Full test Crux interview
We interviewed Trey Wasser, President and CEO of Ely Gold Royalties (TSX-V: ELY). They are still a young company, having only being around for 3 years and are focused on Gold properties in Nevada. They have a portfolio of 33 Gold Royalties and 20 Gold properties sold on an option programme. There is an additional 25 Gold properties which are available for sale.
A Gold Royalty is a share of the gross revenue off the top line of a mining operation. The most common being the Net Smelter Revenue (NSR).
For us to invest in a Gold Royalty company, we need to believe that they can identify a good project and can write proper contracts. Trey Wasser and his team have come from a traditional Gold exploration background and have a track-record of identifying Gold properties, they have previously sold projects to Newmont and Osisko. This track-record should lend comfort that they understand the technical aspect of mining properties.
They employ a cookie cutter approach. Gold. Nevada. Small Royalties. They have learnt ropes with small exposure and risk. It has allowed them to be very niche and free of competition as the bigger Royalty companies don’t play in this area. However, now the business is starting to grow and the Royalty amounts are growing and the returns are increasing. They will look to raise money as they feel they have the ability to deploy the capital. And they need smooth and consistent revenue. This is going to be driven by the strategy and focus going forward so find out what say they are going to do.
They have a blended approach to the types of properties that they have. Exploration, development and now producing properties. This will allow them to compete at the lower end but we want to see how they intend to deliver growth. At $40M market cap it is still a small company. Shares are up 160% over the last 3 years but how do they continue to grow? What are their plans? At what point do they start to see increased competition?
There are some meaningful investors involved: Eric Sprott, Rick Rule – money is available. Does Ely Gold Royalty have the potential to re-rate soon? And when do they start to pay a dividend? We like Royalty companies but is this one of them?
Interview Highlights:
Overview of the Company
What are Royalties and Why Should You Invest in a Royalty Company?
The Team, Relevant Experience & Remuneration
Company Strategy, Growth Plan & Challenges
The Market: How do You Stand Out From the Rest? Is There Much Competition?
Matthew Gordon: It’s lovely to have you on the programme Trey. We’re quite keen on Royalty companies. I think Micky Fulp mentioned your company to us, so we were keen to get a hold of you. Why don’t you start off with a one-minute summary on the business and then we’ll get stuck into some questions.
Trey Wasser: Ok, Ely Gold Royalties – we transformed the company basically 3 years ago and started building a portfolio of royal properties, mainly in Nevada with the idea of selling the properties and retaining Royalties. We’ve been doing that for about 3 years now. We’ve built up a portfolio of 33 Royalties. We’ve got 20 properties that have we sold under a 4-year option programme and if they continue with the option, those 20 properties will also generate Royalties. We then we have an additional 20-25 properties available for sale, so we control through our Royalty portfolio, our option portfolio and our available property portfolio, over 70 Gold properties, primarily in Nevada.
Matthew Gordon: Thanks for that summary. For people who are new to Royalties, can you explain what a Royalty is?
Trey Wasser: A Royalty is a share of the gross revenue off the top line of a mining operation. So, you have several types of Royalties. The most common would be a Net Smelter Royalty (NSR) which means that the producing company does get to deduct their cost of smelting the ore, which is the final process, which is to take what comes from the mine to make it 49 Gold. But other than that, the Royalty owner is paid right off the top line of the Gold sales.
Matthew Gordon: Right. How did you get into this? Have you been in the Royalty business for a long time? What’s your experience of it?
Trey Wasser: I’ve been with Ely about 10 years and we were a more traditional Exploration and Development company. And we developed a project in Nevada – the mount Hamilton Project. We took it all the way to Bankable Feasibility Study (BFS) and full permitting and then sold that in 2015. That’s when we changed our business model and we did that by buying out properties from long time prospector in Nevada – Jerry Baughman – and Jerry then came onboard. He runs our Reno office, he’s our main land man and Jerry’s been doing this for 35 years where he stakes properties, very low-cost acquisition on his properties, sells them and retains the Royalties. He built up one portfolio that was sold, ended up with Newmont and it’s now actually a Osisko Royalties, in 2011.
