Categories: Precious Metals
Topics: General Precious Metals

Nomad Royalty (TSX: NSR) CEO Vincent Metcalfe on Maximizing Precious Metals Leverage and Minimizing Risk with A Proven Royalty Model

Sept. 2, 2020

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the CEO of Nomad Royalty (TSX: NSR)(OTC: NSRXF), Mr. Vincent Metcalfe. Vince, how are you?

Vincent Metcalfe: Very good, Gerardo. Thank you very much for having me today.

Gerardo Del Real: I'm excited to tell this story. We're going to have a pretty in-depth conversation about Nomad and your timing. But I have to start by saying, congratulations. You listed on May the 29th, and it has been an absolute flurry of news since then. Because it's going to be a little bit longer a conversation than I typically have, I want to make sure that listeners stay engaged for all of it. 

We're going to talk about the differentiators that Nomad really provides. There's a dividend involved. There's free cash flow. There's a hundred percent exposure to precious metals. We'll get into all of that. But first and foremost, congratulations, Vince. It's been a busy year.

Vincent Metcalfe: Thank you very much. Yeah, it's been a busy year. It wasn't exactly the type of market we thought we'd be launching a new company in. But you know what, with the backdrop of gold and silver performance since May 29th and since our first day of trading, we have to say that the work that went into creating this company, now we're in a position that we're actually benefiting from that work and also benefiting from a much better gold and silver environment. We think the next few months and quarters, and hopefully years ahead of us, we'll continue with that type of performance.

Gerardo Del Real: You know I was an early shareholder in Nomad and the first two things that I always look at with any company, before I write a check or get involved or help tell the story, is the share structure and the team. 

Let's start with the team. You've put together a pretty impressive group of names. There's even a Gerardo on your board of directors. I don't get very many of those. Can you walk me through the team that has come together to kind of do it again, right?

Vincent Metcalfe: Absolutely. Just to give a bit of background to your listeners and the people that read your Resource Stock Digest, what's important about our team is we've been together for the past 6 years in the royalty sector. It's also a team that complements each other very well. There's myself, I'm founder and CEO. Joseph de la Plante is CIO and director as well. Our third partner is Elif Levesque, who's founder and CFO as well.

The three of us have lived in the royalty and streaming sector now for the past 6 years. We've been buying royalties. We've been structuring new streams. We've been buying portfolios of streams and royalties. I think the important thing on that front is that we've gone through it all.

For investors looking at Nomad today, I think that's the most important thing. Yes, we're a new company, per se. But from an experience point of view our group has the experience, the knowledge and the transaction experience that rivals with even some of the senior companies. I don't say that lightly, because our track record has proven that. I think the first three months of trading is also proving that.

The important thing for us is that we want to be a management team that delivers. We want to put forward goals. We want to make sure that when you look at our goals today and you meet with us in 3 months and 6 months down the road, we're able to be in a position to say, look at the goals we put forward, this is where we're at today, and that we could go down that checklist and be very happy about the results that we're showing to shareholders and to investors. I think that's something that needs to be done a bit more in the resource sector. It's easy to put goals out, but let's make sure that people achieve those goals in a timely manner and with effective use the investor's capital at the end of the day. That's the management team. 

As for the board of directors, we've got 5 and now 6. We actually announced a new board member recently. The first two, Istvan Zollei and Gerardo Fernandez, are both representatives of the two original vendors of assets. Istvan is a Portfolio Manager at Orion Resource Partners. Gerardo Fernandez is VP Corporate Development at Yamana Gold. Both of those companies vended the original assets into Nomad and now have a seat on our board of directors.

What's great about those two individuals is that they're very connected, and very connected in different parts of the world. They also act as conduit to future deals. At the end of the day for a royalty company, that is very important because it gives us access to a lot of different types of deals to basically make sure that our pipeline stays full.

We also have Robin Weisman who sits on our board. She spent 20 years with IFC looking at assets all over the world, doing global mine finance. For us, the way we're going to be building this business is going to be very diversified. She's going to be very strategic on that front. Then we have Matt Gollat and Jamie Porter, respectively with Premier and Alamos Gold. Two individuals who are very connected with the capital markets, very transaction focused. 

