Exploration Opportunities
Exploration Opportunities
Understanding the Royalty and Prospect Generator Models
The investment risks inherent in the junior resource sector are both well-known and well-documented. As a general rule of thumb, never speculate with more money than you can easily afford to lose… and don’t fall in love with your holdings.
In other words… Don’t bet the mortgage money… and be in the habit of taking gains off-the-table on the way up!
Successful speculation in the juniors takes time and dedication. I recommend subscribing to at least a few of the top resource newsletters out there to not only arm yourself with insights on the best investment ideas in the space but also as an ongoing educational tool for sharpening your speculative skills.
It’s all about making money while mitigating risk. And one way to do that is by speculating in two distinct types of juniors: Royalty Companies and Prospect Generators.
Both of these models allocate risk over numerous projects and/or investments. Let’s explore both with VOX Royalty Corp. and Skyharbour Resources Ltd.
VOX Royalty Corporation: A Well-Positioned Royalty Company
VOX Royalty Corp. (OTC: VOXCF)(TSX-V: VOX) is a precious and base metals royalty company wherein shareholders are provided with discovery, development, and commodity price optionality while limiting exposure to risks inherent to operating companies.
Many resource stock speculators have asked the question, “How does a royalty company operate?”
For simplicity, let’s explore this question from strictly a “gold royalty” perspective.
A gold royalty is a contract that gives the owner (a royalty company such as Vox) the right to a percentage of gold production revenues from a mineral producer in exchange for an upfront payment.
Gold royalty companies use these contracts as a way to finance mining companies in need of capital. This alternative form of mine financing is often more attractive to the developer/producer than traditional debt or equity financings.
Royalty companies such as Vox will also purchase pre-existing royalties as a way to build a diversified portfolio of royalty assets. Since royalties typically cover the life of a mine, gold royalty companies benefit from the exploration upside that may extend the life of the mine and thus increase the amount of gold (or revenue) they receive from the mining company at no additional cost.
There are several types of royalties. The two most common are NSR and NPI royalties:
A Net Smelter Return (NSR) royalty is an agreement whereby the mining company agrees to pay the royalty owner a percentage of the production revenue, less refining costs.
A Net Profits Interest (NPI) royalty offers the royalty owner a percentage of the profit from the mine.
Investors also ask, “What’s the difference between a royalty and a stream?”
As described above, a royalty is when a mining company agrees to pay a certain part of its production revenue to the royalty’s owner.
A stream is when the mining company actually sells physical metal to the holder of the streaming agreement. The price per ounce is either a set price (at a much lower rate than spot) or a percentage of the spot price.
The royalty company makes money by selling the physical metal for a profit at the current market value.
VOX Royalty Corporation: A Closer Look
Vox Royalty Corporation (OTC: VOXCF)(TSX-V: VOX) — which is one of the small-cap stocks currently in our Precious Portfolio — is a newly-listed precious and base metals royalty and streaming company with a portfolio of over 40 royalties and streams spanning 9 jurisdictions.
The royalty and streaming model offers a number of key advantages including:
- Leverage to commodity prices
- Fixed operating & cash costs and strong margins
- Exploration & mine expansion upside
- No capex or cost overrun exposure
- No limit to growth as execution of risk does not rise with each acquisition
Founded in 2014, Vox Royalty Corporation represents an early-stage opportunity to participate in the fastest growing royalty company in the world. Since 2019, Vox has conducted 15 transactions to acquire more than 40 royalties.
And, just since July 2020, Vox has acquired 10 royalties representing over 10 million gold equivalent resource ounces.
The company currently has 4 production-stage royalties and expects to have a minimum of 8 production-stage royalties by the end of 2021.
In addition to precious metals [~70% of the company’s current royalties], Vox has exposure to a diverse set of underlying assets including base metals and diamond royalties.
