Maverix proves skeptics wrong

In the three and a half years since Geoff Burns cofounded Maverix Metals (TSX: MMX; NYSE-AM: MMX) with CEO Daniel O’Flaherty in July 2016, the royalty and streaming company’s portfolio has grown to more than 100 assets — 14 of them paying.

In 2018, Maverix posted $3.5 million in net income on record revenues of $34 million from 20,886 attributable equivalent oz. gold sold, and is on track to meet its 2019 guidance of between 22,500 and 24,500 attributable equivalent oz. gold sold. Its largest shareholders are Newmont (TSX: NGT; NYSE: NEM), Pan American Silver (TSX: PAAS; NASDAQ: PAAS) and Kinross Gold (TSX: K; NYSE: KGC), which own 25.1%, 23.1% and 9.4% of the company (undiluted).

Burns was president and CEO of Pan American Silver from May 2004 until December 2015. After more than a decade at the company, he decided it was time to step down and let someone else take the reins for the next leg of growth. While the company was introducing Michael Steinmann as his successor, Burns happened to be reviewing Pan American Silver’s annual information form and realized that buried in the Pan American portfolio was a series of royalties for which the company was getting zero market recognition and no value. So he went to the board and asked whether they thought it would be worthwhile to pull the royalties into a separate vehicle and allow him to bring them to market. Company chairman Ross Beaty, a hugely successful entrepreneur and renowned mining operator and investor, thought about it for about a minute, Burns recalls, and said he thought it was an excellent idea.

It took six to eight months to organize the portfolio, find a shell company to use for an RTO transaction, and identify candidates to participate on the board and management team. Pan American initially held a 60% stake in the company and Maverix completed a private placement before its launch on the TSX Venture Exchange, which provided it with a modest $6-million treasury.

Right out of the gates, two of the 13 royalty streams Maverix acquired from Pan American were cash flowing — contributing the modest sum of 1,500 equivalent oz. gold a year — enough to keep the lights on and the company going. The first was a gold stream on the La Colorada mine, one of Pan American’s cornerstone assets (Maverix received a life-of-mine stream for 100% of the by-product gold production at a flat fee of US$650 per gold oz. produced), and the second one was a net smelter return royalty (NSR) on San Jose, a recently commissioned producing mine in Mexico, owned by Fortuna Silver Mines (TSX: FVI; NYSE: FSM).

Institutions were skeptical at first. “The feedback was: ‘Who really needs another royalty company? How do you think you’re going to be able to compete in a very crowded and competitive sector?” Burns says. “We said: ‘Well, we understand that there’s some skepticism. But we’re not here to raise money. Watch us over the next 12 months and decide whether we’re good at what we do, or we aren’t.’”

Within four weeks of its launch, Gold Fields (NYSE: GFI) reached out. “They said: ‘Look, we have a similar-sized portfolio and we had been looking to do the same thing by launching an independent vehicle, but you have already accomplished that and instead of recreating the wheel, why don’t we see if it makes sense to put the two together,” Burns recalls.

Discussions started in August 2016 and over the ensuing three and a half months, the two companies put together a transaction where Gold Fields received an equivalent amount of equity that Maverix had issued Pan American in exchange for 11 royalties.

Gold Fields’ royalties complemented the ones Maverix already had. Four of them were already paying and most were in Australia, where the South African company had been quite active over the previous decade. With Gold Fields’ 11 royalties, Maverix’s asset portfolio nearly doubled and its annual gold attributable ounces more than quadrupled.

Maverix completed another three transactions in 2017 — what Burns describes as mostly “bolt-on” transactions. It bought a 2% NSR on Silvercorp Metals’ (TSX: SVM; NYSE AM: SVM) Silver Tip mine in B.C., now owned by Coeur Mining (NYSE: CDE). It also acquired two royalties from Auramet, a gold-trading and financing company: one on the Florida Canyon mine in Nevada, now owned by Alio Gold (TSX: ALO; NYSE AM: ALO); and a royalty on the Beta Hunt mine in Australia, owned by RNC Minerals (TSX: RNC). Later that year, it purchased from a third party a pre-existing 2% NSR on Endeavour Mining’s (TSX: EDV) Karma mine in Burkina Faso. Each transaction provided Maverix with incremental attributable gold-equivalent ounces of production and immediate cash flow. Maverix ended 2017 with 27 assets — seven of which were paying.

