Everything you need to know about royalties, with Spencer Cole

Righto buddy. Miners. You wanna know about royalties? This whole episode's about royalties. Everything and everything you wanna know. I wouldn't the the dark art of royalties and you can make a whole episode about it. Really you can. We've got it here, buddy. We have got bloody speaking about royalties. Talk about insurance, broking royalties, CRE insurance. Well, we're on the topic on the on the back of telling everyone our bloody good CRE are mate, they're expanding everywhere, JC

they are. They're they're more people to keep up with the demand that's coming out of finally everyone now and how bloody good they are mate. You want it doesn't matter whether you own the rocks, own the equipment to mine the rocks or you construct things around

the rocks. They can broke a policy for you or review your existing one, mate, Hard Rock Carl friggin construction anything, renewables, anything, CRO insurance and there anything and everywhere Brisbane, Sydney, Perth. They just doubled the Perth chain. Oh mate, it's so happening. Oh, getting right back on to royalties, right this episode we've got Spencer Carl from UBSBHBS 32 fame started the royalty marketplace CIO at Vox Royalties.

And since I've said royalty so many times, you can tell this guy's a guru about royalties. Yes, royalties streaming buddy. The the art of it, all the funky stuff. Let's get into it, JC. Thanks to the boys for recording

this one. Spencer Cole, thank you so much for for joining us. We're really keen to understand the landscape of, of royalties, how that industry has changed. It's changed a lot. The whole yeah, investment universe for investors has evolved. The valuations have changed. The way that, you know, mining companies get finance has changed.

Yeah, I'm, I'm really interested to have this conversation with you because you've spent obviously the best part is 15 years just trying to find obscure royalties in in the most strange of places and, and get your hands on them. Would that be a fair, fair characterisation? Yeah, it's a fair assessment, Trev, and thanks for having me here. Yeah, I'm a sort of self confessed royalty nerd, so I could talk the leg off the chair

about royalties. So happy to talk both of your the legs off your collective chairs and hopefully it's interesting for listeners. We, we, we, we want to own some royalties, Spencer. So if you can find some for us, that'd be wonderful. But I don't think I don't think we're alone in wanting to own royalties. The the challenge is we're just not massive fans of seeing royalties pop up when they are created in deals because they they're pretty the hemorrhage projects.

Yeah. Well, not to be flippant, Trev, but if you're in the market for extremely cheap royalties, the the the inside money would be if you're willing to go to northern Burkina where there's, you know, it's more sandy than secure, I think you you'd be able to buy them for probably less than one times revenue. But that's not necessarily an investment strategy that we at Vox Royalty would necessarily support. So what about? What about actually upholding the the terms of that royalty?

Would I, how would I go about doing that? Yeah, need a few. Well you might bit of security. Challenges You might be getting paid in rubles rather than U.S. dollars, but when your when your friends at the Wagner Group are sending you royalty checks. But no, in All, in all seriousness, there are some some extremely cheap royalties out there, but they're probably not the type of royalties you want to be acquiring. Yeah, makes sense.

Totally. It's like for, for us observing the, the mining industry and, you know, albeit our careers are shorter than the, the history of the royalty industry, but it, it really seems like, you know, the oil and gas industry led the way with, you know, with royalty businesses. They're they're much larger in that, in that world and, and the

likes. But Franco kind of kind of captured the essence of, of, of that, that industry and, and, and birth what is now becoming a quite a substantial and growing part of the mining industry over time. They started like, was it 1986 was the first royalty, but they they didn't actually become at least they spun out of Newmont in 2007. Is that right?

Yeah. So they they were incubated within Newmont and then spun out and then ultimately they were IPO D in 2007. But yeah, that the the classic story was, you know, they threw one of their connections. They they heard heard about a small ad in a local Nevada newspaper selling a a little gold royalty for 2,000,000 bucks and they rattled the tin with friends and family.

This is PLS on and Seymour short can Fast forward to today and I think over 40 million oz have been delineated at that little gold gold claim. So you know, turned that into that $2,000,000 into a billion Ave. and probably another billion in MPV at gold strikes. So you know when you do it right, the industry can be extremely lucrative. It really is like the ultimate treasure hunt.

If you like sifting through dusty old maps and storerooms looking for a reference to a forgotten royalty, this is the industry for you. And you know, it's a great industry where if you choose the right royalty and, you know, you just sit back and collect quarterly checks. So it's that's not a bad business to be in if you can, if you can choose the right royalties. They're such awesome business and yet pretty envious.

It's, they're not just limited to natural resources either, like some of the ones that come to mind, Michael Jordan on, on his shoes and Coco Chanel, I'm pretty sure had one on Chanel #5 and you know, one of them had like just living expenses chucked in for the rest of their life. They're such awesome businesses. I'm sure that's part of the reason you're sort of attracted to them. It's. Perpetuity you've got like, it's these things, it's perpetuity. How many assets do you buy that

have? Yeah, an entitlement for perpetuity like. The people in the you guys fence. I think one of the the most lucrative royalties is actually like AI think it was a royalty on Listerine or some sort of mouthwash. And that's, that's yielded, you know, hundreds of 1,000,000.

So, yeah, I mean, these these types of yield instruments, you know, whether you're in the Pharmaceutical industry, the music industry or mining, you know, you name it, oil and gas, you know, they, they're extremely attractive because as you said, they're perpetual typically.

And you know, if there's a fundamental change or shift in the industry, you know, you can see, you know, exponential factor in, in the yield you're getting, which is why I think generalist investors are also attracted to this model, you know, relative to just single asset mining, mining companies. That's a big distinction right in, in mining royalties versus the the more generic royalties is that, yeah, I'd use the word perpetuity, but the reality is mines have a finite mine life.