At present, there are over 120,000 meters being drilled annually across the company’s royalty portfolio [for which the company incurs zero costs], and approximately 75% of the company’s royalty assets are located in mining-friendly and geopolitically-safe Australia.
Representative of the type of royalty transaction typically sought by Vox — on 22 February 2021, Vox entered into a binding agreement with Gibb River Diamonds Ltd. pursuant to which Vox will acquire a Western Australian gold royalty portfolio for a total cash consideration of AUS$325,000.
The royalty portfolio comprises a 1% Net Smelter Return (NSR) royalty over the Bulgera Gold project operated by Norwest Mineral Ltd. (ASX: NWM); a 1% NSR over the Comet Gold Project operated by Accelerate Resources Ltd. (ASX: AX8); and a 1% NSR over the Mount Monger Gold Project operated by Accelerate and subject to a binding option agreement with Mt Monger Minerals Pty Ltd.
The Gibb River transaction alone:
- Strengthens Vox’s first-mover position as the second-largest publicly traded holder of royalty interests in Australia by royalty count behind Franco Nevada Corporation (NYSE: FNV) with an expanded total of 31 Australian royalties.
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Provides Vox with exposure to 3 advanced exploration gold royalties in Western Australia, each located within trucking distance of third-party mills.
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Offers Vox uncapped exposure to the Bulgera Gold deposit which hosts a JORC-compliant resource estimate of 2.92 million tonnes @ 1.0 grams per tonne gold for 93,880 gold ounces.
- Generates significant organic news flow from the 5,000-meter reverse circulation drilling program at Bulgera.
Vox is deploying an intelligent growth strategy of establishing an overweighted presence in mining-friendly Australia while also pursuing royalty opportunities in other parts of the world, some of which carry a higher risk factor.
Already with 40+ royalties in its impressive portfolio, Vox expects to continue to close highly accretive royalty transactions in 2021 and beyond; Vox currently has access to over 7,000 existing royalties via its proprietary database.
The company expects to also benefit from organic newsflow from its 40-plus operating partners, which account for a combined ~30,000 meters of drilling each quarter.
Independent analyst firm Red Cloud Financial Services recently initiated coverage on Vox Royalty with a “Buy” rating and C$5.40 price target.
Cantor Fitzgerald and Paradigm Capital have followed suit with Buy ratings and price targets of C$4.00 and C$3.75 per Vox share, respectively.
And while Vox has yet to announce formal guidance, analyst estimates are presently coming in right around C$2 million in revenues for 2021, C$6 million for 2022, and C$8 million for 2023.
Vox Royalty CEO, Kyle Floyd, believes the company will be able to exceed those projections both from an organic standpoint and by way of acquisitions currently under evaluation in the pipeline.
Based on operator guidance, Vox expects to increase its producing royalty asset count within its existing portfolio from 4 to 6, including:
- Segilola – 1.5% net smelter royalty in Nigeria, capped at US$3.5M, with Thor targeting first gold pour in Q2 2021
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Bulong – 1% net smelter royalty in Western Australia, with Black Cat targeting commencement of production in Q4 2021
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Koolyanobbing (Deception Pit) – producing 2% Free On Board (“FOB”) revenue iron ore royalty over part of the Deception Pit in Western Australia
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Higginsville (Dry Creek) – producing grade-linked tonnage royalty in Western Australia, covering part of the Hidden Secret, Mousehollow, and Paleochannels deposits
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Brauna – producing 0.5% gross sales royalty interest in Brazil, South America’s largest operating diamond mine, currently mining 1 of 21 kimberlite occurrences on the property
- Graphmada – 2.5% Gross Concentrate Sales care & maintenance stage graphite royalty in Madagascar with the operator targeting updates to its Mineral Resource estimate to support plans for a Stage 2 expansion of production
Vox also boasts a number of key catalysts for its exploration and development stage royalties in 2021, including: Bowdens (0.85% gross revenue royalty); Sulfur Springs (AUS$2/t ore production royalty capped at AUS$3.7M); Lynn Lake (2% Gross Proceeds post initial capital); Pitombeiras (1% NSR royalty); Montanore (US$0.20/t production payments); and Kookynie (tonnage royalty).