Matthew Gordon: So, tell me a little bit about the team because there’s a couple of things that I would need to believe to invest in a Royalty company. 1. That you know how to identify good projects – projects which will succeed – where the Royalties will be paid or continue to be paid. 2. You’ve an ability around the paperwork around the contracting on a Royalty. I guess sometimes that can be fairly formulaic, but they are quite nuanced at times. So, tell us about the team ability to deliver on those 2 things.
Trey Wasser: Well first of all, the bulk of the team is Jerry and myself. Jerry being the land man and working on the identifying of the properties. As I say he’s been doing it a long time, so we’ve accumulated a database on properties that’s probably second only to Barrick Gold and Newmont in Nevada and the Western United States. So, we’ve very good at identifying the properties, I think the quality of our properties is reflected in our third-party partners. If you go to our website and look at the list of our properties that are in the Royalty portfolio, you’ll see all the major companies listed there. The mid-tier producers, Premier Gold, Barrick, McEwan Mining. The list just goes on and on and they’re top quality companies that are prospecting and producing, especially in Nevada. The beauty of our model is that with our option model, we don’t do joint ventures with our projects. They’re way too hard to handle. So, when you mention from the contract side, because we option the properties 100%, we don’t have any management of the projects once the paperwork is signed. We basically just send them an invoice, follow their news of course and report to our shareholders on the progress on the project. For the most part it’s a very scalable model. And what we have is templates that have been approved by the lawyers. So I do most of the legal and contract work and we work under a template so basically from the time we sign an NDA, it’s our NDA, it’s the same one for everybody (non-disclosure agreement), our term sheets are the same, the same options contract goes to everyone and it’s very easy. So, our Royalty Deeds and Royalty Agreements are, with a few changes, nuances from company to company, basically all the same and you’re right it’s a very good question because you can get jumbled up in a lot of different thing if we accepted everyone else’s contracts, but we don’t do that, we supply the contracts.
Matthew Gordon: That’s fascinating to me. That says to me that you’ve got a cookie cutter approach to this. It’s the same types of companies, same structures and set up. So, 1. You’re focused on Gold, which we’ll come to in a second. 2. It’s Nevada, which I guess we’ll also come to in a second. So, you know what you know, you can replicate it and that’s part of the strategy which you’ve consciously decided to settle on. Is that right?
Trey Wasser: That’s correct. We took Jerrys model and put it on steroids by putting more capital behind it, concentrated more on consolidating claim packages. What you won’t see on the surface is that behind the scenes, to put a property package together, we may go out and stake some claims. We’ll then work on putting all the claims together. The best projects that are unexplored in Nevada, that haven’t seen exploration since the 80’s and 90’s, have claim fragmentation problems where different parties own the claims. The major companies won’t fool with that and take that risk. So, we have been very successful in consolidating claims packages and that’s where the real quality of our projects and our partners comes through. I’d probably add one other thing re. back when you’re talking about the development too is we sensed in that last 6 months that we began to purchase some producing Royalties outside of our Royalty generation program and we can get into a few of those. In the development what we really focus on are projects and Royalties that are in and around producing mines. So, if you look at say Gold Resource, we have a producing Royalty at their Isabella Pearl mine that they just put into commercial production this year. But we also have a larger Royalty on all the exploration ground there at Isabella Pearl, about 7 miles of trend that’s been unexplored. 3 satellites mines or projects, Mena Gold, County Line where there’s been not a lot of production, because of claim fragmentation problems, not a lot of modern exploration. So that’s an example of where our projects are near producing mines so what they need to do is find just more ore, they don’t have to find enough ore to build a brand new mine. That’s the same for the case with Premier Gold at their South Arturo mine, that’s a joint venture with Barrick. We’ve consolidated some claims right in the middle of their mining project. We’ve just approved a sale of some claims right in the middle of McEwan Mining’s Gold Bar mine. So, our properties that are being developed have a very high chance of becoming producers.
Matthew Gordon: So that is to my point. It almost doesn’t matter what projects you’ve got to me as an investor. I just need to know that you’ve looked at them, they meet your criteria, this cookie cutter approach to Gold Royalties in Nevada, and it should be fine. I should just sit back and wait for the dividends, shouldn’t I? That’s the kind of trust level I need to have in you.
