Maverix Scores A Gem, But What Was Endeavour Mining Thinking ... - Seeking Alpha

On November 23, Maverix Metals (OTC:MACIF) announced the acquisition of a royalty on Endeavour Mining's (OTCQX:EDVMF, OTC:EDVVF) Karma mine in Burkina Faso. According to the agreement, the up-and-coming royalty company is paying $20M in cash for a 2.0% NSR on the heap leach operation, with projected output of 110,000 ounces over the current 10-year reserve-based mine life.

Here is the corresponding snippet of our real-time commentary on the Itinerant Musings chat board:

Let us add some color to this comment in the following.

Jotting numbers on the back of our trusted envelop yields little surprise: the NPV(5%) works out to $20.8M (assuming a gold price of $1,250/oz and some modest fees for transportation and refining). In essence, Maverix is paying exactly what this royalty is worth at the moment.

Clearly, there are risks including all the usual suspects associated with mining and extracting gold, or risks associated with the jurisdiction, or risks associated with the operating company's financial well-being. But there is also plenty of upside as Maverix is set to benefit from exploration success and mine life extensions at no extra cost.

When Karma was acquired by Endeavour Mining, it had a projected 8.5-year mine life, with average production of just under 100,000 ounces per year. Since then, exploration has not only replaced depleted reserves, but also extended the residual mine life to 10 years, at 10% increased annual gold output.

Interestingly, two other royalty companies cooperated to buy streaming rights to the Karma project in 2014, a couple of years prior to Endeavour Mining adding the mine to its portfolio. Upfront payments of $120M were used to finance mine construction, and in return, Sandstorm Gold (SAND) and Franco-Nevada (FNV) now receive a fixed amount of gold produced at this mine and pay just 20% of spot price for the metal.

Using the same general assumptions as above, we note that Sandstorm Gold and Franco-Nevada also paid almost exactly on par with NPV(5%) when they acquired their streams, except that these two companies accepted a much higher risk: their counterparty at the time was a junior miner called True Gold and Karma was its only and still non-producing asset. However, the risk has paid off for the two streamers, and they have already added value to the original assets thanks to exploration success since closure of their deals.

Yet another gold discovery on the Karma land package was announced only a few days ago, adding yet another reason to believe that Maverix will also come to benefit from additional future resources. We submit that Maverix Metals as well as the other two streaming companies will end up receiving significantly more value over time than they actually paid for. Looking at the numbers in front of us, we cannot help but conclude that Maverix is purchasing this royalty at very favorable terms, adding yet another attractive asset to an already attractive portfolio.

Maverix Metals has been trading at high valuations, and this deal seems to be sufficient for the market to push this company even higher. Shares were up 8.3% on the day.

MMX data by YCharts

As for Endeavour Mining, we wonder why this company agreed to this deal. The $20M consideration is peanuts on the mid-tier's balance sheet, and the royalty permanently narrows the margin at Karma, further impeding future profitability of this otherwise first rate asset. If there was any need to raise cash, then why not draw on the existing revolver? This move is small in relation to the overall business, but it's not designed to instill confidence. Hopefully, the company will offer some explanation in the next MD&A, as there was no news release to provide some context at the time of writing this post.

And Before We Go...

Please consider a subscription to Itinerant's Musings, with exclusive access to our small and mid-cap ideas, a lively community, and regular commentary and outlook on metal prices. We'd love to have you on board.

Disclosure: I am/we are long SAND.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.