Medinah Minerals as a Junior Royalty/Exploration Company
On the heels of yesterday’s announcement regarding the sale, or rather reconfiguration, of Medinah Minerals (Chile) S.A. ownership of the Las Dos Marias claims, I think it is important for shareholders to start embracing, or at least start understanding, the paradigm shift that is occurring with regards to how Medinah Minerals operates going forward. And while I don’t have specific knowledge of management’s plans going forward, I think we can safely sketch the blueprints based on the following:
1) The disclosed terms of the 85% sale of Alto de Lipangue,
2) The LDM claims transaction with Compañia Minera LDM Chile,
3) The BOD’s description of Medinah Minerals transforming into a “capital company” specifically described by Larry Regis and Greg Chapin at the February 2012 shareholder’s meeting.
For years we shareholders have viewed Medinah as a typical junior miner with various properties of varying degrees of development that essentially needed to be explored and proven up in order to be monetized. For a junior miner with no revenues, this business model is oftentimes a lengthy and highly dilutive undertaking. Really since the 2012 SHM, this traditional junior explorer mindset clearly appears to be changing for Medinah, not so much in turn-key fashion, but perhaps more in a hybrid fashion between a junior miner and a precious metals royalty/streaming company as I am envisioning.
Earlier in another forum someone mentioned Silver Wheaton (SLW) for comparison to what the LDM transaction resembles. Silver Wheaton might not be the most accurate comparative business model for Medinah; however, it is pointed in the general direction.
The SLW business model does not concentrate or involve mining development and extraction per se. Rather, for some form of upfront investment in a mine/deposit they acquire a piece of all of the output (a “stream”) of a particular precious metal, in SLW’s case – silver, without the drawbacks of incurring capital expenditures associated with mine ownership, exploration and development. Silver Wheaton essentially buys a percentage of a mine’s silver production (the actual physical metal) at a predetermined price (e.g. $4/oz) for the life of the mine when silver is merely the by-product or non-core asset being mined. This business model is what is referred to as “silver streaming”. There is a very small subclass of companies that follow this business model described as “precious metals streaming” companies. Some of these companies include Silver Wheaton, Sandstorm Gold (SNDXF) and Sandstorm Metals and Resources (STTYF). You may want to read up on the business models of these companies to see how Medinah's latest transactions compare in concept to get a better idea of the direction we are heading.
A similar take on precious metals streaming involves another subclass of precious metals companies known as “royalty companies”. Actually the streaming companies like SLW can be considered royalty companies as well; however, I’m referring to royalty companies here more from a comparison of varying business models. Traditional royalty companies simply purchase a project’s precious metal royalties (NSR or other royalty instrument) for an initial upfront investment. Royalty and PM streaming companies are similar in that they do not incur the Capex costs associated with mine ownership while creating a back-end precious metals revenue stream. However they differ in their business models in that there is no pre-arranged discount price for the precious metals as there is in the SLW streaming business model. Royalty companies simply purchase a percentage of the royalties. The major players in this space are Royal Gold (RGLD) and Franco Nevada (FNNVF).
If Medinah were to sell a portion of its 15% FCI in ADL in the future, it might do so to a royalty company. However, looking at the latest Los Amigos 1 transaction, Medinah has assumed the role of a royalty company in and of itself. The difference being that Medinah currently doesn’t have the capital to make an upfront investment in a royalty stream, nor do they have the capital to share the Capex responsibilities associated with mine development and ownership. So from what I consider to be a creative, astute and necessary alternative, Medinah sold off their ownership interest in the Los Amigos 1 claim, jettisoned the financial burden of whatever future expenses will be necessary to build the Los Amigos 1 mine, and locked in a thick 30% NSR revenue stream from what appears from early indications and past drilling to be a rather significant gold vein to either dividend out to shareholders or reinvest into other royalty/streaming opportunities…while also reclaiming 100% ownership in the remaining 9 LDM claims. Not too shabby.
I have to imagine that this transaction, or one very similar to it, was contemplated for when Compañia Minera LDM Chile eventually hit the high grade ore zone anticipated some 60-90 days from now. However, the discovery of the gold vein at surface, and the conclusion by the Company Geologist that this is the same vein that had been intersected in previous LDM drilling, necessitated an expedited deal to reconfigure ownership of the vein and surrounding LDM claims.
So right now it seems that Medinah finds itself somewhat of a hybrid between a junior miner and a royalty company as it begins making this transition. On one hand Medinah owns a variety and various percentages of several undeveloped or partially explored properties (LDM, Polo, Ciclon I and II, Jota, Poniente, Oriente & Sur) like a traditional junior miner. On the other hand they now have a 30% NSR stream (15% to Medinah Minerals – USA) from the Los Amigos 1 vein that should begin flowing shortly after trucks start hauling ore to Enami for processing. And in between both of those hands sits the Alto de Lipangue crown jewel, which upon its finalization will add a 15% NSR stream in the distant future, but will also provide a short-term stream of a minimum of $180 million paid in 9-month tranches over the next 3 years. This was a nice "big picture" move on the company's part that reinforces their description of Medinah transitioning to a "capital company"...or what I'd prefer to describe currently as a hybrid junior royalty/exploration company.