However, you can have a royal, a royalty over an asset and then there's some new discovery or some like crazy my life extension, which can, you know, and and they can just keep going in there. You talked about Frank Franco's origination. One like that's that's where things get exciting because you can pay a small amount and and have a a really large long term lucrative pay off.

Yeah. I think what's what's not as well understood is, you know, you know, when you value any sort of option, you know, how do you actually increase the value of that option? And, and there's a lot of people running around sort of buying moose pasture royalties or spin effects royalties that don't have any work going on them. You know, our focus is really buy royalties at attractive

prices. But most importantly, they have millions, 10s, hundreds of millions of dollars of work being done on the ground because, you know, buying completely out out of the money options. You know, you're not sort of getting enough shots on goal relative to if you're buying. You know, if you, if you want one hypothesis we love is you pick a big hungry mill that's running out of feed and you try and buy all the royalties on all the satellite deposits around it.

You know, we've, we've had some success with the likes of Genesis and whatnot consolidating some of our royalties and you know, we've made some, some really attractive returns on that, that hypothesis. But fundamentally if your royalty isn't getting any activity and it's moves past you, obviously you know it's you're not going to get a lot of return on it. Kaydrill or Exploration royalty that checks out.

They they do all this royalty talk just reminds me of Rhino Sol Ryan O'Sullivan, the royalty of operation manager exploration drilling, king of the RC and diamond rig. Yeah, mate, there mate. There ain't going to be enough bloody exploration rigs to keep up with this gold mania we are

seeing at the moment. So I would suggest calling K drill right now if you want their expertise drilling your RC and diamond holes, because they're probably by the end of this episode they've been snapped up by someone else. Get up the team go K drill. Oh, mate, call them now. Number is in the show notes. Finds yourself some gold.

Spencer, you made the really interesting comment just before about generalists being attracted to royalties. And I think that's a an awesome segue into sort of setting the landscape of what the royalty business looks like in the Hard Rock natural resources industry right now. Because it's evolved massively over the past couple decades.

Over the past ten years in particular, the the number of companies, while not massive, it sort of ticked up steadily and the combined market cap has also grown quite massively over that period. So given your sort of 15 year experience, talk us through how it's kind of evolved and I'm keen to hear the sort of impacts that the growth in the royalty sector has had on more classical miners, whether that might be sort of pulling away market cap, pulling away generalist dollars

and these sorts of things. Yeah. So, yeah, it's an interesting sort of history, JD, if you go back sort of 20 years ago, you know, there are about 10 royalty companies and but collectively I think the combined market cap was about 1,000,000 bucks, a billion bucks. Sorry. So, you know, the industry as a whole has really picked up steam, I guess you could say largely since the success of Franklin Nevada post 2007. And you know, there has been somewhat of a proliferation of

royalty companies. So the industry's gone from circuit 10 companies to 30 companies in the last 20 years and it's gone from a billion dollar combined market cap to about 70 billion. Then you know, when you segmented through a few different lenses, you know it it, it fragments a bit further. So the majority of that 70 billion is, is precious metals and more specifically gold and silver. So that probably speaks for, you know, about 65 of that 70 billion.

And then there's about 5 billion across sort of diversified or non precious royalty companies. There's three majors, There's like 3, three major royalty companies kind of dominate. Is that right? Yeah, that's absolutely right. So you know, the top three speak for I think 2nd 90 odd percent of the industry in for in terms of market cap.

But you know, in terms of deal flow and activity, obviously the the other sort of 27 odd companies, you know, nipping at their heels and you know, aggressively trying to sort of step into that sort of next that next category. I think in terms of how capital has shifted between miners and royalty companies, you know, it's interesting. We I'd say the incremental buyer of our stock, particularly since we do listed on NASDAQ has been US generalist investors.

And so we get a lot of really granular feedback from US family office investors and generalists and small cap investors. And for a lot of them, what they'll tell us is I was burnt on this, this junior mining stock or this whatever mining stock, you know, a couple of years ago. And so I haven't been able to trust the mining industry since then. And so, you know, the attract the attraction to a royalty model where you've got a portfolio approach, it's capital light, head count light.

It resonates really strongly. So, you know, I wouldn't say that that's always been the same level of attraction from generalists in the last five to 10 years. But you know, certainly, you know, in these markets where particularly American generalists are looking for an inflation hedge, looking for metals exposure, but don't really know how to dissect the mine. You know, I think this model is resonating really strongly in these markets, particularly in the US.

Combine that with the, the historic tendency of of miners to disappoint expectations as well, right? Like I was talking to JD this morning about that, that chart that is always used the showing the historical P NAV, a price to NAV ratio that the gold miners would would, would trade at for over like a, you know, 40 year period.

And for the best part of of history, they roughly traded about two times NAV And then it kind of, you know, rapidly falls off around 2010 ish 2009 two thousand and 10:00-ish where they kind of now hover around one times NAV And the the bulls will tell you a return to the long term average of of of 1.5 Times Now. But I just I think previously the like investors in those gold companies were were willing to pay greater than NAV because if because that would attribute,

you know, the option value, the upside or option value of those like the projects that they had to the to the mining company, They get the upside of them. But in reality, costs escalate massively and they're not able to capture the upside of my life extension on on new discoveries very well at all. In fact, the royalty companies capture that very well. Hence, Franco Nevada rightfully trades at two times NAV. Do you think that's like a fairway to interpret trading

valuation evolution as well? I think there's sort of infinite ways you could dissect it. Look, I think one metric that is really telling or maybe 2 metrics, 1 is if you look at the total quantum of managed mining funds relative to passive mining ETFs. So as of the end of last year, the stats I saw was it was about US 28 billion collectively in in discretionary like mining hedge funds and you know, managed

mining funds. So contrast that 28 billion with the passive mining ETF money and that that was 330 billion. So you know, what do you take out of that? It's that for a lot of the, you know, historically a lot of the industry and the volatility has been driven by that discretionary capital. Whereas now this sort of light towards, you know, passive ETF mining capital.

