Analyzing Relative Valuations for Royalty and Streaming Companies
Royalty and streaming companies
Royalty and streaming companies have a different set of drivers than other miners (RING) (SIL). Their business model is quite conservative since they don’t own mines but have somewhat fixed income streams after making upfront payments for production rights to mines. That could be why they have a higher valuation multiple than other miners. As the chart below shows, they have higher EBITDA (earnings before interest, tax, depreciation, and amortization) margins than their mining peers.
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FNV has the highest multiple
Some investors could be ready to pay higher for higher certainty. These companies’ multiples have expanded in 2017. Among the four major streaming companies we’re looking at in this part, Franco-Nevada (FNV) has the highest forward EV1-to-EBITDA multiple of 28.8x, a 35.0% premium to its peers. This premium seems justified, given its strong balance sheet, superior growth profile, and diversified production base.
Wheaton Precious Metals (WPM), which was previously known as Silver Wheaton (SLW), is trading at a multiple of 17.6x. Its discount to FNV mainly reflects its lower production growth profile. Some of its streams are facing problems such as Barrick’s Pascua Lama project. Also, its balance sheet is not strong enough to support a major acquisition going forward. In addition, a taxation issue has overshadowed its valuation for quite awhile.
Royal Gold’s (RGLD) multiple is similar to Wheaton’s at 18.5x. RGLD has diversified significantly in the last one to two years. However, it’s worth keeping an eye on since another accretive acquisition could provide a further catalyst for the stock. Until then, its valuation could be more or less full.
Sandstorm Gold (SAND) is a smaller company compared to its peers. It’s trading at a forward multiple of 20.1x. Its multiple has significantly rerated at 55.0% year-to-date. It has announced several positive updates, including robust exploration and drilling results. It has also repurchased 3.3 million shares since July 2017.
- enterprise value ↩