In the meantime, Newmont was sitting on a portfolio of 50 royalties that had been created within the company since it had spun out Franco Nevada (TSX: FNV; NYSE: FNV) a little more than a decade earlier. “Newmont reached out to us because they had noted what Pan American and Gold Fields had done and how their initial investments had increased substantially in value,” Burns says. “They decided they were going to do some sort of transaction to harvest value from their portfolio and they thought that we might be a logical partner to talk to.”

Over the following year, Newmont ran a complete process and invited interested royalty-sector participants to engage. “Ultimately they decided that their best course of action was to transact with Maverix,” Burns says. The transaction was predominantly equity based, although it included a modest amount of cash as part of the consideration, and the deal closed in June 2018 — adding 50 assets to Maverix’s portfolio.

“The key for Newmont, which remains one of our largest shareholders, is that they had seen how putting the portfolio into a public vehicle could enhance value,” Burns says. “Typically, royalty and streaming companies trade at somewhere on average of between 1.5 and 1.7 times net asset value and somewhere between 15 to 25 times annual cash flow per share, and at the time Newmont felt that they didn’t really need cash, and could wait for the transaction to be fully reflected in Maverix’s share price and potentially increase the ultimate value they would receive.”

Burns says that Newmont was likely offered cash by other competing participants, “but thought taking equity would give them added upside, and so far their conviction and confidence has proved correct.” Since closing the transaction, Newmont has almost doubled the value it received by taking Maverix’s paper at $3.40 per share. Today, Maverix is trading at $6.95 apiece. (When it launched in mid-July 2016, the company’s shares traded at just over $2 per share.)

Maverix completed another two bolt-on transactions in the early months of 2019. The first was a silver stream with Northern Vertex Mining (TSXV: NEE; US-OTC: NHVCF) on a small gold-silver project in Arizona called the Moss mine. (Maverix receives 100% of the silver, which is a by-product of the mine, for ongoing payments of 20% of the spot silver price.) The second was with Ascendant Resources (TSX: ASND; US-OTC: ASDRF) on its El Mochito mine in Honduras. El Mochito is predominantly a base metal mine that produces silver as a by-product. Under that silver-streaming deal, Maverix receives 22.5% of the mine’s silver production for a 25% cash payment of the spot price.

“The reason why we really liked those two deals was: A) they were both in production so immediately cash generating to Maverix, and B) both mines are long-lived insofar as the Moss mine was in only its second year of production, with a 10-year-plus mine life ahead of it, and El Mochito has been in production for over 60 years,” Burns says. “El Mochito probably has got about another 10 years of reserves and likely well beyond that, so it fit very well with what a growing company needs, which is cash flow and long life. Plus these streams were good fits for our operating partners, as they are focused on by-product production from each of the mines.”

In addition, Maverix closed a royalty deal with TMAC Resources (TSX: TMR) on its Hope Bay mine in Nunavut. Hope Bay is in production and has a plus 20-year mine life ahead, but TMAC found itself in a situation where it needed more financing. “They had some difficulties in their start-up, which were very well documented, and they reached out to us because we already had a royalty on the property, had visited the operation so were comfortable, and without speaking for TMAC. I suspect that they were not very enthralled with what the equity market could offer them at the time,” Burns says.

That deal, which closed in August 2019, was for another 1.5% royalty on the mine, to go with the 1% NSR that Maverix already owned. “It’s an ideal asset for Maverix to become involved with, given its long life and exceptional exploration potential, and we are confident that TMAC is ultimately going to turn their fortunes around in terms of their operations there, and make Hope Bay the exceptional asset that it has the potential to become,” Burns says. “We were in the right place at the right time to help them out.”

Maverix’s most recent transaction with Kinross, which closed in December, contributed another 25 royalties, one of which, an NSR equivalent royalty on Polymetal International’s (LON: POLY) Omolon processing hub in the Magadan region of western Russia, is cash flowing. Among the Kinross portfolio is Cerro Casale in Chile, a 20 million oz. plus deposit that is owned by a joint venture between Newmont and Barrick Gold (TSX: ABX; NYSE: GOLD).