It's, it's just it grown so much that, you know, if, if investors want exposure to gold, they're going to buy an ETF that's sort of gold linked or mining linked more, more and more. So, So yeah, I think there is an element that a lot of the large cap golds have have disappointed. You know, I think our investors tell us that all the time and that's why they sort of move recycling capital into royalties. Like you look at Newmont, I think over the last five years they've doubled their share

count. They've grown production from 5 million oz per annum to 8 million oz and then they've sold 3,000,000 ounces of production. So, you know, they're still at 5 million ounces of production, but they've doubled their share count. And the share prices, you know, they're broadly flat. So I think for some of these large golds companies that just haven't focused on value per share or compounding returns per share, investors are

understandably pissed off. And you know, that's why a, a number of people are sort of moving away from the large caps and just, you know, there's, there's a trend towards passive sort of index hugging. To to go into the, the multiples

of how these royalty businesses trade sort of in general, it seems to be around that 20 times, you know, EBITDA multiple that they kind of trade on. And whilst the market has grown massively. Am I sort of right in thinking that has, you know swayed as the the commodity cycle of ebb and flowed, but it's broadly for a long time despite the growth stayed similar to that level, right?

Yeah, I think, I think you're right, JD, particularly at the sort of mid to large cap space at the small cap end of town, you know, we see sort of multiples that are quasi tech multiples like 50 to 60 times revenue where, you know, investors I guess are buying into longer dated, you know, DCF. Or. Yeah, development royalties, so and there's probably a lot more arm waving around, you know, those development pipelines that

at the large end of town. So but yeah, like broadly speaking, the industry has sort of traded around that sort of 2020 times level. And look, I think what also shifted in the industry was about sort of 15 years ago with the advent of streaming and streaming and it's, you know, when it was created, it was just pure financial arbitrage. We'll pay 10 times revenue for this metal, this, this silver byproduct stream and it'll trade, you know, magically it'll

trade at 20 times. And there's a number of people in the industry that's still trying to chase that, you know, financial arbitrage dragon, so to speak, some successfully, some extremely unsuccessfully. But, you know, we're, we're not in the game of sort of financial arbitrage.

We're trying to focus on, you know, identifying which mines and deposits are just about to be built and then finding forgotten royalties from 20 to 40 years ago on those rural on those projects and acquiring them at attractive prices. But yeah, this this arbitrage game and and hoping that everything trades 20 times historically that that's been quite prevalent, particularly on the streaming side of the business. That that's an interesting

point, right? And I mean, you do get the the big difference in in trading valuations between the the royalty goes that have largely development portfolios. You don't get too much value for a development royalty given so much uncertainty with them. But I can like those companies can try to like slows like .3 Times Now all the way up to to Franco, which is often north of two Times Now whenever I've

checked. But on the on the on the actual like the the arbitrage, financial arbitrage side of things, it's like how do you if you're playing that game, how do you compete with the, the Francos of the world where the cost of capital is so, so low? You know what I mean?

Like that, Like, yeah, I always, I always thought of that conundrum for De Terra in a lot of ways because they they didn't have the same cost of capital as as as Franco, but you know, probably found themselves trying to compete with them on various opportunities. Yeah. Look, I think if you go head to head with, you know, the strongest balance sheet in the industry, generally speaking, you're going to come come off pretty bad and then bruised.

You know, I think the behind closed doors, a lot of the large capital royalty companies will tell you their cost of capital is effectively 0 and 1%. You know, maybe that's crept up with rates a little bit, but you know, you're probably talking zero to 3% for a lot of the, you know, the large caps. And so for them, you know, a lot of things, almost everything

looks accretive. So, yeah, the key to in any rational business model is not not coming head to head with that extremely low cost of capital. You know, it's, it's I guess comparable to say, you know, a sand fire or capstone, you know, trying to compete with a Chinese SOA cost of capital, you know, that places strategic value on copper off take like, you know, it just doesn't make any sense. Don't don't bid against someone who's got, you know, a structural advantage relative to you.

So look, I think, you know, most sort of mid to small cap royalty companies acknowledge that and you know, some are still in the business of trying to win auctions. Others, you know, we're trying to find bilateral proprietary deal flow. But you know, it doesn't grow on trees and you can sort of go seek 25% returns in Excel, you know, all day every day. But as we all know, you know, you often that's often not going to be reality.

So just copying and pasting the PEA or the pre phase into Excel, you know, that's delusional. So, yeah, all that is to say, I think people have tried to compete with with the large cap cost of capital, but you know, there's there's a trail of impairments behind that sort of folly in. My banking Dave Spencer, I did it. There was like one, yeah, unsuccessful advisory to a royalty Co bidding for a, a, a royalty portfolio.

And I can tell you the the assumptions to to try and compete in that process were assumed better than the better than the Peas and PEFSS have some really questionable, dubious projects and they still didn't win. Yeah. Yeah. I mean, some people there, some people sort of reach for the wrong assets. I'm sure we've all seen it.

But yeah. And, and I think others will try and sort of create, construct this narrative that, you know, the market's missing a certain technical assumption or, but you know, if you're getting close to paying 10 to 15 times revenue, even if there is exploration success in year 25, what does that really mean for your DCF? And, you know, you're probably not going to be able to massage your returns from, you know, maybe from 5 to 6% if you're bidding against the herd like

that. That's a really interesting sort of concept you, you bring up there because the beauty in a in a sense is the, the optionality and the thing the, the, you know, you think about the iron ore royalties and some of them gone on for 50 years and that wouldn't have looked great in ADCF, but it's awesome to still get that check 50 years down the track down the track. But it just doesn't show up as a massive kicker if you're looking at it from a DCF perspective.