Vox has announced the following Growth Targets for 2021:
- To continue to be one of the fastest growing royalty companies in the industry; closing out calendar 2020 with the completion of 13 transactions to acquire 30 royalties including the acquisition of its Brits vanadium royalty and the Breakwater Resources Limited royalty portfolio in Q4 2020 and Q1 2021, respectively.
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To continue to grow and acquire additional NAV-accretive royalties leveraging Vox’s proprietary royalty database and continuing discussions already underway with potential royalty vendors.
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To increase analyst coverage of Vox beyond the current 3 independent firms providing coverage — Red Cloud Securities, Cantor Fitzgerald, and Paradigm Capital Inc.
- To conduct a review of secondary exchange listing options.
Vox CEO, Kyle Floyd, commented via press release:
“The Company’s Q4 achievements rounded out a transformational 2020 year for Vox and promises a catalyst-rich 2021 year. We started 2020 with one producing royalty, being Graphmada, and added Koolyanobbing in Q2, Brauna in Q3 and Higginsville in Q4 to our growing list of producing royalties. We look forward to the organic news flow from our existing operators in 2021 as we see the number of producing royalties within our existing portfolio continue to grow.”
Vox Royalty Corp. (OTC: VOXCF)(TSX-V: VOX) has approximately 38.2 million shares outstanding for a current market cap of less than C$100 million, and the company is well-funded with approximately C$6 million in cash and no outstanding debt.
For more information, please visit www.VoxRoyalty.com.
Skyharbour Resources: A Well-Positioned Prospect Generator
Skyharbour Resources (OTC: SYHBF)(TSX-V: SYH) is a uranium exploration company that’s primarily following the Prospect Generator model while also advancing some of its own properties via its own dime.
Many resource speculators ask, “What is the Prospect Generator model?”
First, let’s take a quick look at how the vast majority of junior exploration companies operate: A typical junior exploration company will stake a single “promising” mineral property and then drill exploratory holes until one of two things happens: (1) they get lucky and hit a discovery hole, or (2) the company runs out of cash.
Of course, that can be great news for those select few juniors that do get lucky. Yet, it has been well documented that less than 1% of true grassroots explorers ever come across an economic mineral deposit.
Those are long odds to say the least!
In the Prospect Generator model, risk is spread across multiple projects through joint venture farm-in agreements with third-party firms with the aim of getting those firms to spend capital on advancing the Prospect Generator’s properties in return for an ownership stake.
Here’s how it works:
- The Prospect Generator company will stake prospective mineral licenses or acquire early-stage projects, oftentimes for pennies on the dollar.
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The Prospect Generator company will partake in early-stage exploration work oftentimes without drilling a single hole.
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The Prospect Generator company will package and market its early-stage projects to larger players that may be interested in the jurisdiction, the target commodity, or the geological story.
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The joint venture partners (who are usually larger and more established than the Prospect Generator company) will spend their own money and time advancing the project in exchange for a majority ownership position.
- The Prospect Generator company can then sit back and watch things unfold for each project on someone else’s dime.
In a best-case scenario, a project will reach production over a period of 5 to 10 years with the Prospect Generator company receiving a decent percentage of profits from production via their remaining ownership stake.
In a worst-case scenario, the JV partner ends up spending millions of dollars on a project only to decide that they are no longer interested in the project or partnership. In that scenario, the project is returned in full to the Prospect Generator company.
As noted, a key benefit of this model is that the risks are spread across multiple projects. Plus, a lower burn rate can mean less dilution to shareholders. More specifically, the company’s G&A expenses are spread over many projects versus only one or two.
The Prospect Generator model relies on intellectual capital which gains value with time. In essence, prospect generation is all about leveraging intellectual capital with other people’s money.