Burns acknowledges that Cerro Casale is not close to being in development — or is even likely to be within the next decade — but it is still an “incredible opportunity” to participate “with some of the largest players in the gold industry on essentially what you would deem a potential megaproject, and which, in the fullness of time, I fully believe will get developed. I don’t know the time frame, but Cerro Casale represents an incredibly large gold resource in a jurisdiction that remains relatively mining friendly, and is in the hands of two of the most skilled and resourceful operators in the entire sector.”

Kinross, like Newmont, ran a formal process looking at options to monetize its portfolio and chose Maverix, Burns says, because it desired some equity exposure and the potential upside that a stake in Maverix’s equity could provide. “I would like to believe that Kinross and Newmont and Gold Fields also looked carefully at the management and the board we had assembled and realized that — and I hate to put words in their mouths — but that they concluded we know what we’re doing, and, perhaps as importantly, that we are open, trustworthy and forthright partners to deal with.”

Burns notes that Maverix’s largest shareholders are really “corporate partners … They have been supportive of our efforts, and Pan American and Newmont have nominated members to our board, which added additional strength, experience and diversity,” he says. “They also recognize that on occasion opportunities come to each of them that are either too small or in the wrong jurisdictions so don’t fit with their future plans, and they seem to happily bring those opportunities to our attention to see if they are transactable for Maverix, but in a different way. That has been very helpful as we continue to look for opportunities to grow.”

While Burns admits the field is getting more competitive, Maverix finds itself in a “sweet spot.”

“We’re the only royalty company that has a market capitalization of between US$200 million and US$1 billion,” he explains. “The next largest would be Sandstorm — they’re over US$1 billion — while Metalla Royalty & Streaming (NYSE-AM: MTA) is close to US$200 million. And what makes that unique for us is that a transaction such as the Kinross transaction actually moves the needle for Maverix. It’s a significant transaction for us, whereas a US$75-million deal for a Royal Gold (NASDAQ: RGLD) or an Osisko Gold Royalties (NYSE: OR), or certainly a Franco-Nevada (TSX: FNV; NYSE: FNV), would likely be of less interest to them, just given their size.”

Moreover, the ability to get a lift on the equity seems to be appealing to the sellers, he says. Kinross could easily have sold its royalties to a larger company, he says, but it might not enjoy the same potential rise in the share price. “They’re all high-quality companies,” Burns says of his peers. “It’s just that a transaction of this size is not going to make a huge difference to those companies, whereas for us it is still a material transaction, and we are hoping for Kinross’s sake and for that of our current shareholders that we might see a nice bump in equity just based on the value created in completing this deal.”

What’s more, he says, Maverix is in a unique place in the market because its hunting ground is most likely below the size range that really gets the larger royalty and streaming companies excited. “We’re looking in the US$20-million to US$40-million range, and while we have no doubt that the larger royalty and streaming companies will look at those opportunities, they perhaps aren’t as motivated or focused on them as we are, and we have become very adroit and skilled in identifying those types of opportunities and talking to the companies that are looking for financing in that size fraction.”

Burns acknowledges there may be a time, if Maverix’s success continues, that it will start to bump up against more competitors, because as it grows it will eventually look at larger transactions. But for now, at least, it’s in a niche spot. And with gold trading at over US$1,500 per oz., there are companies with operations in production that are looking for development financing for expansion, but, as yet, equity markets have yet to really respond to higher metal prices, and that is where Maverix can be helpful.

“We have seen some level of equity financings of late, but more often than not, they have been fairly unique situations with very specific circumstances,” he says. “We have not seen equity markets generally open to companies with projects that are still looking for financing. If and when equity markets open, and that could happen quickly, we may need to react and adjust our strategy, but, at least for now, we’re not short of opportunities to continue to grow.”

At the same time, Maverix is trying to enhance its capital markets profile and continues to market aggressively in New York and London  to get its story out. In mid-2019, Maverix moved from the TSX Venture Exchange to the main Toronto stock exchange and has also listed its shares on the New York Stock Exchange-American. Today the company is covered by seven mining analysts and has a US$120-million line of credit to draw on to fund acquisitions.