But how do you think about the optionality of multiple cycles in a commodity and the fact that if you're, you know, in, in a precious or often in a, in a bulk like an iron ore or a a long life cop of mine, that it could be around way, way, way down the track. How do you sort of put that in perspective when you're crunching the numbers? Yeah, there's there's probably two different answers to that.

JDI think 1 is, you know, P Ellison often says as the the godfather of the royalty industry often talks about, you know, you need a, you know, a 20 year mine life. So that then you're going to have four or five peaks. And, you know, if you have commissioning and ramp up challenges for up to three or four years and then, you know, enclosure or sort of as the the mine starts to run off, you know, becomes less predictable and less stable.

So, yeah, I mean, obviously if you can, if you can sort of underwrite and acquire a royalty on that sort of longevity happy days. But I think, you know, and, and, and getting exposure to the full commodity cycle and multiple cycles, you know, I think gives you some extra embedded

optionality and option value. But I think something is more important perhaps is if you look at the absolutely spectacular, like the best deals in the royalty industry, the absolute barn burners, a lot of them haven't been from, you know, mine life extending from 10 to 15 years. A lot of them have been, you know, if you take gold strike, it was, you know, a smaller scale gold, gold asset in 1986 something, it had 400,000 ounces of reserves in the ground.

There was an ownership change, you know, some brownfields drilling that that really proved up, you know, extremely well. And then lo and behold, they've produced another 20 million oz. So often it's change of ownership, change of project scale, you know, doubling, tripling, quadrupling the size

of the mill. As ridiculous as that sounds in this sort of capital intensity environment, you know, it's, it's often that ownership change and rescoping the fundamental size and shape of the project that where you see the 100X plus returns in the royalty industry. And so even if you look at, you know, another, another incredible deal that Franco did historically was they put, I think it was a 2 or $3,000,000 into D2 or like when that asset was effectively being acquired.

So, you know, if you can back acquisition finance for an asset that's been either forgotten or overlooked and then the new management team comes in, dusts it off and absolutely, you know, it might inject a billion or a couple of billion dollars of capital into it. That's where you get the real talk. It's not, it's not necessarily the mind life extension. It's it's that rescoping the the actual throughput and often through change of ownership.

That's yeah, that's fascinating how the different ways that

royalties actually like come come into existence is is an area of interest. And and like what you talked about there is acquisition finance is one method. Project finance, I imagine is a, is an, is another method of a single asset developer might not be able to access equity in debt markets quite enough. Chuck a royalty in there. Yeah. And so so M and a project finance distressed balance sheets, I think, I think that's why Sabani I did their streaming deal last year because they

needed the cash. Franco sure, we'll do that. What like what are the other way weird ways that that you see royalties kind of come into existence? Yeah, so, so before moving to other categories, I think balance sheet repair is an interesting one and particularly on the streaming side of of the business, less so on the royalty side. So if you look at some of the the highest IRR streams in the industry, most of them came from balance sheet repair transactions.

So, you know, you may recall Circuit 10 years ago when Glencore had a mountain of debt. And then, you know, the, the, the, the, the extremely novelty sized checkbooks from the streaming industry came out and started writing half half billion dollar checks, you know, into sort of large silver streams on assets like antimener and you know, some of these absolute generational base metal ore bodies to repair the likes

of Glencore's balance sheet. Those streams really have been the most, the highest IRR streams in the industry and likewise the balance sheet repair royalties as well. The other, I guess probably the most common way royalties are created is, you know, when mineral rights claims, tenements

are farmed out or sold. So, you know, particularly in Australian or US context or in some other countries where the individual owns the mineral rights, you know, and let's say a rancher, you know, in Brazil or Nova or even Nevada sells the the gold rights to their to their land. You know, selling the mineral rights and then retaining a royalty is sort of deferred consideration. That's the most common way that royalties are typically created.

But the challenge then becomes, how the hell do you find that landowner or, you know, that salty prospector who lives in a van doesn't have an e-mail address? It's a real example. But yeah, so it becomes, you know, bizarrely, the challenge for the industry for these forgotten royalties is how do you actually track down who owns the royalty? So, you know, we, we use private

investigators. We send a lot of snail mail, as as crazy as that sounds, because there's a number of prospectors and royalty holders that are basically off grid and the only way you can reach them is, you know, with a written letter or, you know, through a a private investigator. So yeah, that that type of royalty created from mineral rights being sold, that's probably the the most common sort of creation mechanism for royalties in the industry. I think you sort of nailed the other ones.

Project finance is probably the second most common creation sort of genesis. Yeah. And when you're in a big company and you sell, sell an asset, you maybe can't get much for it. You've got to put a royalty on it to have some insurance. You don't look silly down the track if the new if the new are going to find something. You call small. That's everyone. Yeah, it's a great way to get some schmuck insurance as long as you don't sell the royalty too early.

And unfortunately I've, I've, you know, having worked at the big end of town, I've, I've seen, you know, that schmuck insurance created sometimes and then, you know, sold too cheaply, unfortunately. On the, the earlier point that's

really counter cyclical investing the the Glencore example you gave when they're in a real pinch point, you know, indebted up to the hilt and they need to get cash on board. How do you how do you think about counter cyclical investing given that you know, you spend a lot of time looking at the precious metal space Gold has done phenomenally well over the past couple years. Those more counter cyclical type deals would be a bit harder to come by, right?