Trey Wasser: Well you know I think that having now been at this for 3 years in this business model. Jerry having had more than 10 times that (35 years). We also have on our board Bill Sherriff who’s a long-time prospector in Nevada. We bought all of Bills properties and Royalties a couple of years ago and his database which was huge. He’s on the board advising so we know where the projects, we know who the people are who have them which is why we’re able to do deals to consolidate the properties. But if you look at our website and look at the news flow, you can see we’re pretty prolific at doing deals with quality companies.
Matthew Gordon: You are but also if I go and look at the news flow there’s not a lot of chat around it, no one cares, because it’s fairly formulaic. It’s business as usual which says a lot to me – it says people either trust you or they don’t care. Looking at your share price, it’s heading the right way. Gold price is helping obviously. Just sticking on numbers if I look at market cap, your $40M, you’re a small Royalty company in a sea of quite big precious metal, Royalty and streaming companies in the US. Is that because you’re niche – you’re going to remain niche – you know where you sit in the market or is there room for growth?
Trey Wasser: Oh, absolutely there’s room for growth.
Matthew Gordon: From where?
Trey Wasser: We’re at a point in the market now with a $40M market cap. I’ve always worked around an overall limitation that is we’re looking at deals that would have to be an awfully good deal for it to worth more than 10% of our market cap. So, this time in the first couple of years when we were at a $10M market cap, I was looking at a $1M deals. Last year I was able to start looking at some larger deals and now that our stock, over the last 3 years, has been up 160%, so we are growing. Now we’re looking at deals that are in the $3-5M. They’re flying below the radar of the larger companies for sure and yet we’re at that hockey stick yard with our growth because a $4M Royalty deal to us at that size really moves the needle for us. All of a sudden it can add up to $1M a year in revenue and it’s going to be adding some of these $4M deals that allows us to get to the next step which will be where we can have a predictable income to start paying dividends.
Matthew Gordon: Right, ok. So, you’re going to stick with Nevada, it’s what you know, you’ve got a big data base. This niche means you don’t have to compete with the big guys, because it’s way too small for them so you think there’s enough growth in the next couple of years for you. Is there much competition? Are you competing for these Royalties?
Trey Wasser: Well, yes. We compete for them. Some of them we get a leg up one way or another. Because we are more exploration and development orientated we a look at things that maybe don’t have full Bankable Feasibility Studies (BFS) and necessarily proven and probable reserves especially if they’re with good operators. The big operators they don’t necessarily publish 43-101 reports on their properties. But again, there is some competition. But in the junior Royalty space which there’s probably 4 or 5 companies, I won’t mention them here, but they’re in the area of $100M-$200M market cap, maybe even $300M. That’s what we call the junior Royalty space and that’s what we’re aspiring to right now. We think we have a portfolio, we’re only a Royalty or 2 away from handling the companies that are $100M market cap. You then have a second group – the mid tiers – that would be companies like Sandstorm. They’re closer to $1Bn, they have more predictable revenues, starting to pay more dividends. Then of course the big boys, Franco Nevada, Royal Gold, Wheaton Precious metals. Every time you step up in the Royalty space add to your net asset value you get higher valuation. Franco Nevada’s trade at x25-30 cash flow and x2.5 to 3 Net Asset Value (NAV). The mid tiers are a notch below that, maybe x18-25 cash flow. Then the juniors are a notch below that. So, as you grow you actually get a higher valuation off of the portfolio.
Matthew Gordon: So what’s holding you back?
Trey Wasser: Absolutely nothing. We have been going gang busters. And like I said our stock is performing quite well. We are in this for the long haul. There’s not a secret sauce that says we’re going to magically transform. It’s a long-term game so you will see us continue to acquire more Royalties and do more option and sale deals that create Royalties. And over the next 2 years you’re going to see, we believe, probably 3 of our development Royalties will start production. You were talking about the due diligence before, the one thing, and I use our Lincoln Hill Royalty that we purchased from a third party this year. This is a property that was bought by Core Mining. It’s right next to their Rochester mine. At Rochester they’re building a new 300Mt leach pad that is right next door to the Lincoln Hill deposit. And when they purchased it Core said that this is ore they want to put on the leach pad. It’s 4 times the grade of Rochester. You don’t just have to necessarily just believe what I say. You can go and look at what our partners are saying and look at Core’s press release. They’re saying that they’ll be in production there by 2021, 2022 at the latest.
