Palisade Research - Tue, May 30, 2017

Desperate Times Call For Desperate Measures

picture of a Chinese man with his hand on his head worrying about stock prices which are shown on a lit board behind him

Since 2009, royalty and streaming companies have gained 230% while gold and the TSX Venture have returned 50% and 1%, respectively.

Royalty and streaming companies are able to sign advantageous deals during poor market conditions, at times when equity investments become less accessible. Desperate times call for desperate measures. In the troughs of a bear market, issuers seeking development and production capital often times must sell away future production at a discount.

line chart showing royalty and streaming companies +227% return versus 1% for the TSX Venture exchange and 46% for the price of gold, since 2009

Therefore, we wanted to compare equity investments vs. royalty and streaming deals since 2009 to see if a shift is underway.

line chart showing TSX/TSXV equity raised in C$ billions by miners versus capital committed by royalty and streaming companies, since 2009

2009 was a strong year for gold stocks - a year that saw C$22.2 billion in equity investments across all TSX and TSX Venture listed mining companies. Yet, this number falls to just C$6.8 billion in 2015, nearing the end of a horrific bear market. That's a 70% drop!

During that same time period, in 2009, streamers were only able to deploy C$1.34 billion. But when miners began to realize traditional forms of financing were no longer available, they turned to alternative methods. And in 2015, royalty and streaming companies did a record $5.4 billion in deals.

Equity financings simply became too dilutive and undesirable. However, miners could not simply mothball entire operations and wait for equity markets to recover, instead looking towards streams as a source of non-dilutive financing. Give away future upside to advance the project today.

What this all goes to show is that periods of heavy capital investment by steamers and royalty companies coincide with bear market conditions. Conversely, an increase in conventional financings by miners and a drop in capital committed by streamers indicate that the markets are finally turning for gold stocks.

2016 saw a significant drop in streaming and royalty activity, and an increase in equity deals. It seems the major streamers will now slow business development, and allow the recovery in metal prices to increase the value of their newly bolstered portfolios. Yet another sign that times are changing for gold stock investors!

We want to note that while the portfolio growth phase of the majors is now done, the junior streamers (sub-$200 million market cap) will now flourish. During this transition phase, the juniors acquire the rest of the royalties that have either been looked over or too small for the majors.

This building and incubation stage can be very lucrative for investors, and if done correctly, almost always end in an acquisition by a major. We have determined a junior on the right path, and have written outlined their growth trajectory and its already-rich portfolio here.

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