You'd be surprised, I think, you know, royalty holders are still, you know, subject to the same whims and emotions as everyone else. And you know, depending on what types of royalties you're, you're creating, like which of those you know, whether it's project finance or historical prospect or royalty, you know, there are, there are, you know, plentiful opportunities to acquire royalties in troughs in

certain commodities. So you know for example, you know, when we speak to people about lithium royalties or Palladium royalties today, you know, relative to two years ago, you know it's night and day. So yeah, I think the fact that there is effectively no holding cost on a royalty means that there are close to perfect counter cyclical investment instrument because you can buy a royalty when the price is in the doldrums and put in the bottom drawer.

And then you know, hopefully you know that commodity price, that metal price main reverts and happy days. But obviously, you need to make sure that you're buying a royalty on on an asset that's at the right point in the cost curve. Yeah, I'd never thought of the fact they have no holding costs. That's actually like a food. Food for. Thought the only, the only one caveat I should say on that is like the only way typically or sorry, I guess there's two ways that a royalty can be zeroed

out. One is if the mining company relinquishes the tenements. The other one is if the mining company ultimately disputes the royalty legally. But you know, put that to one side, assuming you've done your proper legal due diligence, like I guess there's no holding cost on a royalty insofar as the mining company doesn't give the tenements back to the actual state, which would only typically happen if there's there's no buyer for those those tenements. So it's a pretty sort of rare,

rare event. So you don't want to buy royalties on absolute junk, can you? Because. It will be really good. Gotcha. Yeah, or, or or, you know, you need to be careful also like if the company, if the operator goes into administration, this gets into the weeds. But you need to be sure that the royalty runs with the land and can be secured in the event of administration. But yeah, so, but generally speaking, it's if you don't buy a lot of moose pasture royalties with dodgy operators, you're

probably in in good shape. Spencer, there were some pretty

big themes coming out of 2024 in In Your World of royalties. And I'm came to chat through a couple of them. You sort of mentioned with a bit of experience the offloading of these, you know, non core royalties out of, you know, you know, some of the big companies you worked with. But it it was a trend across a number of companies last year with near on a billion dollars in transactions happening. Is is that something you see continuing?

And can you sort of dig into just briefly the, the rationale behind the, you know, the liquidation of these royalties? Yeah, absolutely, JD. So you know there's a lot of major mining companies or large mid caps that end up with sort of stranded portfolios of royalties as you're sort of alluding to. Yeah, last year we did see sort of close to a billion dollars of secondary royalties traded.

There still are, you know, a number of quite a large quantum of royalties held within mining companies. You know, I think as the broader mining industry has sort of, you know, understood more about the sort of option value of royalties, you've seen more large cap miners include royalties as part of sort of divestment or sale proceeds when they're selling assets. So I think you will see that the trend of majors creating royalties continue.

You know, if you look at BHP effectively gave away a 2 million oz project in Brazil, the central gold asset just for a 1% NSR. So, you know, I think the major miners do realize the value in these royalties G mining. Picked that up. Yeah, that was the one that came out of Oscar was Oscar was. Oscar Minerals, Yeah, I think I tried to sell it, yeah, in the past, but couldn't get much, yeah. So, yeah, so look, it typically these are the completely orphaned assets internally.

And you know, when I was with BHP in South 32, it was less so S 32 more so BHP that, you know, we LED this project essentially trying to find all these bottom, bottom drawer royalty contracts. And you know, they they either come from divestments or you acquire a company like BHP bought WMC and WMC were brilliant in the 90s when they were divesting all their gold

assets. They always kept a royalty and so, so you know you've got some of these companies, you know, I've got a lot of respect for WMC that in their DNA, you know they understood the value of royalties, so they created a lot of them. So you know, I think when will these major miners, when will large the various miners are still on royalty portfolios sell them.

A lot of it comes down to our esteemed beam counters and you know, when the CFO has a 50 to $200 million holder plug on there, you know, for their annual cash flow or their balance sheet, they'll say, oh, don't we own those royalties? Can we flip those to, to some sucker for, you know, 50 to 200 million. So a lot of it's sort of influenced by filling cash holes. That matches the balance sheet, that matches the divestment of South 32's royalty portfolios and also Anglo's divestment.

In their in their defence, though, shareholders just don't really care an awful lot about a couple royalties within a 20 to $200 billion company, do they? But then they're not really getting much value. From royalty to pay through the roof for it. Yeah.

And royalties will see the value, like you said, if they're going to get marked 20X on the, on the cash flow of some of these, then it's, you know, it's the kind of financial type of engineering or whatever you call it that the people on the finance side love. But it really goes back to what you were saying before, that you need a balance of geological knowledge as well as financial knowledge to understand the the true value of a lot of these royalties. I'd love to ask. Yeah, two of them.

Two of the WMC 1 Spencer, one of one of them. One of them you're about to ask about Trev, but go on.

So the the I'm not going to, I'm going to ask about the other one. So the one I want to ask about is when I actually only learned about it recently. But so there was like the, the royalty, the infamous Morgan Stanley royalties that that haunted WA kind of gold, gold companies that this was like these were royalties put in

place in 1991 by WMC. But smart folks at Morgan Stanley commodities, a portfolio of the they will have the same royalty I think in 2002. And the way it was, was structured was an unindexed royalty, 4% net smell to return with an additional price participation at 10% of, of, of any gold price above $600.00 Australian per oz. That's an amazing royalty to own because gold grass has just like

trended N over time. And all of a sudden, you know, like you just get 10% of that price capture into perpetuity. How like, like surely that's like just an unknown pitfall. You don't structure royalties like that anymore. But what's your understanding of like that royalty and the the kind of impact it had? Yeah, this sort of brings up, you know, I guess a few questions around, you know, what's sustainable from a royalty percentage or burden

generally. So, you know, WMC, they structured a number of gold royalties with price linked escalators historically. That's that's on the public record. I think, you know, when gold's at 23400 bucks, who could possibly imagine that it's going to double. So it's not not only is it sort of schmuck insurance, it's schmuck insurance with, you know, an escalating clause type thing.