In general, Prospect Generators will see less upside in the euphoric stage of a bull market but will have much more staying power when the going gets rough.
The only real downside to the Prospect Generator model is that the company does not get to keep the entire project for itself. For instance, if a JV partner finds something that ends up turning into a mine, the Prospect Generator company will only get to keep around 10%-30% of a project that it previously owned outright.
That said, mineral deposits are oftentimes worth hundreds of millions, if not billions of dollars. Even a minority ownership in a sizable deposit can result in a 10-fold return for early shareholders.
Skyharbour Resources: A Closer Look
Skyharbour Resources (OTC: SYHBF)(TSX-V: SYH) is a hybrid prospect generator with the dual focus of partnering on multiple projects as well as advancing its flagship Moore Uranium Project on its own.
The company’s primary properties are located in the prolific Athabasca Basin of Saskatchewan, Canada — the #1 highest-grade depository of uranium on the planet.
The Athabasca hosts numerous world-class U3O8 deposits including:
- Cameco’s McArthur River and Cigar Lake Mines
- NexGen Energy’s Arrow Project
- Fission Uranium’s PLS Project
- Denison’s Wheeler River Project
Let’s start by taking a look at the prospect generator component of the company’s strategy.
Skyharbour brought in strategic partner, France’s state-run Orano (previously known as AREVA), via an earn-in option on its Preston Uranium Project located on the west side of the Athabasca Basin near NexGen’s high-grade Arrow deposit and Fission’s Triple R deposit.
The Preston project represents the largest and longest contiguous property portfolio adjacent to NexGen’s Rook-1 claims and trends nearly the full east-west property border covering multiple conductor corridors identified within the region.
The earn-in allows Orano Canada to acquire up to 70% of the project by spending up to C$8 million; that’s C$7.3 million in exploration expenditures and C$700,000 in cash payments over six years.
Orano is about halfway through the earn-in and has completed a large geophysical program at Preston.
Skyharbour CEO, Jordan Trimble, commented via press release.
“This initial geophysics and ground program being carried out by our strategic partner and industry-leader Orano will further advance the Preston Project and refine future drill targets. Skyharbour continues to execute on its key objectives by adding value to its project base in the Basin through ongoing mineral exploration at its flagship, high grade Moore Uranium Project with a 2,500 metre drill program underway while utilizing the prospect generator model to advance its other projects with strategic partners. In addition to Orano’s field program at Preston, Skyharbour’s other partner Azincourt Energy is carrying out a 2,500 metre drill program at our East Preston project which collectively will provide ample news flow and catalysts in the near term.”
Skyharbour/Dixie Gold have a similar deal with Azincourt Energy at the East Preston Project where Azincourt has now earned-in their 70% working interest in the project.
They did this by completing C$2.5 million in staged exploration expenditures and making a total of C$1 million in cash payments over the previous four years as well as issuing a total of 9.5 million common shares of Azincourt divided evenly between Skyharbour and Dixie Gold.
The current exploration program at East Preston [fully funded by Azincourt] is aimed at identifying high-priority targets at the East Preston Zone for anticipated follow-up drilling.
Skyharbour CEO, Jordan Trimble, commented via press release:
“Skyharbour continues to execute on its business model by adding value to its project base in the Athabasca Basin through focused mineral exploration at its 100% owned flagship Moore Uranium Project as well as utilizing the prospect generator model to advance its secondary projects with strategic partners. We are excited to have the opportunity to work with Azincourt as a joint-venture partner at East Preston going forward and will benefit from any upside at the Project with our minority interest. This partnership also complements the recent option agreement we signed with Valor Resources at our North Falcon Point Uranium Project as well as our partnership with Orano Canada at our Preston Project adjacent to East Preston. Skyharbour maintains a dominant land position in the Athabasca Basin with six drill-ready uranium projects.”