Matthew Gordon: Coming back to the question, whats holding you back? Is it a case of you can’t deploy capital or you can’t raise capital? What do you see as the hurdles you next need to get over?
Trey Wasser: Well, look we built the portfolio up and this year was really the transformation year for us. We spent the first 2 years mostly working with companies, third party partners, to sell our properties for them to know who we are. To understand our 100% sale option model with the retained Royalty as opposed to the joint venture model. And we were very successful in putting that portfolio together for the first 2 years. It was just last year that we really started doing any work to get out and tell the story to investors. One of our goals for last year, and we completed it right at the end of the year, was to get our first institutional shareholder. So, Rick Rule took us, through one of his Sprott global funds,a 9.5% position, literally right at the 1st of the year this year. And then a couple of months ago in April, we did a deal where we sold a portion of a Royalty we had to Eric Sprott and he took a 5.5% position. Our market cap has doubled this year so we’re looking at bigger deals. We have proven we have the ability to raise the capital, but we want to raise it in conjunction with deals. We currently have about $3.5M in the bank and some marketable securities that puts working capital a little over $4M. But, we have transactions on the table right now where that could be deployed in the near future. But, we do have people wanting put money in the company. We’re not in the mind to go out and to just dilute shareholders at this market valuation to increase the piggy bank. We want to do it in conjunction with deals that are non-dilutive.
Matthew Gordon: So, if we look at where you’ve put yourself in the market, where you’ve slotted yourself in, you’re looking at Explorers and Developers, pre-revenue. So, you’ve got to wait until they get into revenue before you can start issuing dividends to shareholders, right?
Trey Wasser: Well, that’s correct. I mean, as I said we have picked up a couple of producing Royalties, one on Jerritt Canyon this year. That’s going to be a steady, predictable Royalty source. Isabella Pearl has started to pay Royalties and over the next 12 months we think we’ll see a couple more that are better paying. When we have that Royalty income, and we will do about $4M this year. So we more than cover our G&A. We’re not earning capital at all. But a lot of that comes from the property sales, from the option portfolio, which would generate about a $1M-$1.5M this year. Royalty income will be about $1.5M and then we had a gain on the sale of a Royalty too. That is the next step for us, certainly to pay a dividend and I think you can look for that. It’s one of my goals for 2020 is to get this company established to where we have a couple more producing Royalties and that predictable revenue to not just do a one-time dividend program, but on going.
Matthew Gordon: That’s going to be a much more competitive environment where you’re bidding for people who are in production rather than companies which are in expiration and development because you know people want to sort of see there’s money coming shortly.
Trey Wasser: That’s true, but we have a couple of advantages. As I said a $3M-$4M deal for us is significantly it moves the needle. We’re not competing with Franco Nevada and the majors for that. If we sell them once in a while, we’re in the mid-tiers. We might be running into more junior Royalty companies but there’s only a couple of the junior Royalty companies that are actively adding to their portfolio. Some of them just sitting back with the Royalties they already have and maybe you know something here or there but not aggressively out in the market like we are.
Matthew Gordon: We’ve talked about focusing on Nevada. Will you focus on looking outside of Nevada anytime, in terms of this growth story that you want to start telling?
Trey Wasser: Yes, we did purchase this last year and this year. We first purchased a 1% Royalty and then another 2% Royalty on Wallbridge Mining’s Fenelon Project in Quebec. It’s a very exciting project and anybody who is following Quebec mining has probably heard of Wallbridge and this Fenelon Project. It’s just looking very exciting and I think it’s a project that will probably be taken over by a major mid-tier producer. I’m not sure Wallbridge will take it all the way to commercial production. They had been doing bulk sampling there so that’s one example. For producing Royalties, we will look outside of Nevada, if it’s a good jurisdiction. I don’t think you’ll see us buying something in West Africa, but we did look at a producing Royalty in Peru with a very good operator that we know very well. So, if we know the operator and if we view it as a safe jurisdiction, certainly for producing Royalties, we are looking outside of our Nevada comfort zone.
Matthew Gordon: Right and who’s assessing those deals, is that Jerry?
Trey Wasser: No, that’s me.
Matthew Gordon: Ok that’s you. Right so you’ll assess those deals. Ok fine.
