Pacific Trader: Metalla Royalty grabs for the brass ring

Metalla CEO Brett Heath presents at the Precious Metals Summit in Beaver Creek, Colorado, following the announcement of its merger with Nova Royalty

The stock: The mining royalty streaming model has a couple of advantages over investing in mining companies themselves. Essentially, a streaming company is a specialized financial institution that puts money up front into miners’ projects in return for a share of the mine’s output. First, there’s reduced execution risk; the royalty is a percentage of revenue, so the streaming company gets paid whether the mine is profitable or not. Second, in time the streamer generates dividends as the mines come into production. So a patient investor ultimately gets income as well as exposure to commodity prices, a rarity in this parsimonious industry. The challenge is that it can take decades to build a portfolio of cash-generating projects a la Wheaton Precious Metals (TSX, NYSE:WPM) or Franco-Nevada Corp. (TSX, NYSE:FNV). But Vancouver-based Metalla Royalty & Streaming (TSXV:MTA) just took an important step in that direction.

The drivers: On September 8, Metalla announced an all-share merger with crosstown rival Nova Royalty Corp. (TSX:NOVR) that gives its shareholders a 60-percent stake in the combined company. The transaction not only boosts the firm’s number of active royalty deals from 82 to 105, it broadens its exposure beyond gold and silver to copper, a key element in the global energy transition. The combined market capitalization is just under $400 million. Financing was provided by diversified investment bank Beedie Capital.

With just six projects in production so far, Metalla is still a long way from making money. It lost US$487,000 or a penny a share on revenue of $959,000 in the second quarter. But with the merger the company expects to grow its metal sales 10 times over by 2030, just based on its existing assets in development. Throw in the volatility of metals prices, though, and anyone considering investing in the stock should have a long time horizon and an iron constitution. As of Tuesday (September 19), the stock was trading for $4.32 on the TSX Venture Exchange.

Word on the street: On top of the benefits noted above, “this deal also increases Metalla’s liquidity, which advantageously positions the company to be involved in future royalty company consolidation in the small-cap space,” wrote Haywood Capital Markets analysts Kerry Smith and Owen McCleery in a September 12 research report. They have a $10.50 target on the stock with a “buy” rating.

Coming and going: Vancouver-headquartered First Majestic Silver Corp. (TSX:FR, NYSE:AG) this month opened a minting facility in Nevada, First Mint, that it says will enable it to increase its direct bullion sales, which have lately been constrained by the capacity of its minting partners. First Majestic has a program allowing its shareholders to buy silver bullion directly at a discount.