And last but not least, Skyharbour (as noted in the above comments from Mr. Trimble) has an arrangement whereby Australian company Valor Resources can earn 80% of its Hook Lake Project (previously called North Falcon Point).
The terms of the deal are C$3,975,000 in exploration expenditures by Valor over a 3-year period and just under half a million dollars in cash payments as well as 233 million Valor shares issued to Skyharbour.
Skyharbour CEO, Jordan Trimble, commented via press release:
“We are thrilled to have this Definitive Agreement signed as we continue to execute on our business model by adding value to our project base in the Athabasca Basin through strategic partnerships as well as focused mineral exploration at our flagship Moore Lake Project. We are excited to have the opportunity to work with new partners in Pitchblende and Valor led by experienced management and technical teams at our North Falcon Point Project while maintaining a 100% interest at the Frasers Lakes Uranium and Thorium Deposit at the South Falcon Point Project. News will be forthcoming on exploration plans and the timing is excellent given the recent upward momentum in the uranium market.”
All three of the partnerships detailed above are key to Skyharbour’s prospect generator model and serve as a sound and strategic way for the company to ensure that its projects are being advanced.
And in the case of Preston, East Preston, and Hook Lake — they’re being advanced via the treasuries of Skyharbour’s partner companies.
Also important, Skyharbour receives cash payments from its partner companies as they earn-in on the various projects, which helps Skyharbour to minimize equity dilution.
It also allows the company to focus its own time, money, and efforts on its flagship Moore Uranium Project located in the eastern Athabasca Basin — which we’ll take a look at now.
100%-owned Flagship Moore Uranium Project
Skyharbour is the 100%-owner of the 137 sq mi Moore Uranium Project following its completion of an earn-in from Denison Mines.
The Moore project is situated 9 miles east of Denison’s Wheeler River project and 24 miles south of Cameco’s McArthur River mine — the world’s largest high-grade uranium deposit.
The image below shows the location of the Preston Uranium Project with Azincourt’s East Preston option area and Skyharbour’s 100%-owned Moore Uranium Project with Cameco’s McArthur River and Cigar Lake mines situated just to the north.
The Moore project — where the company has announced a 2,500-meter drill program — hosts the high-grade Maverick Zone where 2017 drilling returned 6.0% U3O8 over 5.9 meters — including 20.8% U3O8 over 1.5 metres — at a vertical depth of just 265 metres.
Skyharbour CEO, Jordan Trimble, commented via press release:
“We are excited to have this fully funded drill program commence at our flagship Moore Uranium Project. This will serve as an important near-term catalyst for the company as we continue to drill test the fertile Maverick Structural Corridor with the intent of expanding known high-grade zones as well as discovering new ones. Partner funded exploration programs at Skyharbour’s other projects are slated to commence shortly as well. The uranium market has recently shown notable signs of an accelerating recovery including increasing uranium prices and improving sentiment as we enter a more seasonally active time of year. This acceleration appears to be due to several sector developments including mine closures and production curtailment.”
Skyharbour Resources is well-positioned with multiple drill-ready projects at the epicenter of North American uranium production — Saskatchewan, Canada — which is consistently ranked in the top five mining jurisdictions globally by the Fraser Institute.
The fundamentals are also in place for higher uranium prices going forward: Current annual global uranium consumption is 190 million pounds while annual global mine production is 140 million pounds — resulting in a 50-million pound deficit.
What the market needs next is for the major utilities to come in and start signing U3O8 contracts at higher prices. Once that starts happening, the long-awaited rebound in the uranium sector will finally be underway.
Skyharbour Resources is one of only a handful of North American uranium juniors with multiple, high-potential, drill-ready uranium projects in a Tier-1 jurisdiction.
Once this highly cyclical market turns higher — which it has shown to do with great ferocity in the past — it will be those rare, few, well-positioned companies like Skyharbour Resources that’ll attract the lion’s share of buying in the junior uranium space.
For more information, please visit www.SkyharbourLtd.com.