Update: Gold Royalties makes unsolicited offer for Elemental Royalties

Gold Royalties (NYSE-AM: GROY) is proposing to acquire Elemental Royalties (TSXV: ELE) in an all-share deal valued at $130 million.

Gold Royalties said it is taking its offer directly to Elemental’s shareholders, after its two previous approaches to the junior — the first on October 21 and the second on December 15 — failed  to engage Elemental’s board of directors, the company said in a December 20 news release.

The latest offer — 0.27 common shares of Gold Royalty for every one share of Elemental Royalties — values Elemental at $1.78 per share, a 37% premium to Elemental shareholders based on the closing share prices of each company on December 17. Gold Royalties noted in a press release that the $1.78 per share offer exceeds Elemental’s peak share price in 2021.

If the transaction is approved, Elemental shareholders will own about 12% of the combined company.

“Gold Royalty has completed three acquisitions in 2021, and in each case the implied premium paid is higher today than at the time of the transaction announcements due to the strong performance of the Gold Royalty shares, which could further enhance the ultimate premium realized by Elemental shareholders,” Gold Royalty stated in its press release. Its three previous acquisitions were: Ely Gold Royalties, Abitibi Royalties, and Golden Valley Mines and Royalties.

Other advantages of its offer, Gold Royalty said, included having ownership “in a larger, more diversified, higher quality portfolio of royalty assets anchored by cornerstone royalties on Canadian Malartic (Quebec, Canada), Fenelon (Quebec, Canada), and Karlawinda (Australia),” as well as a “deep development and exploration pipeline.”

In addition, it said, Gold Royalty has about US$30 million in cash and securities and no debt, and if approved, the business combination would position the larger company “as the preeminent intermediate gold royalty company.”

In response to Gold Royalty’s press release, Elemental Royalties’ board of directors stated it had not yet received a formal offer from Gold Royalty, and if and when one comes in, it would review it with its legal and financial advisers.

It also confirmed that it had previously received “unsolicited, non-binding and conditional proposals” from Gold Royalty, and that its board had assessed them, but “did not find the conditional proposals compelling, and therefore did not have an interest in pursuing” them. 

Jacques Wortman, an analyst who covers Elemental Royalties at Laurentian Bank Securities Equity Research, described Gold Royalty’s offer as a “compelling proposition” for Elemental’s shareholders.

Wortman noted that in addition to “enhanced trading liquidity” and the “successful track record” of Gold Royalty’s management team, the rationale for the deal included the 37% premium; a “sector-leading portfolio of 200 strategic royalties;” and “a path to a re-rerate” for Elemental shareholders due to “the combined company’s increased scale, portfolio diversification and trading liquidity.”

But Wortman also believes that a competing bid could emerge due to Elemental’s “compelling combination of quality, high-value royalty positions and near-term revenue growth and critical mass.”

The analyst noted that Elemental’s attributable gold production “is expected to continue to ramp higher, allowing Elemental to generate in excess of $10 million of royalty revenue in 2022.”

“Elemental’s near-term revenue prospects are highly attractive as they fill a void present in other royalty companies,” he wrote in his research note to clients, adding that potential competitors to Gold Royalty include Maverix Metals (TSX: MMX; NYSE-AM: MMX); Metalla Royalty & Streaming (TSXV: MTA; NYSE: MTA); EMX Royalty (TSXV: EMX; NYSE-AM: EMX) and Nomad Royalty (TSX: NSR).

“With that said,” he added, “we believe the Gold Royalty transaction is a great ‘fit’ for Elemental, as it fills Gold Royalty’s 2022-2025 revenue and GEO [gold-equivalent oz.] void and was our top takeout candidate when we initiated on Elemental.”

Kerry Smith of Haywood Securities believes a superior bid should emerge. “Given that Elemental has several assets delivering GEOs and considerable growth potential in the next year (55% GEO growth in 2022 modeled), a superior bid is likely,” he commented in a research note to clients. “With a market capitalization of only ~$100 million, the company is small, and of little interest to the larger royalty players, but would add meaningful royalty revenue to the mid-tier royalty players. Elemental will take its time to evaluate this proposal while looking for an alternative. Elemental is now ‘in-play’ and it’s only a matter of time before a superior bid emerges from Gold Royalty or another bidder.”

“Elemental has considerable revenue growth in the next year … and is a unique small-cap royalty player, as most of their assets in the portfolio are cash generating,” he wrote. “Gold Royalty is the opposite, with a very large portfolio of mostly development stage royalties and modest cash flow today, but does have excellent liquidity.”

Smith also pointed out that Elemental “has a small shareholder list, with insiders holding ~16% of the shares, South32 holding 19% and three other long-term investors holding another 24%.

“With over 50% of the shares in ‘friendly hands,’ any bid will need to be cordial, and would likely require some cash as part of the consideration in our opinion,” he said.

Shares of Elemental Royalties in mid-morning trading in Toronto on December 20 were up 21% or $0.27 per share at $1.57 apiece.

Haywood’s Smith has a target price of $2.60 per share.