As you can see so far, in the first 3 months of trading, we're going to be a group that's going to be very transaction focused. Our board of directors reflect that Nomad's going to be a highly transaction focused business. We're going to be looking at acquiring public companies, private companies, straight assets, straight royalties, printing new streams. That's going to be very important.

The last person that we just added to our board is Susan Kudzman. She spent 20, 30 years in the risk management area. She was very high up at the Caisse de dépôt, the Quebec pension fund. She just spent the last three, four years with Laurentian Bank on risk management. She was Chief Risk Officer. She is going to bring a different type of value in the sense that when looking at certain investments that we do around the world and how we look at risk profile and limiting volatility, limiting the risk factor. She's going to be very, very complementary to the business we're building.

Gerardo Del Real: Two things that really stand out to me about the board of directors. One, it's not your typical resource company, friends and family board of directors. The group that is involved is here to perform. And you know that because of the mandate to have low G&A. Can you speak to that a bit? Because I think it speaks to the integrity of the team and the vision looking forward. Right?

Vincent Metcalfe: Absolutely. When we started this company, we wanted to have a few things that really differentiate Nomad to the rest of the companies in the sector. We want to make sure that investors understand exactly that the managers running the company are fully aligned with them. Joseph, myself, and Elif are some of the largest shareholders of the company. We think as shareholders first.

Keeping the G&A down is something that's very important for us. Because at the end of the day, the less we spend on G&A, the better, usually, we're able to either return that capital through a strong dividend or reinvest in new opportunities. Typically if we invest in the right opportunities, that means we're going to have a higher share price. Thinking like shareholders first is very important in that sense, because we want to make sure that we actually do have a real return from that perspective. We're not looking to just grow the business just to grow the business. We're looking to make sure that the acquisitions we end up doing have an immediate effect on the share price with also that effect on the long term. So that's something that's very important.

In terms of the actual G&A, that means that all three of us are not taking a cash salary this year. We're all taking shares on a quarterly basis instead, because we want to make sure that we show the sector and the investors that, for us, building this business is the most important thing. Clipping a weekly salary for us is not necessarily what we want at the moment. If we're able to grow a business that grows the dividends, well, us as shareholders benefit from that, same as you as a shareholder. We want to make sure that when people look at Nomad, again, it's a management team that delivers. It's a management team that is aligned, and that thinks about shareholders first.

Gerardo Del Real: Walk me through the share structure. Because again, when I look at that, it's clear to me that with Orion, with yourself, with management, interests are clearly aligned with shareholders. Can you walk me through briefly the share structure, Vincent?

Vincent Metcalfe: For sure. The thing to remember is when we created this company, we vended in two big portfolios and Orion and Yamana took back pretty much all stock for those portfolios. Where we stand today is that Orion owns about 76% of the shares, Yamana owns just under 13% of the shares and management owns around 2.5% of the shares. So it's very concentrated at the moment. Just based on how we want to grow the business – and you can already see it with the announcement from last week in us looking to acquire Coral Gold and Valkyrie Royalty – we'll be adding to our float by going after companies and bringing in new investors.

At the moment, we have around 520 million shares outstanding, which as I said, you've got 76%, around there, that's owned by Orion and Yamana's another 13%. So we'll say there's probably a float of around 8%, 9% at the moment. So it's very tight. But that's also a goal of ours over the next 12 to 24 months to really deliver on new acquisitions, to add to that liquidity. As you said, Orion, Yamana, the management team, we are fully aligned on how we want to grow this business. We want to make sure that we deliver strong returns.

Orion and Yamana backs this management team to keep on acquiring stuff. At the end of the day, they don't want to sell their shares at the moment. They want us to dilute them through accretive acquisitions. They took back stock at $0.90. We're around $1.50. So they're obviously very happy, but they want to see that growth just keep going basically.

Gerardo Del Real: To be clear, the focus is 100% gold and silver exposure. Correct?

Vincent Metcalfe: Absolutely. When you look at our current breakdown, we've got about 77% gold, 23% silver. That's always going to be the major focus for us. We're not looking at any of the battery metals. Obviously, maybe at one point we end up with some copper exposure, but that would probably be because it's a royalty on a copper-gold porphyry of some sort. You obviously can't separate those metals. But it's always going to be precious metal focus. That is absolutely clear for us.