“If someone had asked me when we launched in 2016 if I believed that three years later, we’d have plus-100 assets and have annual revenue in excess of $40 million, I would have sort of laughed at them and said, ‘OK, if you say so.’ But through some hard work, coupled with unwavering focus, we have built a very reputable company that is an attractive partner for some of the most well-respected mining companies, who understand our sector and look for quality opportunities to essentially invest in. Our success in growing our business has led to even more opportunities coming our way, and it has just kind of snowballed from there. It has just been an incredibly exciting ride so far.”

Burns says the key to its strategy is to keep it simple and look for opportunities “that are right down the middle of the fairway.”

“We’re not looking to do exotic types of financing. We have no intention of doing exploration and certainly are not interested in operating. We’re going to keep it as simple as possible and stay right within the royalty and streaming model, focused on building our cash-generating engine.”

For the most part, the company also plans to try to stay in what it considers the most mining-friendly jurisdictions of Canada, the U.S., Mexico, Australia, and certain South American countries, where nearly 85% of its revenue is generated.

And in terms of the metals mix, 90% of its assets are precious metals (75% gold and 15% silver). Although it won’t rule out considering a small component of base metals — it would only do so if at least 80% to 85% of its revenues still come from gold and silver.

“That is a hard line for us — a bright orange line,” he says. “That’s where we start. We might consider diversifying into some base metals, provided it didn’t become a dominant revenue line item for us. Diamonds, nope. Other battery or EV materials, no, not in our future. We are also going to avoid anything that gives us direct operating exposure — we’re just not looking at that — it’s just not in the expertise that we have built. We’re going to keep our transactions straightforward, looking to invest cash in companies that might need some financing help in exchange for streams or royalties.”

The strategy is working. In 2018, the company’s average cash cost per attributable equivalent oz. gold of US$162 resulted in cash-operating margins of US$1,468 per ounce.

“This is quite a unique business that does lend itself to very large margins,” Burns says. “The margins are excellent and do allow us to sleep better at night, there’s no question about it.”

The royalty and streaming model also protects Maverix against negative price fluctuations, he says, while allowing significant upside when prices are strong and companies build a new project or expand their own operations.

Burns sees Maverix as an effective partner with the operating companies, providing financing to bring projects onstream or expand projects already in production. As such, it tries to be reasonable in terms of its return expectations, he says.

“It makes no sense to me to overburden an asset. If there isn’t a profit motivation for the mining operator, then we’re doing something wrong because that means we aren’t really helping. For us to get a good return for our shareholders, the underlying operator has to have an opportunity to do the same for its shareholders, so we try to be careful not to put so much of a burden on an asset that it hampers the asset or the operator,” he says. “That makes no sense, and in the long-term will ultimately be counterproductive for both ourselves and our operating partners.”

He notes that the 30 years he spent on the operating side of the business has helped him assess an asset technically and determine how much burden it can bear. And it hasn’t hurt having shareholders like Newmont, and Pan American and hopefully Kinross, where it can access and leverage experience and expertise. “To be able to ask for advice or feedback, particularly with two of those companies having board representation with Maverix, is incredibly additive.”

Admittedly, some of Maverix’s assets are more marginal than others, or have higher-risk profiles, but there’s little that keeps Burns up at night, he says. And he has had the luxury of working on both sides of the business. “As an operator, I was always jealous of the valuation that royalty and streaming companies got, but now having sat in this seat for the last three and a half years, I think I understand it,” he says. “When I started at Pan American Silver, we had three operations. When I left we had seven and had tripled our production base. That took 12 years and a huge amount of effort with a consummate group of mining professionals to accomplish. We started Maverix with just two assets that were in production, and we now have 14 in three years, so we have been able to achieve a level of diversity that really isn’t available to operating companies, and that probably helps justify a premium valuation, and perhaps even a higher premium, if you do it smartly.

“Operating is hard. Above and beyond the complex discipline of mining productively and profitably in sometimes very harsh environments, mining companies must also establish a positive social licence to operate in today’s world … It requires constant attention and nurturing, and is, frankly, just the right thing to do … I have the utmost respect for our operating partners because I understand how difficult it can be at times, and while I do miss being on the operating side, I have to be honest, there are certain operations-related headaches that I don’t miss that much.”

As for Maverix, he says, “it has been an absolute scream so far, but there’s more to go. I’m excited about where we are today and even more excited about where we can go.”