But yeah, I think in that that world is specifically and more generally, I think once you start to see a royalty overburdening the asset and, you know, directly impacting operators willingness to drill, you know, develop or expand an asset, it's this bad business. And so unfortunately, this whole large swathes of that Morgan Stanley royalty ground that were effectively sterilized for, you know, over a decade at least because of how hefty that royalty was.

So hats off to the Morgan Stanley team for for picking that royalty up. What did what did they pay for it? And what have it like? Have you ever done the numbers on what that what their returns must have been on that? I No, I haven't. I haven't. I'd be talking out of school, to be honest. Trav yeah, I can speculate. But yeah, the most recent iteration, I guess of that

specific royalty was just with. In and around Higginsville and and Beta Hunt where it was obviously restructured but but no like I'm sure was a great deal for Morgan Stanley.

But when you think about the cumulative oz and and exploration that you know that that royalty sterilized in WA, it was it's probably quite substantial, although you know somewhat amusingly that WA government's probably in Morgan Stanley's debt because it means that gold's being mined at you know, 4400 bucks an ounce instead of 1000 bucks an ounce. Exactly. Yeah, exactly.

Yeah, yeah, I it's it's I'd I'd love to own that royalty if I if I couldn't almost stand if you've got any, any left, I'll I'll happily be gifted one Yeah. And then the the other funky kind of like WMC. They must have just had yeah like real now so at them. But these royalties always been kind of part of their, their deal making, which is wicked. But they, the one that came into focus last year was a royalty linked to the use of a drill database.

They had this like drill database from I think diamond exploration and and I think IGO had some agreement with them that they could access the database. And if that database access led to a discovery, then there would be an applicable royalty on that discovery. And then it became kind of contentious last year when S S 32 had had basically suggested that Tropicana, Tropicana, you know, is entitled to to to that royalty. That's a kind of a funky different structure, but.

It's hard to pay that. Yeah, yeah, yeah, yeah, yeah, yeah, yeah. Which wouldn't be great for IGO and Regis, but yeah. Yeah. I mean, look, it's an interesting example where you can create royalties through a number of different methods. You don't only need to sell tenements in that case, you know, WMC had, you know, one of the most prolific geochem sort of databases, you know, in Australia or probably in

Australian geoscience history. So, you know, that's a piece of IP that has, you know, infinite future value. So creating a royalty structure on the back of that, I think it's brilliant. And so, you know, it's, it's not dissimilar to to, you know, in the Pharmaceutical industry, if someone comes up with a new sort of, you know, formula that can be the base of a number of different vaccines, you know, getting a royalty on that, you know, that's that it's very

comparable. Like if you create some some valuable IPA royalty is a perfect way to sort of extract rental value where you don't even know what the future use cases could possibly be. So, yeah, look, I'm having been at South 32 for a number of years and a lot of friends that are still, you know, at South 32, I'm obviously, you know, very invested in how that one plays out, you know, very strong team at South 32. So I'm sure they've got their fact base fairly well put together.

But here we'll have to wait and see how that one, how the chips fall on that one. I think we should touch on

briefly why there's a bit of a, you know, a relative lack of a royalty sector in Australia. Obviously, like you've said, heaps of royalties over assets here in Australia. But when it comes to the big companies you mentioned earlier, Trev, they're not listed here. We've got the terror, but the, you know, the combined market cap of ASX listed royalties is relatively small. So it'd be worth you just glossing over why, why you think that sort of is, and why the

market formed that way. Yeah, it's one of the most common questions we get from investors, JD, is why isn't there, you know, a sort of a royalty industry on the ASX and you know, why, why is it sort of a bit of a forgotten sector, you know, until I guess the terror hit the market. Look, something I've given countless hours of thought over. I don't think there is anyone sort of logical reason for it.

I think there was an element of first mover advantage in, you know the likes of Toronto and North America generally where you know, you had the likes of Franco and Royal Gold just aggressively mopping up royalties, you know, in Australia, you know, and globally. And so if you look at some of the largest royalties by sort of square kilometre coverage in Australia, a number of them are owned by Franco and Royal. And so it's a. Pretty big run out by Gina. Yeah.

So, well, but I mean, particularly royalties that have that have sort of transacted, yeah. But yeah, I mean, Gina's no stranger to royalty checks, obviously, but so, but yeah, no, going back to why, why have hasn't there been more of an industry? Yeah, I think it's just that people started to make from when Franco came out of the gates in 2007 on on equity markets, you know, it was up and to the right, the share price chart. And so as you know, they were successful.

It sort of created, you know, it was a bit of a self fulfilling prophecy in North American equity markets. More royalty companies were created in North America trying to replicate that same success and that same multiple and investors were recycling capital that they that made from

Franco's appreciation. So I think it was this, this sort of, you know, this this virtuous cycle that was heavily North American centric and that ecosystem was picking off Australian royalties, you know, over, over that, that history.

So yeah, there were a couple of attempts, you know, we speak to different entrepreneurs around the traps and they said, oh, I tried to launch a royalty company in Oz 10 years ago, but investors couldn't understand why I should, you know, they should value it at 20 times when BHP trades at 7 times. And look, I think that's sort of lack of understanding around the option value in royalties is part of the equation where you know, let's say you started, you built a royalty portfolio in

Australia 10 years ago. Where are you going to go? You're going to list on the ASX where instos don't understand the valuation dynamics as well? Or are you going to go to North America where the same size institutions have made 3X4X5X on Franco already and they've got extra change in their back pocket to fund your new royalty company.