Trey Wasser: And I have a couple of outside consultants that I use. One that’s more of a number’s cruncher and he’s worked for hedge funds and bankruptcy and work out kind of situations. I’ve known him a long time. So, he helps on the evaluation of the deals and then we have a couple of outside consultants that are kind of bird-dogging deals and bringing us all the time on an they get paid on a success fee basis.
Matthew Gordon: OK, so we’re Nevada, outside of Nevada if it’s producing, it is Gold. I mean most of the big Royalty companies are precious metal companies in the US. There don’t seem to be many niche Royalty or streaming companies outside of precious metals. Why is that? Is it the sheer size of the market or is it too complicated to do anything else?
Trey Wasser: Well I think if you look at base metals for example they’re not really very exciting , the excitement kind of goes along the electric vehicle, or the battery market. So, you’ve seen some run up there but not really enough opportunities to really exploit. Of course, Franco Nevada has some oil & gas interests that they’ve picked up, so they’ve added a little bit there. Gold Royalty space is the best way to invest in Gold. I mean if you look at the 10-year charts. Franco Nevada, Wheaton and Precious Metals and Royal Gold who’ve out performed SNP. SNP’s been on a pretty good run.
Matthew Gordon: Trey, get into it. To me, I like Royalty companies, everyone’s different. But remind people why you say that? Why do you say they’re the best way to invest in Gold? What are the risks that you’re taking away from the table?
Trey Wasser: Well, look, I love physical Gold and that’s my second favourite way to own Gold. If you just look at the charts and see that Royalty companies have outperformed Gold, handily over the last 10 years. where the regular Gold equities have not. The juniors have underperformed and the GDX is about even. What you get with Royalty company is a very low risk. Like Gold itself but with leverage. The leverage that you get is on the operating business. Because you’re getting the Royalty right off the top. You don’t have development risks as a rule. You don’t have construction risk, you don’t have expiration risk. All of that comes and you have all the expiration upside in an asset without having to pay for it because you’re taking your money off the top, not the bottom after they’ve deducted for exploration cost you know. The big challenge in mining is the CapEx cost that have to be maintained and what your true cost of production is when you look at exploration, the operating expense, the CapEx that’s needed and everything. The Royalty holder isn’t affected by any of that. That’s where the you’re banking on the producer doing a good job and having a good asset. So it’s a very low risk way of getting the leverage of equity in Gold without taking all the risk.
Matthew Gordon: That’s great. And as soon as you guys start paying out a dividend it gets more exciting, right?
Trey Wasser: I think so yeah. Everybody likes to see the dividends.
Matthew Gordon: Everyone loves the dividends. And how are you guys keeping your cost down? It sounds like quite a small compact team, but how do you remunerate yourselves? Do you do it say based on what we’re returning to the company? Are you paying yourself big salaries? How does it work within a Royalty company in the US?
Trey Wasser: Well first of all the way we operate, Jerry and I are the only two full-time employees. We have a part time CFO that is with an accounting firm and we have to give some of our directors’ a small amount for their audit committee work. But Jerry and I are the only two full-time employees. We have a salary plus bonus and the salary is, you can go look at the financials and see it, we both draw up about $150,000 a year in salaries. So for what we’re doing in the shareholder value and then the board decides, based on performance through the year, on both the share price and the portfolio, about paying a bonus. But you know a bonus’ have never been equal even to the salary. We operate very lean, we use outside consultants as I said for a lot of our bird-dogging deals and evaluating deals, and that way we’re not paying a full-time staff. We do have an office manager in Reno whose full time I guess you could say we have a third full time employee there.
Matthew Gordon: I’m very glad to hear it. That’s a very honest – the most honest answer – I’ve had to that question. And I’ve asked a lot of companies, so I appreciate that, I appreciate the low overhead. I can see where you’re at in your development. The rest of this year and the beginning of next year is a big time for you and if you can just get that next deal over the line, it should move the dial considerably. Trey, thank you very much for the introduction to your business. I’d like to catch up with you soon to see how things are going. Sounds like you just as you say started to see the benefit of the hard work over the last 3 years.
Trey Wasser: Listen, I appreciate the chance and the introduction to your viewers and let’s check back with each other here. I think what you see, in our news flow, is several deals that are in the pipeline right now. Different levels and a couple of, as you say, and a couple that could and should move the needle.
