In conversation: A step by stepping stone guide to scaling up a global royalty company
Richard Evans is co-founder and Senior VP Technical of Elemental Royalties (TSX-V:ELE, OTCQX: ELEMF). Richard is a geologist with 35 years’ resource industry experience. Of note, he was involved with exploration, feasibility, underground mining, risk assessment, corporate governance and business development for WMC Resources Ltd, an iconic diversified Australian mining company finally acquired by BHP for US$7.3B in 2005. Richard was also an early shareholder and consultant to Mantra Resources (acquired by ARMZ for A$1.2B) and CEO of Resource Star Ltd, an ASX-listed exploration company. In a wide-ranging interview, we talked with Richard on starting small, incremental growth, key determinants in project evaluation and Elemental’s new sweet spot.
When one door closes another opens. In 2016, after an exploration initiative was taken off the table, you and (Elemental CEO) Frederick Bell then pivoted to address a market opportunity that leveraged your complementary skill sets.
Richard: I’ve both known and worked with Fred for a long time. Fred is about 20 years my junior, but the mix of my grey-haired experience and his youthful enthusiasm work very well together. It’s a complementary relationship: I’m much more into the technical side and Fred loves deal making and the financial/capital-markets part of the equation. Around 2014, we began to think there must be a better way than to struggle as a small listed exploration company and decided to repurpose a small pool of investment capital from an exploration opportunity that didn’t materialize. In his previous evaluation of exploration projects, Fred had noticed a couple of royalties on some of them that piqued our interest. We began to research to get a better understanding of the royalty industry.
We recognized that the handful of big royalty companies had become so large and dominant, they had neither the time nor interest to look at smaller investment opportunities. Starting off, we didn’t have the advantage of working for an investment bank with links to large amounts of capital or a larger mining company that had a royalty portfolio you could readily spin out, which is the route for most royalty companies. Our strategy was to first launch as a private company focused on acquiring a number of small, ideally paying, royalties that had marketable value prior to going public. Our concern was going to market selling only an investment concept, raising equity and finding ourselves potentially pressured to do a deal to justify ourselves. Through our collective contacts and network, we were able to identify deals and raise the funds as needed to create a strong foundation for going public.
Elemental’s royalty portfolio has been intentional in its design from Day 1. Your acquisition strategy was not focused on trying to swing for the fences to win the game in the first inning.
Richard: In order to preserve shareholder capital we ran Elemental on a shoestring budget. As a private company, we acquired a 0.25% royalty on the Kwale mine in February 2017. I had worked on a similar mineral sands project in Africa and had met and liked what the Base team were doing. We bought it for less than a million dollars, which seemed like a lot of money at the time. This past year alone (2020), the Kwale royalty provided a return of approximately US$500,000 to Elemental. From that one deal in 2017, we were able to step up incrementally. Kwale was not a company maker on its own but provided the cashflow to build Elemental through subsequent deals. In July 2018, while still a private company, we acquired paying royalties on the Amancaya (Austral Gold, Chile) and Mercedes (Equinox Gold, Mexico) gold-silver mines. To get into a position to go-public it was very much using the last stepping stone to get to the next one. On our listing day in July 2020, we might’ve seemed to be an overnight success more than four years in the making.
Aside from co-founder, you are also SVP of Technical at Elemental. A big part of your role is evaluating opportunities. How many projects have you evaluated and what are the main profile attributes you are looking for?
Richard: Elemental has put together a database comprising more than 5,500 projects. For the past five years, we’ve easily looked at a project a week in some detail, and approximately one a month at a deeper, more diligent level. There are fundamentals: demonstrated revenue potential, ideally reserves and a feasibility study and, even better, an asset in production.
However, the two biggest deal-making determinants in our royalty space are exploration potential and the management team. We know we’re going to have to pay a fair price on demonstrated revenue from the reserves at an operating mine. So, the main question is whether there is upside beyond that both in terms of total mineral endowment and rate of production. For example, with Wahgnion (Endeavour Gold, Burkina Faso) we were confident on both fronts: the long-term potential was there and the operator should be able to increase production relatively quickly. We felt the initial operators (Teranga) were very conservative in their forecasting, likely not wanting to over-promise to market. Wahgnion came online in late 2019 as a 135,000 ounces per year mine. However, it produced about 175,000 ounces last year. To have that production growth in Year 1 is really, really encouraging. And now, new owner Endeavour has committed the second highest exploration budget out of its entire portfolio (US$12M) to Wahgnion, exploring the 1,000km2 land package systematically. In addition, there’s great opportunity to convert resources to reserves and to discover new resources at the existing mines to materially extend the operational life and maybe even increase production further.
The other key determinant is the quality of the team that runs the project – the operator. A significant part of our due diligence is to assess whether the team has the track record and ability to deliver on all necessary disciplines: technical, social, safety, environmental and financial. Having worked in this industry for a long time, often you can read between the lines and see that, for example, a company has designs on getting acquired by a more senior company and management, which may for us be a positive consideration.
Now that you are public, has your sweet spot for potential acquisitions changed?
Richard: Eighteen months ago, I would have thought our recent US$55M, part equity acquisition of the WA gold royalty portfolio from South32 would be tough. From mid-2021 onwards, this acquisition is now forecast to nearly double Elemental’s royalty revenue with continuing revenue growth in 2022 and 2023. With cashflow coming forward, including Karlawinda (Capricorn, Australia) once it comes into production mid-year, we can now look at similar sized deals to South32. We have also had excellent support from Sprott Private Resource Lending, and other banks may now be interested in providing future financing. We have cash in the bank to invest in potential cash-paying royalties to complement our current portfolio, where we remain focused on quality over quantity. We want royalties that have uncapped revenue and no buyback options, providing our shareholders exposure to lower risk, zero subsequent cost and diversified growth as we scale up Elemental Royalties with the same intention and discipline that has got us this far.