So I think part of it is that the capital, you know, there's been momentum in the capital markets in North America and it's just been an easier proposition to, to, to insert new companies into that slipstream and not have to deal with educating capital markets that haven't profited from that industry, which I think, you know, for companies like the Terra, that's the challenge is. And you know, we've got some investors in Australia, but you know, some new investors in

Australia say, well, I can buy Fortescue at 8 * 9 times. You know, why would I buy a senior royalty company at, you know, 20 to 30 times? It's so. It's so fascinating and and kind of counter intuitive what what you're saying there, because on the other side of that, we see mining companies come and list here in Australia because they're like Aussies and the ASX get mining. They understand that there's still relative to other countries around the world, dedicated mining, investment

funds and these sorts of things. So as a miner, you, you'll come here to get a better multiple, you know, especially comparing to the LSE and these things. I think it's linked. I reckon it's I think, I think you you come and list in Australia because we have like greater access to equity capital markets. Our like you know, the the forthcomingness of investors to provide equity capital is what it's actually way better than Canada.

I think, correct me if I'm wrong, Spencer, but I think I think like you know, the equity checks come a lot easier on the ASX and they do in in your neck of the woods and as a result. Being a, as a result, being a proud Australian, I, I feel like I can say this, there's probably more of a, a gambling culture, yeah, there's more degenerate gamblers in. Australia way more, yeah. Well, love making having a punt. So yeah, no, but I think Trevor, I think you've hit the nail on

the head there. Like I think as with any industry, whether it's tech in Silicon Valley or, you know, mining in part in Australia, it's where is the, the largest sort of pool of risk capital at the lowest possible cost. And if investors don't believe a certain valuation paradigm, say in the royalty industry or in African gold producers or you name the sub sector, you know, if there's not sufficient risk capital or it's at the wrong price, you'll just go to a

different capital market. So, you know, that's probably a quarter. Why isn't there a royalty industry here? And why is this such a thriving mining industry in in Oz still? Yeah, Yeah. Like why would you put a royalty on your on your project if you could just raise capital in the company level instead in general, you know, assuming you don't have egregious pricing dynamic supply, But yeah. But but I still think, you know, the mining investment funds understand how hard mining is,

yes. And they understand that a royalty is a Better Business. Like it's just it's a kind of interesting feature of the the market. Yeah. I think also, and this is maybe a more left of centre perspective, but there's a natural friction between specialist lining funds and royalty companies in the sense that royalty companies are, you know, capital allocators by nature. And so they're almost in, yeah, correct. It's effective a listed investment company.

But if you're, you know, a discretionary, you know, APM at a mining fund, you're charging fees on the basis that you're picking the right mining assets. And so the minute you put capital into a royalty company, you're effectively becoming a quasi fund of funds. You know that it's sort of a little bit derivative, but that is the way that some, you know, mining PMS view the royalty industries. Well, I can pick my own assets, you know, directly and directly

invest in them. So I don't need the portfolio approach of a royalty company. So that is some pushback from some mining PMS. But you know, for every one of those, there's, there's, there's plenty of other investors that are, you know, very excited to invest in the royalty industry.

That touches on like a yeah, another development in the, in the royalty space and that's like, you know, hedge funds who participate a lot in, in the, the equity participation of, of junior mining. Like here in Australia, Regal, Regal Regal started their own royalty fund a few years ago. They, they also acquired 50% of Taurus more kind of private equity project financing, but they had a big royalty portfolio

themselves. You know, I'll probably see some synergies with that, but there's that, but also emergence of the new players in the royalty market who aren't, you know, a listed, a listed royalty company per SE, but they are instead, yeah, investment managers, fund managers or, or or private equity who are, who are bolting together these portfolios. What's the what's the rationale for for them you say in in doing

this? Look, I'm, you know, talking a little bit out of school here, given I'm, you know, not on the buy side per SE. But you know, I think if you look at most asset management shops, you know, whether they're private, public equity, hedge fund or something else in between, you know, you've got to be good at two things. One, you've got to be good at sourcing deals and investments and vetting them and, you know, actually allocating the capital.

That's obvious. The other thing you've got to be good at is raising money and, you know, bringing the money into the door so you can invest it and get it out the door. You're not saying they're just trying to offer a new product, are you? Well, JD, that's a fairpoint. I think there's the element of that.

But I think, you know, there are some synergies where if you are offering a credit product through your credit fund and then, you know, maybe there's a royalty kicker, maybe you know, your credit, your lending ratios are maxed out with that issuer. But hey, an extra 1% royalty, you know, doesn't sort of breach covenants and you know, you can slot that into your royalty

fund. But likewise, you know, if you have access to proprietary deal flow and you know, if you have access to capital, you know, the more that you can keep that sort of flywheel spinning, whether that's requiring other asset managers or, you know, spinning up extra funds. Happy days. You know, we're, we're obviously at the smaller end of town as a, you know, $200 million Aussie

company, you know, US 1:20-ish. You know, we're essentially in a similar business of allocating capital investors investments, but then also attracting investors to buy, you know, our listed, our listed stock. So yeah, I think if you can marry those two ends of ends of the like 2 barbells and scale it up, you know, logically, you know, all power to I've.

Got yeah, 22 last questions for you, Spencer, as a as someone who has probably studied plenty of mining history as a result of looking at the the deals that created royalties, worst, worst deal you've come across? Worst, Worst royalty deal, do you mean? Yeah. Go for it. Yeah.