Gerardo Del Real: Walk me through the diversification in the portfolio, because that's important. Maybe before we do that, Vincent, if you can explain just really briefly the upside to a royalty company versus me going out and buying shares in a company that is producing and also generating free cash flow, but maybe only has two or three operational mines in a specific country. Can you walk me through the royalty model really quick?

Vincent Metcalfe: Yes, absolutely. Well, the first thing I would say is that as a resource investor, I believe every single resource investor out there should have some type of royalty company exposure, because it's very complementary to the rest of the sector. Obviously, you could invest in exploration, development and producing companies. They all have different criteria.

The great thing about the royalty exposure is that us, as a management team we're not operators. We're portfolio managers in a sense. Our job as a royalty and streaming management team is to limit that exposure to the operating costs, to the development costa. 

What we have to maximize is basically two things. We have to maximize exposure to precious metals, which in our case is gold and silver. The second thing is resource upside because at the end of the day, if we buy something today that has a million ounces, but we strongly believe that that million ounces ends up being 3 or 5 million ounces down the road. Well, the price we've paid today, that's fixed, but we get all the potential upside down the road. So those are the two things we have to maximize. 

What we have to minimize as a management team is risk. Risk takes a lot of different forms. You have jurisdictional risk, you have operator risk, you have asset concentration risk. As a team, that's our focus on a daily basis. We want to make sure that we have, and now I'm talking more specifically for Nomad, when we look at the business we're building, we started with 10 assets. We're already on 13, if we close the two acquisitions that we announced last week. But our ultimate goal is to grow that 10 asset base to a 20 asset base within the next 12 months, and then get to 30 assets.

But we want to make sure we have that jurisdictional diversification, because we want to be in hopefully 20, 30 different jurisdictions at that point to make sure that we don't have too much risk associated to one country. Even the top countries in the world, we saw it in Australia a few years ago, they hiked their taxes on mining assets. So you might be in pristine mining jurisdictions, but you can never hide from those governments. You never know exactly what they're going to do, what they're going to decide. In the current environment that we're in, I wouldn't be surprised if some of these governments hike taxes at one point. We want to make sure we minimize risks from a jurisdictional point of view. That's going to allow us to look at assets in a lot of different jurisdictions. 

Second, we don't want to have a dynamic where we have 40%, 50% of our value associated to one asset. Because if we wake up one day and that operator, they have some problems with permits or they have a blockade of some sort or they have problems with the community for some reason that we can't control, or perhaps they run out of water or they have fires. We want to be in a situation that if one asset goes down, we've got 19 other assets that are pulling the portfolio back up.

We don't want that we be associated to one single asset. I think that's very important for investors to limit that specific risk to one asset. That's something that we work on every day. Same thing goes for an operator. We don't want to have 10 assets with one specific operator, because if they have debt problems, if they get hit with an environmental lawsuit of some sort, like we saw in the last few years, we don't want to have that operator impact our business.

That's what's great about the royalty business. You're able to diversify away from all those mining risks. Mining is hard. You know very well. Whether it's exploration, whether it's operating a mine, it's hard. There's always a lot of risks that you can't control. The great thing about royalty companies is that if you bet on the right management team, on the right company with the right structure and everything's aligned, you're going to be able to maximize your exposure to gold and silver, maximize exposure to resource growth, while minimizing all the associated risks to mining.

That's what, for us, really makes it for a royalty company and why we want to focus on it. We have the benefit of having been in this sector for 5, 6 years. We have a very, very robust pipeline of opportunities. We see our growth keep on going for the next few years, that's for sure.

Gerardo Del Real: I mentioned free cash flow when we started this conversation, Vincent. I know that visibility on cash flow is extremely important. For those that don't understand that concept, 49% of the assets that you have a royalty on, are currently in production. I believe, and I'm working off your slide here, 37% are what you call a near-term production, meaning 2021, meaning 86% visibility on cashflow. 

You mentioned wanting to scale from 10 to 30 and you're busy. You just announced two new deals here in the past week and a half or so. Moving forward, as you go from 10 to 30, are you still wanting to maintain that visibility on cashflow?

