Gold Mining royalty companies offer an alternative way to play gold...
GOLD MINING and resource analyst Imaru Casanova, managing director in the research department at McNicoll, Lewis & Vlak, specializes in "under-covered" and turnaround companies in the resource sector. Here she tells The Gold Report about a number of situations that fit her investment parameters, including Gold Mining royalty companies.
The Gold Report: Thanks for joining us this morning. Before we get into specifics, please give us a little background on McNicoll, Lewis & Vlak LLC. (MLV) and its participation in the resource investment sector.
Imaru Casanova: MLV is a relatively new full-service investment bank/broker-dealer in New York. We've been around for about a year, focusing on capital-intensive industries—namely natural resources, mining, oil and gas and healthcare. Currently, we cover about 40 companies. We did 25 At-the-Market (ATM) issuances in the last 12 months. ATMs are becoming a huge segment of shelf registration takedowns. About 22% of all the US shelf takedowns last year across all sectors were ATMs. Our philosophy on research is to provide very in-depth coverage and expose those ideas to fundamental institutional investors.
TGR: Could you explain a little more about how ATM works for people who aren't familiar with it?
Imaru Casanova: In a very simplified way, companies can issue stock at an opportune time for them under a shelf registration. So, a company might file a US$100 million ATM with MLV under a shelf registration. When the issuer and MLV decide that it's a good opportunity to issue stock, the stock is issued in the open market. The goal is to minimize the disruption to the share price compared to a traditional equity raise. And the costs to the issuer are lower, which, obviously, translates into better value for shareholders.
TGR: Are you looking at mining and metals specifically?
Imaru Casanova: We have other analysts covering the other sectors at MLV. I'm the Metals and Mining analyst. Traditionally, I have looked at precious metals names; but now, I'm also looking at some names with copper exposure. Primarily, my approach has been to provide research on relatively under-covered names—names that don't have a lot of analyst coverage out there that I think can really add value to the institutional shareholder base by providing research that they're not getting elsewhere.
TGR: Let's talk about royalty companies. This is probably an area that most investors know little about because there aren't many of them out there. Can you explain what these companies do and why you think this is an attractive area for investors?
Imaru Casanova: You're right, royalty companies aren't a very well-known area. Royalty companies enjoy many significant benefits. One of the most important benefits is that by owning this stock, investors get exposure to a diversified portfolio of mining projects, including some of the highest-quality projects operated by many of the major producers. They also get reserve and resource growth at no cost to the company, which is a significant benefit. Generally, the majority of these royalty deals don't have production caps.
Another key differentiation is protection against operating-cost increases, which all but guarantees expanded margins in a rising commodity price environment. This is not always true for the producers. So, the royalty structure is a great way to get the optionality that comes with owning a mining name versus physical gold or an ETF. I've always talked about it as being sort of a middle ground—a hybrid between an ETF and a producer—because investors get the lower risk profile from the cost-increase protection, as well as the organic growth potential they don't get if they own bullion or an ETF.
TGR: So, by owning a royalty company, investors end up with something like a closed-end mutual fund?
Imaru Casanova: You can look at it that way, except the interests are not equity interests. Basically, the company owns portions of the production of numerous projects operated by many different publicly listed miners; so, investors get exposure to all those equities via one single stock.
TGR: What other factors do you consider?
Imaru Casanova: Obviously you can't just look at isolated events. You look at jurisdictions. You look at the quality of the project. You look at the strategy of the management to try to recover from whatever obstacle they're facing. And you decide if there's a good chance that it might indeed get resolved. I think they present a great opportunity to realize great returns with the obvious understanding that they're riskier plays. If a project should get built, it will get built. It may just take time.
TGR: Thank you for giving us a very good explanation of the areas you cover.
Imaru Casanova: Thank you.
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