Interpret it like that, yeah. Look a funny one maybe like not ha ha funny, but funny, you know, if you weren't involved in the deal was if you look at so it's it's it's well understood that, you know, BHP historically held the ground at at Paleo Tolgoi. I guess what's sort of less known is that, that, that BHP actually retained when that when they sold well, they effectively gave that ground away to Robert Friedland. They retained, they retained a

2% NSR on the projects on basically all of oil Tolgoi. So and then the decision was made I think back in sort of November 2003 to sell that 2% royalty back to Ivanhoe Mines for like 37 million. You know, so I think that royalty would easily be doing sort of circa 40 million bucks a year, 30 to 40 at a minimum, plus have sort of the Stardust of oil togos sprinkled on it. So you know whether that would be be easily I think a sort of a billion dollar.

I think you'd probably get a billion dollars for that today. But yes, so selling that for 37 million even when the initial sort of discovery drill holes, you know, the, the discovery was humming along. So I think that's, that's a cautionary case study of if you've got, you know, absolute elephant size deposit and intersections and you've got a uncapped 2% NSR on, on the asset, don't go and sell it for $37 million. So that was that was probably one of the more unfortunate deals.

But you know what that. Reminds me of is, do you remember hearing the story about that the royalty that the terror is built on Maxi? It's like I, I heard that in that, that, you know, when when that mine was sort of, you know, progressing, yada, yada. It was still uncertainty, but but a few times BHP had had had offered to buy back the royalty and, and and and basically by Luca who who owned it came, came back and said no, not, not 10 million.

My numbers could be wrong here. We want we want 50 million for it something. Like that ten. I remember that #2 Gabriel spoke about that on the show. And and and BHP said no and now like fuck look at the valuation Tara. Anyway, have you heard similar? Yeah. Well, well, yeah. So I have, I guess, heard similar anecdotally. Yeah. So the flip side of that coin is, you know, not to be BHP bashing because I'm, you know, a proud former BHP alumni and, you know, I I had a good experience

working for the company. And so I've got a lot of respect for the big fella. So the other side of that coin, Trav, is probably the best royalty deal in history was a little known deal that if you if you're obsessive about tracking public records, you can find this, you know, in the archives. But in 2001 there was a duplicate of the of doterra's Mac royalty that BHP successfully bought back for about 10 mil. So from a company from a company called Cyprus. So I did not know that.

So yeah. So they get credit yeah, yeah, yeah. They tried to buy reportedly they tried to buy the other one, the doTerra one back. But so I think you know, to to for a balanced scorecard for my my former alumni at BHP, worst deals selling the Oyo Togoy 2% NSR, but probably one of the best deals in in buying back a duplicate Mac royalty for 10 mil thereabouts. So, yeah, yeah. You can't win them all, hey? You can't you can't win them all. You can't win them all. Yeah, they get they get some

points for buying back. Yeah, the the duplicate totally. Yeah, right on BHP. Yeah, win some, you lose some. What's that? That's that Michael Jordan quote. You can't. You can't make a shot you don't take. So just got to just keep throwing those those bricks at the ring. What's the best royalty you've bought? The. Best deal? I don't I don't like to be too promotional, I guess. You know, we so look 11.

That's that's the sort of near and dear to the heart was yeah, we we acquired a royalty from an automotive company. It was the bottom drawer royalty. They've historically been, you know, a mining exploration company hollowed out as an ASX shell, an automotive company was dropped into them. You know, a high grade discovery is made. And then we saw that this this shell still held a royalty. So we're able to buy the royalty

for a couple 100 grand. And you know that that royalty has just come into production in the last in the last couple of months. So that's been in the timeline from discovery drill hole to 1st gold bar port was about six years. So pretty rapid development on that asset. So that's one that is sort of a more recent highlight reel is that there's a few others mount. Ida one or am I thinking different? No, no, but. That was a shell as well, right? Yeah. Man, it was from a hearing aid

company. From that a different shell. But yeah, so that was that was another, another fun deal. But no, like we've got a few royalties where what I get really excited about, and this shows just how much of A colossal mining nerd, royalty nerd I am. But what what our team gets really excited about is, you know, if we can buy royalties at really attractive prices, you know, let's say 50 to 200 K on, on stranded deposits that we

could see ultimately feeding. You know, adjacent mills, I mentioned it from the outset, but in WA, you know, it's a dynamic that's really attractive and it's something we've had quite a bit of success with. So I think, you know, ultimately our best return return deals are deals that have that characteristic where it's difficult to see exactly how

that comes into the mind plan. But with some Intel and with a bit of analysis from our team, technically, you know, that's how we can, we can see a line of sight around, you know, it's, it's you can see a path to 5000 X on some of those investments. They don't grow on trees and you've got to work hard to find them. But you know, we've been out this for quite a long time. So those are the deals that get

us get us most excited. Before you call Spencer, if you got one of those royalties, call me. Money mine royalties. Hey Spencer, this is this has been awesome mate. I've learnt a heap about royalties and yeah, I always love talking to someone who goes very deep on a a sort of particular niche. It's always awesome to to speak with those sorts of folks. So appreciate you sharing your wisdom with us.

Appreciate that JD, I I wish my beloved California wife shared the same enthusiasm about my passion for mining royalties, but that's probably that's a separate conversation with the beer in hand. You can talk to us whenever you need that. Yeah, I appreciate that, guys. Right now you are. There you go. Royalty, royalty royalties and mate, we'll hand out the royalty, the royalty worth of companies that keep the lights on for us. GC Mineral Mining Services

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Go Gold. Information contained in this episode of Money of Mine is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Before making any investment decision, you should consult with your financial advisor and consider how appropriate the advice is to your objectives, financial situation and needs.