Vincent Metcalfe: Absolutely. I think that's what's going to make the true difference between Nomad and maybe some of our mid-cap peers. When we created this business, we sat down, obviously, with Orion and Yamana and we looked at the various assets that they had in their respective portfolios. It was important to understand, we didn't take all the assets that were available. We wanted to build this business to be a cash flow machine.

That's another main thing that we didn't cover necessarily on the royalty sector is that royalty and streaming companies typically come with very, very high margins. Our life of mine margins for Nomad at the moment is around 77%, so that's a very high margin. When looking at free cash flow, right now this year, we're probably going to generate around $20 million US for our first year. Next year, based on current gold price, we're probably looking at between $35 and $39 million US.

That money, we're going to reinvest into new opportunities to get to that 30 number, but we're also going to return that through the dividend. But visibility on cashflow? Absolutely. If you look at the acquisitions that we've done in the last month, we did three. One of them was on a producing asset in Arizona. The other one is in Nevada and is in the development stage, but also comes with minimum payments that start in 2025 if it's not, so we have that visibility. The third one was more on optionality in Quebec, on the Troilus Gold Mine. 

Making sure that we always have at close to 50% in production, very important. The great thing right now is that we've got two that are in construction. We have the Blyvoor Gold Mine in South Africa and also the Woodlawn Mine in Australia, which was an operation pre-COVID. It's currently on care and maintenance because of everything that's happening in the world.

The Woodlawn Mine's actually fully built. It's just going through the ramp up in the optimization phase. But typically within the next 12 months, we should have those two assets online, which would bring our assets up to close to 75% to 80% in production. When you compare that to the senior companies from a valuation point of view, that's really what fuels higher valuation in our sector.

When you look at the Francos, the Royals, the Wheatons, all of their assets are pretty much 80%-plus in production. They get valuations that are between 2.5 times and 3.5 times NAV. We're currently sitting at 1.3, 1.4. So the more production and more cash flow we're able to show to the market, typically that will fuel our higher valuation as the market recognizes that value.

Gerardo Del Real: We obviously believe that gold and silver are headed higher. I believe we are in the early stages of what's going to be a historic gold and precious metals bull market. The beauty with Nomad is in the meantime, even if gold prices and silver prices just stay here, you get a dividend as a shareholder. That's something that I think is unique to the space. Can you speak to that a bit?

Vincent Metcalfe: Yeah, absolutely. We announced our dividend policy last week. It was something that was very dear to our hearts. We always put that forward when we were actually creating the company, as you may know. We've announced our initial dividend, so right now we're looking at basically a 1.5% yield. Based on the rest of the sector, it's probably double the average yield out there.

I think the important thing on that front, it's just a start. As this portfolio matures, we will return capital to the shareholders even more. We strongly believe that this asset base is going to do very well. Again, it's just a starting base for us on the dividend. It's something that's important to us. I think more companies should do it. At the end of the day, that cash belongs to all investors. We think we should be returning that value back.

That's why we also put our credit facility in place, so that we don't keep necessarily all that cash on the balance sheet. If we need to use cash, well, we have a credit facility up to $75 million US that we could use to buy an asset. Then if the investors like it, well, we could go back in the market and refinance that debt down the road. We're not going to just build a big war chest, just for the sake of it. We'd rather return that capital and make sure when we do need cash, we use our credit facility.

Gerardo Del Real: Vincent, that's a lot. Can you walk me through what to expect the rest of the year?

Vincent Metcalfe: Increasing market awareness is going to be very important. Increasing trading liquidity is going to be very important. Right now, in terms of the pipeline that we have in front of us, I think executing on a stream in the range of $40 to $50 million would be something that we would obviously really like to do. 

That really differentiates the small cap royalties, the mid-cap royalties. Having that capability of writing a stream, that's when you see that your management team has a different skill set than maybe some of the others that are coming into the sector. From that perspective, that's going to be something that's going to be a big focus. But right now there's a tremendous amount of work that we have in front of us, in terms of looking at various different opportunities. We're going to keep being busy and hopefully keep announcing deals.

Gerardo Del Real: Vincent, thank you so much for your time. I encourage everyone to go to the website. It is nomadroyalty.com. We'll put a link up. Fun conversation. Thanks again. I'm looking forward to the updates.

Vincent Metcalfe: Thank you very much, Gerardo.