Can Royalty and Streaming Companies Maintain Premiums in 2017?



Royalty and streaming companies

The business models of royalty and streaming companies are quite different from those of other precious metals miners (RING) (SIL). Unlike other precious metals companies, royalty companies don’t own mines. They make upfront payments in return for the purchase of fixed percentages of future silver or gold mine production.

As mine owners deliver precious metals to royalty and streaming companies, additional payments are made to them. As such, their correlations to gold prices are lower than miners’.

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FNV and SLW have higher multiples

Due to their more stable income streams, royalty and streaming companies usually trade at higher multiples than miners. As the above chart shows, they also enjoy higher EBITDA margins than their mining peers.

Of the four major streaming companies we’ll discuss in this article, Franco-Nevada (FNV) has the highest forward EV-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of 22.8x. It has a superior growth profile. Its balance sheet is also strong, and its diversified production base, strong pipeline, and robust balance sheet warrant a premium to its peers.

Silver Wheaton (SLW) is trading at a multiple of 17.5x. Its discount to FNV is mainly due to its lower production growth. Although its leverage is low, its balance sheet may not be able to support a major acquisition going forward, which could restrict its growth options. Moreover, a taxation issue has overshadowed its valuation for quite awhile. Any resolution to this issue could see a major re-rating of its stock.

Re-rating catalysts

Royal Gold’s (RGLD) multiple has expanded 42% to 15.2x in the last year. The company has diversified significantly in the last one to two years. 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, and it’s trading at the lowest multiple of 14.4x. While it’s smaller, its leverage to gold prices is higher than its peers’. Even a small deal could alter its fundamentals significantly, acting as a positive catalyst for its valuation.


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