes the royalty’s existence. The company has taken the view that it was diluted down to a 0.125% royalty, a 75% dilution. However, EMX Royalty disagrees and is looking to aggressively pursue it. As EMX paid CAD$200,000, even in the worst-case scenario, settling at 0.125% will be a massive financial win for the company as the royalty will offer substantial capital as the global resource is close to 2Bn tons at just over 1% copper equivalent. The company is optimistic that the odds will be in its favor.

The process will follow the British Columbia arbitration protocols in which both parties pick an arbitrator. Following this, both arbitrators pick a third. If this is not achieved, the court picks a third arbitrator. All 3 arbitrators then review the different information and the parties each pay pro-rata fees. The process takes between 6-12 months on average.

It has been well-documented that the royalty had the ability to be diluted in EMX Royalty’s materials. In an event where the royalty was diluted, it would be through direct project expenditure by Freeport only, in exchange for project equity. However, this did not occur. Instead, the direct project expenditure occurred at a subsidiary level which was specifically disallowed in the document.

Operational Challenges in Chile

Chile is seen as a risky country to operate by EMX Royalty. The company believes that even though the events are overdramatized by the media, there is, in fact, sabre-rattling ongoing in the country.

There have been reports that Chile might impose really high taxes on copper producers.  Additionally, the country rewrote its constitution to confront climate change and raise mining royalties and taxes. This is where the government is targeting extractive industries. Since these industries have a resource in the ground, operations cannot be relocated.

Risk Management

As EMX Royalty operates over a wide variety of jurisdictions, it faces operational risks in several countries. However, the company has 100% factored in the operational risks. Being a royalty investor with a global portfolio, the company has substantial diversification across assets. This includes diversification across political risk, geological terrain, commodity, and more. The operational risks are taken into account through the company’s seasoned professionals that have an extensive work history in the mining industry.

The key differentiating factor for EMX Royalty is that the bulk of its royalties are grown organically. The company seeks out royalties across various mining terrains for opportunities that can enable organic growth through royalty purchases. The company focused on the astute allocation of capital while building its royalty portfolio.

The Sprott Loan

EMX Royalty has an ongoing credit facility with Sprott Private Resource Lending for an amount of $44M. The company is considering an extension on the credit with either Sprott or another entity for refinancing. In case the company has a substantial cash flow, it can get a senior note from a major bank, leading to a lower cost of capital along with lower coupon rates of around 4%.

Currently, the coupon rate sits at 7%. EMX Royalty’s strategy comprises paying out to buy current cash flow from production royalties, leading to a cheaper cost of capital in the future. Given the company’s growth strategy, it does not believe that the current capital is expensive. It is working toward attaining a recurring positive cash flow that will allow cheaper borrowing of money.

The loan by Sprott has enabled the company to reach a lower cost of capital in the future. The company is looking to either extend or refinance the credit. However, it has no plans to raise capital at the current share price. 

The capital will be utilized by the company to fund its business. The company could pay down the debt over time through the capital raised. Though, the company is currently focusing on the astute allocation of capital in interesting projects.

Cash Position

EMX Royalty has $15M in current cash flow along with around $15M in traceable securities and long-term investments. The company has a $44M debt to Sprott. It has a VTB (vendor take-back) note for the VAT on the SSR deal that amounts to $7.5M.

The VTB is for VAT that is collected as production from the Balya royalty and Gediktepe royalties. Since the Turkish Lira has observed a devaluation, the company is expected to lose some money as the VAT is valued in local currency. However, the company expects to receive back the VAT over the course of the next 3-4 years based on the production rates of mines.

Notably, EMX Royalty has been approached by several big Canadian banks including CIBC (The Canadian Imperial Bank of Commerce), Scotiabank, and BMO (Bank of Montreal). These financial institutions are looking to establish new capital relationships along with capital partnerships in the future. Currently, EMX Royalty is pleased with its ongoing capital partnership with Sprott.

Targets 2022 and Beyond 

This year, EMX Royalty is expecting the initiation of strong cash flows from Balya and Timok. The company anticipates that the royalty will be close to 0.5%. The Caserones Copper-Molybdenum Mine is already generating revenue. Additionally, the company’s Gediktepe royalties will serve as a cash cow for the first few years, providing a 10% royalty on the oxide zone. The first doré has already been poured at Gediktepe. EMX will start getting royalties after 10,000oz has been poured, which is expected over the next 2 months. 

Notably, when the Gediktepe royalty was acquired by SSR, part of the selling price consisted of 50% equity the predecessor had in the mine instead of cash payments. The predecessor took a large royalty on the highly-profitable upper oxide gold and silver enriched zone as a way to pay for the project.

This negotiation was carried out as a part of the purchase price when Lidya Madencilik consolidated 100% ownership. EMX Royalty took SSR Mining’s place in buying the royalty position. As a result, EMX will now be paid for the deposit. This leads to the generation of immediate cash flow for the company. The asset is currently under additional exploration for oxide. Additionally, the company will get a 2% royalty once exploration starts at the polymetallic sulphide zone.

The Kaukua Royalty

In February 2020, EMX Royalty acquired 2% NSR royalty on various exploration licenses for the Kaukua property, totaling over 1,000 hectares from Akkerman Exploration B.V, a private Netherlands company.

Notably, the Kaukua Royalty licenses host palladium-rich PGE (Platinum Group Element) mineralization at Palladium One Mining Inc’s flagship Läntinen Kollismaa project in Finland. The Kaukua deposit lies within the Kaukua Royalty property.

The Kaukua royalty was acquired by EMX for CAD$125,000 along with the issuance of 52,000 EMX shares. The NSR royalty applies to all future mineral production from the Kaukua Royalty licenses. 

The Kaukua property is Palladium One’s flagship asset. The company continues to chase the igneous stratigraphy and layered intrusions with igneous beds of enriched metal horizons, featuring platinum, gold, copper, and nickel. The company continues to step out and chase the geophysical anomalies that identify the metal-rich zones. The most recent drill holes offered highly-positive results. EMX Royalty has an exceptional royalty discovery optionality on the Kaukua property.

Guidance Metrics

EMX Royalty’s CFO, Doug Reed is working on the development of a 5 year model from the existing assets. This will enable the company to provide either an annual or quarterly market guidance. The company is focused on shelf filing along with updated technical reports to ensure that the aspects of the guidance are legally-compliant and covered by the technical reports.

To find out more, go to the EMX Royalty website